Representing Designated Persons: A US Lawyer’s Perspective

Over the past 20 years, the United States has increasingly leveraged its economic power by implementing sanctions to effectuate foreign policy objectives.^[2] As a result, more and more parties labelled as sanctions violators or operating in sanctioned countries face significant limitations in their day-to-day international dealings.

This chapter details the authorisations and prohibitions commonly seen in the representation of persons subject to US sanctions, be they designated as such by the US Department of the Treasury’s Office of Foreign Assets Control (OFAC) or parties based in a jurisdiction subject to a broader economic embargo. This chapter also provides an outline of: the scope of representation authorised for sanctioned individuals; OFAC’s policy and position on payments to counsel, related costs and judicial award transfers; the processes by which parties can seek authorisation to conduct transactions that would otherwise be prohibited by US sanctions; the process by which a sanctioned individual may seek to have sanctions lifted; and reputational issues counsel can face when representing sanctioned individuals.

Scope of representation of parties in sanctioned countries and parties that are sanctioned

The SDN List

OFAC ‘administers and enforces economic and trade sanctions based on US foreign policy and national security goals against targeted foreign countries and regimes, terrorists, international narcotics traffickers, those engaged in activities related to the proliferation of weapons of mass destruction, and other threats to the national security, foreign policy or economy of the United States’.^[3] Sanctions ‘can be either comprehensive [i.e., targeting specific countries] or selective [i.e., targeting specific entities and individuals]’.^[4]

With respect to selective sanctions, ‘[a]s part of its enforcement efforts, OFAC publishes a list of individuals and companies owned or controlled by, or acting for or on behalf of, targeted countries. It also lists individuals, groups, and entities, such as terrorists and narcotics traffickers designated under programs that are not country-specific. Collectively, such individuals and companies – including front companies or individuals determined to be owned or controlled by, or acting for or on behalf of, targeted countries or groups – are called “Specially Designated Nationals” or “SDNs.”’^[5] When OFAC adds individuals and entities to the Specially Designated Nationals And Blocked Persons List (the SDN List),^[6] ‘[t]heir assets are blocked and US persons are generally prohibited from dealing with them’.^[7] ‘In making a listing determination, OFAC draws on information from many sources, including but not limited to relevant United States government agencies, foreign governments, United Nations expert panels, and press and other open source reporting.’^[8] OFAC will then conduct an investigation and document its findings in an evidentiary memo and a proposed listing action, which is then reviewed by the relevant US agencies.^[9] Individuals and entities can also be added to the SDN List via secondary sanctions, where applicable.^[10]

Parties conducting business outside the United States, however, cannot merely rely on the SDN List to determine which entities they should not conduct business with. As OFAC has explained, ‘any entity owned in the aggregate, directly or indirectly, 50 percent or more by one or more blocked persons is itself considered to be a blocked person. The property and interests in property of such an entity are blocked regardless of whether the entity itself is listed in the annex to an Executive order or otherwise placed on OFAC’s list of Specially Designated Nationals’.^[11]

A party sanctioned by the United States and, therefore, shut off from the US economy, may still have significant financial and legal interests subject to US jurisdiction. Moreover, in many instances, the very basis for many OFAC designations is grounded in the harm these parties are alleged to have committed against US citizens or US interests, which may be litigated in US courts or other tribunals and require the sanctioned individual to obtain legal counsel. And some citizens and residents of sanctioned jurisdictions (i.e., territories subject to comprehensive US sanctions) may have substantial touchpoints outside their home country, such as owning businesses in third jurisdictions not subject to sanctions, having personal affairs in the United States, and having US or third-country passports.^[12] Broadly speaking, OFAC regulations authorise US counsel to provide many types of legal services to parties that are subject to sanctions. A party might, therefore, require an attorney to:

• counsel the targeted persons on the requirements of US laws and regulations;
• represent them before US federal, state and local agencies, whether they have been named a party to such a case or have initiated it themselves;^[13]
• represent them in litigation and other dispute resolution in the United States;
• apply for OFAC licences to engage in otherwise unauthorised transactions;
• seek removal from the SDN List;^[14] or
• represent them in cases where US laws require access to legal counsel at the public’s expense,^[15] such as in a criminal matter where parties can be represented by a court-appointed attorney.

