The recent developments on this front show that the diplomatic efforts between the US and the Turkish governments appear to bring to a positive outcome and, accordingly, the sanctions under the Executive Order seem to be in abeyance until the political commitments are fulfilled. Nevertheless, the Executive Order could be deemed as a climax by which local and multinational companies conducting commercial activities related to Turkey encountered, in real terms, with the far-reaching legal consequences of US sanctions. The commercial and financial impacts of US sanction regime are expected to keep its popularity in terms of corporate compliance. In this respect, by way of this article, we tried to provide our readers with an insight on the general concepts and extraterritorial effects of the US sanction regime through a compact analysis on the sanctions imposed on Turkey under the Executive Order.

The Ratione Personae Scope of Sanctions under the Executive Order: Who is Targeted under the Sanctions?

The Executive Order mainly targets Turkish public officials, government agencies and their affiliations (instrumentalities), and individuals or entities operating in certain sectors of the Turkish economy to be identified in future.In this respect, the designations specified under the Executive Order appear to authorize a wide array of sanctions which might be deployed in the future without any requirement for a prior or additional notification. Section 1 of the Executive Order authorizes blocking US property and the interests in any property of any person (natural and legal) (determined by the Secretary of the Treasury, in consultation with the Secretary of State) which:

(i) is a current or former governmental official of Turkey,
(ii) is a Turkish state agency or its affiliate (i.e. instrumentality covering state-owned enterprises),
(iii) operates in the sectors upon which the US may impose sanctions going forward,
(iv) has materially assisted, sponsored or provided financial, material or technological support for, or goods or services to or in support of, any person blocked per the Executive Order,
(v) is owned or controlled by, or has acted or purported to act on behalf of the persons falling within the scope of sanctions under the Executive Order,
(vi) has an impact on the current situation in Syria.

Furthermore, Section 3 of the Executive Order authorizes the Secretary of the Treasury, in consultation with the Secretary of State, to impose sanctions on a foreign financial institution which knowingly conducted or facilitated any significant financial transaction for or on behalf of any person whose property and/or interests in property are blocked under Section 1.  

Who Should Be Concerned?

The US sanctions regime substantially targets the persons and institutions falling within the definition of US persons, having a significantly wide scope of implementation. Therefore, the concept of US persons does not only comprise the US citizens, but also includes the following persons and institutions:

• Foreign citizens (aliens) who are permanently residing in the US territory (including green card holders),
• All companies/entities incorporated under the US laws or any jurisdiction within the US,
• Branches or liaison offices of the companies’/entities’ incorporated under the US laws or any jurisdiction within the US,
• Any person present in the US.

In addition to those, foreign financial institutions should also be careful about compliance with the US sanctions regime as they might be subject to the sanctions to the extent that they knowingly conduct or facilitate any significant financial transaction for or on behalf of any person whose property and/or interests in property are blocked under the US sanctions regime.

In this respect, as described under Section 7 of the Executive Order, the “foreign financial institutions” mean any foreign entity engaging in the business of accepting deposits, making, granting, transferring, holding, or brokering loans or credits, or purchasing or selling foreign exchange, securities, commodity futures or options, or procuring purchasers and sellers thereof, as principal or agent.

For the purposes of assessing whether certain actions falling within the scope of the US sanctions regime should be deemed as actions undertaken “knowingly”, it would be sufficient to conclude that the person in question should have known the relevant action and its consequences within the meaning of sanctions.

The Rationae Materiae Scope of Sanctions under the Executive Order: What Sort of Sanctions Are Specified?

Before delving into the details, it should be noted that the Executive Order does not, in and of itself, give rise to the implementation of the imposed sanctions, however, it authorizes and specifies certain US administrative bodies to implement the sanctions subject to the Executive Order without any further authorization from or notification to the Presidency.

Accordingly, as addressed in detail under the following sub-heading, the Office of Foreign Assets Control (“OFAC”) simultaneously started to implement a certain part of sanctions by issuing three different General Licenses:

(i) General License 1 – Official Business of the United States Government

(ii) General License 2 – Authorizing Certain Activities Necessary to the Wind Down of Operations or Existing Contracts Involving the Ministry of National Defence or the Ministry of Energy and Natural Resources of the Government of Turkey

(iii) General License 3 – Authorizing Official Activities of Certain International Organizations Involving the Ministry of National Defence or the Ministry of Energy and Natural Resources of the Government of Turkey

The Executive Order specifies twelve different sets of sanctions. Having said that, the backbone of the sanctions substantially structured under the first, second and third sanction form  the basis for the others. The aim of the rest of the sanctions is primarily to prohibit conducts which might potentially nullify the implementation of the first three.

