Yesterday, the Biden Administration released the results of a broad review of U.S. economic sanctions policy following two decades of expanding use of sanctions as a foreign policy tool. The report recognizes that U.S. sanctions policy must evolve to confront changes to the global payments system, including the rise of digital currencies, reduced use of the U.S. dollar for cross-border transactions, and evolving foreign policy challenges presented by cybercriminals and strategic economic competitors.
In part, the report reflects concerns that the United States has become over-reliant on sanctions in recent years, encouraging adversaries and others to build alternative payment systems using digital currencies and other mechanisms that do not involve U.S. dollars or the U.S. financial system. Such developments threaten to reduce the effectiveness of U.S. sanctions in the long run, as more payments occur outside of U.S. regulatory jurisdiction.
Below are the key recommendations from the report, which may reduce the number of sanctions actions by the United States, but will also likely increase complexity for the companies and financial institutions that must comply with these rules:
- Crypto, digital currencies, and digital payments: The report makes clear that Treasury will continue to focus on digital currencies and alternative payment platforms, which adversaries and others can use to avoid the U.S. financial system and blunt the impact of U.S. sanctions policy. The report follows the recent designation of a cryptocurrency exchange for facilitating ransomware payments and the issuance of guidance for the virtual currency industry on sanctions compliance.
- Multilateral approach: Reflecting a marked shift in strategy from the last administration, the report indicates that the Biden Administration should seek to continue to coordinate with allies and other international partners to impose multilateral sanctions to increase the effectiveness of sanctions as a policy tool and retain the “credibility of U.S. international leadership.” Recent U.S. sanctions actions targeting Belarus and others are examples of a renewed U.S. focus on collaboration with allies on the deployment of multilateral sanctions.
- Avoiding unintended harm: Treasury intends to further tailor sanctions to limit unintended economic, humanitarian, and political impacts on U.S. businesses, allies, and non-sanctioned populations abroad. One potential outcome of this approach may be the continued development of bespoke sanctions restrictions, such as Russia-related sectoral sanctions and Chinese Military-Industrial Complex Company securities sanctions, and a reduced reliance on traditional blocking sanctions. While these more tailored measures are intended to limit unintended harm, they also increase complexity for companies and compliance programs. The report also highlights a renewed focus on expanding sanctions exceptions related to the flow of legitimate humanitarian goods and services that support basic human needs, which are often restricted due to sanctions compliance concerns.
- Investment in Treasury resources: As anyone who interacts with U.S. sanctions officials know, the agencies responsible for implementing and enforcing U.S. sanctions face resource constraints, including staffing and technology limitations. The report calls for investing in the modernization of Treasury’s workforce and operational capabilities, particularly in the digital assets and services space, and updating OFAC’s website and guidance documents to make them easier to navigate and understand.
- Increased industry coordination: Treasury intends to increase coordination and reach out to industry, including companies operating in the digital currency and payments space, to encourage effective implementation of sanctions restrictions.
- Structured framework for new sanctions: The report indicates that Treasury should adopt a more structured framework to assess the potential impact of new sanctions, akin to the vetting process used to authorize military force. The new five-point framework should be designed to ensure that sanctions support a clear policy objective within a broader foreign policy objective and consider the factors noted above when crafting new sanctions restrictions.
Overall, the report suggests a more restrained approach to U.S. sanctions policy designed to tackle the evolving nature of international payments and more sophisticated efforts to evade U.S. sanctions. While the number of sanctions actions may decrease under the new framework, compliance departments will likely remain busy as Treasury crafts more complex sanctions rules designed to maximize pressure on adversaries and minimize impacts on the United States, allies, and vulnerable populations.