Because legal representation increasingly relies on the support of non-lawyer experts, including expert witnesses, electronic discovery specialists, investigators, forensic accountants and IT experts, these types of engagements are generally authorised by OFAC, although many may be prohibited outside the litigation context. As further described below, however, receiving payment for these legal and related services could require a specific licence.^[16]

Although every US sanctions programme is unique and designed to effectuate distinct policy ends, the scope of OFAC authorisations for the provision of legal services to sanctioned parties and parties in sanctioned jurisdictions is generally consistent across sanctions programmes, albeit with some variation and nuance. These provisions – predominantly found in the Code of Federal Regulations (CFR) or OFAC-issued general licences^[17] – not only authorise the representation of these parties by US counsel, but also cover ancillary issues such as paying attorneys’ fees and reporting obligations. Of course, US counsel are, however, prohibited from assisting clients in circumvention of sanctions laws, such as structuring transactions in a manner aimed at keeping them outside the purview of US jurisdiction, as these acts could violate provisions of OFAC regulations prohibiting US persons from engaging in unlawful facilitation.^[18]

Despite the broad flexibility afforded US counsel and supporting parties, there may be times when general licences do not suffice, requiring the US counsel to apply for a specific licence to engage in certain representation. These can be issues such as representing a sanctioned party in litigation or arbitration outside the United States, acting as expert witness or counsel in a dispute abroad, or merely advising on contractual matters. For example, providing expert witness services as a US legal expert may be intrinsically legal in nature but viewed under OFAC regulations as a general service, given that the expert would not be providing legal representation per se. Separately, if US counsel is advising on a commercial transaction for a foreign party that is subsequently designated by OFAC, there may be a need for a specific licence to continue providing advice or engage in a wind-down of legal services.

Licensing

According to OFAC, ‘[a] license is an authorisation from OFAC to engage in a transaction that otherwise would be prohibited.’ Chapter V of Title 31 of the [CFR] and Executive Orders establishing sanctions programmes include language authorising OFAC to issue licences to effectuate the intent of sanctions programmes, ‘ensuring that those transactions consistent with US policy are permitted’.^[19]

OFAC issues two different types of licences: general licences and specific licences. General licences authorise ‘a particular type of transaction for a class of persons without the need to apply for a license’.^[20] OFAC issues general licences to authorise activities that would otherwise be prohibited with regards to sanctioned countries and entities. These broad authorisations allow all US persons to engage in the activity described without applying for specific authorisation issued on a case-by-case basis.

A specific licence, by contrast, ‘is a written document issued by OFAC to a particular person or entity, authorising a particular transaction in response to a written license application’.^[21] When a contemplated activity falls outside the scope of a general licence, a party can request a specific licence authorising both US and non-US persons to engage in the activity. After receiving a licence application, OFAC will issue a written response approving or denying the request. If approved, an OFAC licence is issued to a particular person or entity and authorises a particular transaction^[22] for a set term. Importantly, persons engaging in transactions pursuant to general or specific licences must strictly comply with the terms and scope of the licences.^[23]

Requests for interpretive guidance

Although a general or specific licence may be clear on its face, certain activities may warrant seeking interpretive guidance from OFAC, as it may not be clear whether the proposed activities fall within the scope of the licence. In these circumstances, sanctioned individuals and entities, or those conducting business with these entities, are well advised to, at a minimum, seek interpretative guidance from OFAC.

Interpretative guidance may also be sought when there are sudden political or economic shifts and resulting conditions that the original sanctions programme did not contemplate. For example, when the Taliban took control of the Afghan government in August 2021, it created the unusual circumstance where a sanctioned entity was the controlling entity in a nation that was not under a country-wide embargo. This led to considerable confusion as to whether certain activities that required interaction with the local government were allowed or prohibited. In these circumstances where the political shift has created a disconnect from previously issued licences, written guidance from OFAC can provide clarity to entities operating within these environments and can be used as a reference by counterparties. Further, if this guidance is provided publicly, it could potentially stave off similar requests to OFAC by parties performing similar transactions.