The First Set of Sanctions

As per the first set of sanctions, if the assets belonging to the persons subject to the sanctions are present in the US or transferred to the proprietary or control of US persons, the transfer, return or revocation of these assets is prohibited.

The Second Set of Sanctions

The second set of sanctions prohibits any relationships based on services or goods between the persons subject to the sanctions and US institutions. In addition, entry into U.S. territory is also prohibited for senior managers or controlling shareholders of companies subject to the sanctions.

Further, the following conduct is also prohibited within the scope of the second set of sanctions:

• Any United States financial institution is prohibited from making loans or providing credits to the sanctioned person totaling more than $10,000,000 in any 12-month period, unless such person is engaged in activities to relieve human suffering and the loans or credits are provided for such activities,
• Any transactions in foreign exchange that are subject to the jurisdiction of the United States and in which the sanctioned person has any interest,
• Any transfers of credit or payments between banking institutions or by, through, or to any banking institution, to the extent that such transfers or payment are subject to the jurisdiction of the United States and involve any interest of the sanctioned person,
• Transfer of assets of the persons subject to the sanctions to outside of the US is prohibited,
• Any US person is prohibited from investing in or purchasing significant amounts of equity or debt instruments of the person subject to the sanctions,
• Import of goods, technology, or services, directly or indirectly, into the US from the person subject to the sanctions is also prohibited.

It should be noted that senior managers (or persons performing similar functions) of the companies or institutions subject to the sanctions would individually fall within the scope of these sanctions.

The Third Set of Sanctions

In order to prevent the circumvention of the targeted results of the sanctions, Section 3 of the Executive Order allows the imposition of sanctions on a foreign financial institution where such institution knowingly acts or facilitates any significant financial transaction for or on behalf of any person subject to the sanctions under Section 1.

Sanctions Started to Be Implemented

As stated above, the Executive Order does not, in and of itself, give rise to the actual implementation of the proposed sanctions. In this regard, the implementing governmental institutions should take action under the laws governing their decisions. Accordingly, OFAC has started to implement a certain part of the sanctions by issuing three General Licenses immediately after the official announcement of the Executive Order.

General License 1 re-authorizes employees, grantees, or contractors for all transactions and activities prohibited under Section 1, 2 and 3 of the Executive Order to be made for the conduct of official business of the US government. In other words, General License 1 provides an exemption from the implementation of the Executive Order for official business of the US government.

General License 2 targets to prohibit all transactions and activities under Sections 1, 2 and 3 of the Executive Order with the Ministry of National Defence or the Ministry of Energy and Natural Resources of Turkey, or any other companies in which these ministries have, directly or indirectly, a 50 percent or greater interest, control or ownership (collectively referred as “The Sanctioned Ministries”).

That being said, General License 2 provides an exemption for the agreements in force as of the moment that the sanctions are officially introduced. In this respect OFAC explicitly states that the agreements in force with the sanctioned Turkish ministries should be terminated until October 13th, 2019 (until 16:01 Turkish time).

Lastly, General License 3 provides an exemption from implementation of Sections 1, 2 and 3 for the conducts of the Sanctioned Ministries with certain international organizations .

Moreover, OFAC decided to add the Minister of Internal Affairs, the Minister of National Defence, the Minister of Energy and Natural Resources of Turkey to the US Specially Designated Nationals and Blocked Persons List (“SDN List”) along with the Ministry of National Defence and the Ministry of Energy and Natural Resources.

In addition to the sanctions explained above, President Trump announced an additional tariff of 25% on iron-steel products in addition to the current tariff of 25% which is still subject to an on-going WTO dispute. Further, negotiations for an agreement between the US and Turkey aimed at increasing trade volume by in $100 billion are also suspended.

In conclusion, the increasing political tension between the US and Turkey has inevitably affected the legal climate and US sanctions regime gained an extraordinary significance in Turkey. Such politically based developments have alerted local and multinational companies conducting commercial activities related to Turkey to take action to manage the potential risks by improving their compliance with the US sanctions regime.

1. World Bank, IMF, FAO, OCHA, OHCR, UN Habitat, UNDP, UNFPA, UNHCR, UNICEF, WFP, The World Health Organization (WHO) including the Pan-American Health Organization (PAHO).