Payment for legal services and related expenses

Even where the provision of legal advice is allowed by a general licence, payment for these services often still requires a specific licence. For example, the Weapons of Mass Destruction Proliferators Sanctions Regulations^[24] state, in relevant part: ‘The provision of the following legal services to or on behalf of persons whose property and interests in property are blocked pursuant to §544.201(a) is authorised, provided that all receipts of payment of professional fees and reimbursement of incurred expenses must be specifically licensed.’^[25]

Even where a specific licence is obtained for payment of legal services, the relevant CFR sections will often dictate that payments to the licensee of professional fees and expenses authorised by the licence must not originate from a source within the United States, or from any source outside the United States within the possession or control of a US person, or from any other entity or individual whose property and interests in property are blocked pursuant to any Executive Order.^[26] This requirement for parties to pay their legal fees from outside the United States can prove difficult given that SDNs and parties in comprehensively sanctioned territories are generally barred from the US banking system. To effectuate payment in these circumstances, each regulatory framework has its own requirements, with some requiring prior notification to OFAC, some requiring prior specific licensing,^[27] and some requiring periodic reporting.^[28] Where a sanctions regime provides no guidance with respect to legal representation or payments for representation, parties should seek interpretative guidance, and in the alternative, a specific licence for legal representation and payment for the same.

Finally, the receipt of payment based on awards of judgments and settlements generally requires a specific licence.^[29] Even entering into a settlement agreement may, under certain sanctions programmes, require licensing, and efforts to pre-emptively obtain pre-approval to collect payment on a court award or settlement amount may prove difficult, given the time it takes for OFAC to evaluate and approve the licence application.

Applications for general and specific licences

While US persons can submit specific licence applications to OFAC for any type of transaction, counsel should first assess the likelihood of receiving a licence. This means assessing the proposed activity and the policy interests of OFAC and, more broadly, the United States in relation to the involved parties and the proposed activity. To illustrate, a licence application enabling US counsel to engage in proactive representation – such as representing sanctioned persons on international, non-US matters such as a contract or structuring of a financial transaction – is arguably less likely to be seen as consistent with US interests than engaging in an activity that would be subject to a general licence if in the United States, such as serving as counsel or a US law expert in a dispute abroad where the US lawyer’s or law firm’s services are critical to the representation.

Although OFAC does not provide standard forms for most of these licence applications, its website states that licence applications should include ‘all necessary information as required in the application guidelines or the regulations pertaining to the particular embargo program’.^[30] Applications for licences must include ‘all information specified by relevant instructions and/or forms and must fully disclose the names of all parties who are concerned with or interested in the proposed transaction’.^[31] Furthermore, OFAC asks that licence applications include ‘a detailed description of the proposed transaction, including the names and addresses of any individuals/companies involved’.^[32] After receiving a licence application, OFAC will issue a written response approving or denying the licence request or return it without action if it finds a given general licence or other authorisation to apply.

Evidence and documentation

There is no established burden of proof for OFAC’s consideration of applications for specific licences. However, because the success of the application is heavily fact- and policy-specific, it is critical to include detailed, accurate and verifiable information so that OFAC can make an informed decision regarding the application. Parties seeking these licences should be clear in their request and explain not only the rationale underpinning their applications, but also the policy justification warranting the issuance of a specific licence. Supporting documentation should be provided to the extent that it is available and responsive.

In terms of the criteria for evaluating applications, OFAC has stated that its licensing determinations are ‘guided by US foreign policy and national security concerns’ and that ‘[e]ach application is reviewed on a case-by-case basis and often requires interagency consultation’.^[33] For this reason, certain public comments by the leaders of other federal agencies explaining or defining the US government’s foreign policy objectives can be useful in advocating for the approval of a specific licence. Additionally, although OFAC will disclaim any precedential value to the approval of any given licence, it nonetheless strives to achieve consistency across its evaluations of licence applications, meaning that it will consider its prior decisions in similar matters.

Beyond the basic facts and circumstances of a given transaction, as well as the involved parties, counsel can and should make active arguments justifying approval. Counsel should advance arguments as to why the proposed transaction aligns with or does not contravene US foreign policy objectives. For example, if US policy favours divestment from a sanctioned country, counsel should highlight how the transaction that is the subject of the counsel’s representation advances that policy. Similarly, if a proposed transaction has at least some humanitarian objectives, counsel should stress them. A frequent criticism of sanctions regimes is that their impact is felt predominantly by the ordinary people living in the heavily sanctioned country rather than by the governing regimes, especially where the sanctioned country is ruled by an autocratic government where the population has no say in its government or its conduct. OFAC often attempts to address these concerns by issuing general licences directed at humanitarian efforts, particularly in the supply of food and medicine. Still, these general licences do not contemplate all aspects of humanitarian aid, including legal representation, and to the extent possible, applicants for specific licences should emphasise the humanitarian objectives within the proposed transaction.

Challenging OFAC’s denial of a specific licence

OFAC licensing decisions are considered ‘final’ agency actions. Thus, to appeal OFAC’s denial of a licence request to provide legal services, the applicant would have to demonstrate some ‘good cause’, such as changed circumstances or additional relevant information that is outcome-determinative.^[34]

Alternatively, applicants denied OFAC licences can file a lawsuit against the agency. This option can be costly, and a successful challenge to ‘final agency action’ requires a litigant to show that the agency’s decision was ‘arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law’, a very high standard in the US legal system.^[35] Furthermore, because US courts afford tremendous deference to government agencies charged with making decisions that affect national security, it is imperative that OFAC licence applicants ensure that the application is accurate and exhaustive prior to submitting it for OFAC’s consideration.

Precedential value

Even when OFAC agrees that a proposed activity is within the scope of a general licence or grants a specific licence, it will often also state that its response has ‘no precedential effect’ and is ‘based on the facts and circumstances of the application’. Nevertheless, OFAC states that part of its evaluation of any given application includes its prior determination in similar situations. Because OFAC does not publish its grants of specific licences, it can be challenging for applicants and counsel to cite other applications for any guidance. For that reason, it is important for an applicant to hire counsel with experience in making licensing applications for transactions affecting sanctioned persons or in the sanctioned country at issue because that counsel will be able to draw upon similar cases and previous OFAC decisions to support the application.

Timing considerations

There are no set timetables for OFAC to respond to a request for a specific licence to conduct any activity. OFAC can take months or even years to respond to a given request, but, as a general matter, it will respond to routine requests within several months, and more complex transactions can potentially take over a year to obtain a response. OFAC’s ability to respond expeditiously to each request may be thwarted by major sanctions events, such as the Taliban takeover of Afghanistan or the Russian invasion of Ukraine. Consequently, applicants for specific licences should clearly state the time-sensitivity of the request, including all relevant deadlines for the transactions or legal proceedings. Where humanitarian interests are involved, the applicant should unambiguously request and emphasise the importance of an expeditious review, as well as the detrimental consequences of denial of the application or non-action. If OFAC has failed to respond to a given application, the applicant or counsel can call the agency and speak with an information specialist who can update them on the status of the application. In some circumstances, the applicant or counsel may be able to speak directly with the licensing officer assigned to the application.

Confidentiality

Finally, to the extent that a licence application contains extremely confidential and business proprietary information as well as certain commentary that could potentially endanger the party making the application, its owners and any affiliates and contractors if released to the public, the applicant should so note and request confidentiality pursuant to the Freedom of Information Act and 5 USC Sections 552(b)(4) and (b)(7)(F), which prevents the release of the information to the public, even when requests for this information are made pursuant to other laws and regulations. Certain parts of an application, even if released, can be redacted under these provisions.

Obtaining delisting

As part of its guidance, OFAC explains that the ‘power and integrity’ of its sanctions stem not only from its ‘ability to designate and add persons to the Specially Designated Nationals and Blocked Persons List (SDN List), but also from its willingness to remove persons from the SDN List consistent with the law’.^[36] OFAC guidance further explains that ‘[t]he ultimate goal of sanctions is not to punish, but to bring about a positive change in behavior’.^[37]

To petition for removal from the SDN List – that is, to ‘seek administrative reconsideration of his, her or its designation or that of a vessel as blocked’^[38] – a listed party should submit to OFAC ‘[a] request for the reconsideration of OFAC’s determination, including a detailed description of why the listed person should be removed’.^[39]

Pursuant to 31 CFR Section 501.807, ‘[a] person blocked . . . or a person owning a majority interest in a blocked vessel may submit arguments or evidence that the person believes establishes that insufficient basis exists for the designation.’ ‘A request for reconsideration – also sometimes called a delisting request – may include arguments or evidence rebutting [OFAC’s] “basis . . . for the designation,” or “assert that the circumstances resulting in the designation no longer apply.”’^[40] In other words, the designated person must argue that ‘whatever rationale led to the designation was never true or is no longer true’.^[41] A blocked person also may propose remedial steps, such as corporate reorganisation or the resignation of persons from positions in a blocked entity, that may negate the basis for designation.^[42]

OFAC guidance^[43] further lists circumstances that could lead to an entity’s or individual’s removal from the SDN List: ‘the death of an SDN’;^[44] the fact that a ‘designation was based on mistaken identity’;^[45] ‘a positive change in behavior’;^[46] or the fact that ‘the basis for the designation no longer exists’.^[47]

After a party has petitioned for removal from the SDN List, OFAC reviews the petition and ‘may request clarifying, corroborating, or other additional information’.^[48] OFAC guidance states that ‘[i]f needed, OFAC typically endeavors to send the first questionnaire within 90 days from the date the petition is received by OFAC’.^[49] Because these requests for information may result in further questions, ‘it is not uncommon for OFAC to send one or more follow-up questionnaires and to engage in additional research to verify claims made by a petitioner’.^[50] Parties seeking removal may also request a ‘meeting’ with OFAC, although these meetings are not required and OFAC is not required to grant a meeting request.^[51] Further, ‘[a]s part of the agency’s reconsideration process, designated individuals may request disclosure of the administrative record supporting the designation decision’.^[52] OFAC ultimately renders a decision in writing.^[53]

The length of the removal process is case-specific. OFAC guidance states that ‘[t]hough each case is unique, OFAC applies the same standards to petition reviews across all sanctions programs. The timing of a review depends upon a range of factors including whether OFAC needs additional information, how timely and forthcoming the petitioner is in responding to OFAC’s requests, and the specific facts of the case. Incomplete answers to questionnaires or incomplete documentation often cause delays.’^[54] If OFAC rejects a petition for removal, a party may reapply – although, without new arguments or evidence, or a change in circumstances, the outcome will, in the absence of an independent decision to delist, remain the same.^[55] ‘[T]here is “no limit on the number of times a designated person can request delisting.”’^[56]

Listed parties may have a statutory right to seek judicial review.^[57] Thus, ‘[i]f OFAC denies a request for reconsideration, the blocked person may challenge that determination under the [Administrative Procedure Act] in federal court.’^[58] Indeed, a listed party may ‘bypass the administrative-delisting process altogether and immediately challenge the agency’s designation’.^[59] Listed parties pursuing delisting litigation should, however, be aware that the relevant judicial standard of review in cases challenging an OFAC designation decision is a very deferential one. Courts will ‘set aside OFAC’s designation only if it is “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.”’^[60] Thus, where the evidence ‘provides adequate basis to justify Treasury’s determination’,^[61] courts will deny the petitioner’s application for delisting. However, where OFAC refuses to provide reasons for the investigation and designation – if, for example, the evidence is classified – courts have found a due process violation.^[62] Similar constitutional violations have been found where OFAC fails to obtain a warrant before seizing assets, violating the Fourth Amendment.^[63] However, with respect to constitutional claims, the government’s motion to dismiss has been granted where the court finds that a foreign national lacks standing to assert these claims.^[64]

Public relations and reputational issues for both the client and the lawyer

Sanctioned individuals and their attorneys both face unique reputational and public relations issues. For sanctioned individuals, the reputational harm associated with being designated is often catastrophic to their business and personal interests, as fear of being blocked from the US economy can trigger their counterparties to engage in de-risking activity, meaning that many counterparties that may legally transact business with the sanctioned party may nonetheless choose to end the relationship merely because of the perceived risk of running afoul of the sanctions. Counterparties may cease all transactions and cancel contracts and financial institutions may close accounts, even if they are not subject to US sanctions. For those clients engaged in authorised business with a sanctioned party or in a sanctioned country, the reputational risks of being associated with a sanctioned person are also quite high, especially given that OFAC has been known to designate persons based on open-source reporting, and the mere association with a sanctioned person could result in a designation.

Even when sanctions are lifted, the stigma of a listing can linger. Once publicly associated with the activity that led to the listing, formerly sanctioned parties and parties operating in sanctioned countries may face public demands for counterparties to cancel contracts or for local partners to divest from their investments.

Legal counsel can assist in alleviating many of these reputational harms. For example, counsel can interface with counterparties that are skittish about continuing to transact with the sanctioned party and potentially provide comfort that proposed activity is, in fact, not prohibited by the sanctions listing. Counsel can also advise on divestments and corporate reorganisations to allow entities that are majority owned by a sanctioned party to continue its business in accordance with the sanctions. To the extent that a sanctioned party is cut off by financial institutions, US counsel can advise on securing financing from other institutions to ensure compliance with the sanctions regime that led to the listing. And, of course, counsel can advise and represent the sanctioned person in obtaining delisting.

Lawyers, too, face reputational risks for representing sanctioned parties. Although the American Bar Association, which publishes Model Rules of Professional Conduct for attorneys, states in Model Rule 1.2(b) that ‘[a] lawyer’s representation of a client, including representation by appointment, does not constitute an endorsement of the client’s political, economic, social or moral views or activities’, it is not unusual for lawyers to be publicly criticised for representing unpopular or controversial clients. This consideration is particularly acute when representing sanctioned persons, largely because sanctions regimes are inherently political and often exist at the cross section of foreign policy and national security, and an attorney for a sanctioned person may be perceived as operating contrary to the national interest or be labelled ‘un-American’.

This desire to dissociate with sanctioned bad actors may also be brought on by economic concerns on the part of the attorney. Specifically, a law firm risks losing or failing to retain clients who may not want to be represented by a firm representing sanctioned persons. This loss may extend to employees as well, who may shift to a competing firm following a decision of the initial firm to represent a particularly controversial client.

These issues can be particularly difficult to navigate when there are sudden political shifts or unforeseen international crises. For example, after Russia annexed Crimea in 2014, the United States instituted a sanctions regime on Russia, yet many US law firms continued to represent Russian nationals (including Russian ‘oligarchs’) and operate offices in Russia. But when Russia invaded Ukraine in February 2022, the international outrage caused an unprecedented number of multinational law firms to shutter offices in Moscow, dissociate with Russian clients, and refuse to onboard new clients associated with the Russian economy or regime.

Fear of reputational harm may lead attorneys to terminate sanctioned clients, even mid-litigation.^[65] If a case is pending in court, a lawyer’s effort to withdraw from a client’s case may require court approval.^[66] In other legal matters that do not require court approval, lawyers who wish to withdraw from representation of a client must ensure that they are complying with ethics rules in their jurisdiction and that clients will not face a ‘material adverse effect’ from their withdrawal.^[67] Failure to do so could lead to disciplinary complaints and malpractice lawsuits, although the latter is less likely in the absence of evidence of actual harm to the client.

It is therefore imperative for any sanctions attorney to weigh the advantages and disadvantages of representing a sanctioned client. It is also critical to do a thorough background check; due diligence and vetting are critical in assessing whether a sanctioned client’s case presents reputational issues that are insurmountable. Beyond what the client discloses, a comprehensive dive into the potential client’s past and records may turn up information that affects the lawyer’s decision to represent the party.

Footnotes