THE FOUR TYPES OF ECONOMIC SANCTIONS

Every time you spend your money, you are casting a vote for the type of world that you want.” – Anne Lappé

Recent U.S. foreign policy actions towards Cuba, Iran, and Russia all have one thing in common - sanctions.  However, most people don't know precisely what sanctions are and how they work.  Economic sanctions are penalties applied unilaterally by one country (or multilaterally, by a group of countries) on another country (or group of countries).

The use of sanctions in U.S. foreign policy originated from the War of 1812 when Secretary of the Treasury Albert Gallatin administered sanctions against Great Britain for the harassment of American sailors.  In 1861, during the Civil War, Congress approved the Trading with the Enemy Act (TWEA) which prohibited transactions with the Confederacy and called for the forfeiture of goods involved in those transactions.  The TWEA of 1917 modernized the Civil War legislation for World War I.

During World War II, the Office of Foreign Funds Control (FFC) was established following the German invasion of Norway.  The FFC program was administered by the Secretary of the Treasury throughout the war to prevent Nazi use of the occupied countries’ holdings of foreign securities and to prevent the forced repatriation of funds belonging to nationals of those countries.  After the United States formally entered World War II, the FFC played a leading role in economic warfare against the Axis powers by blocking enemy assets and prohibiting foreign trade and financial transactions.

The successor to the FFC, the Treasury Department's Office of Foreign Assets Control (OFAC), was formally created in December 1950.  The FFC was expanded into OFAC in response to China's entry into the Korean War when President Truman declared a national emergency and blocked all Chinese and North Korean assets subject to U.S. jurisdiction.  In 1963, OFAC applied TWEA to Cuba which is still the oldest sanctions regime.  While U.S. sanctions against Cuba are still in force, they have been rolled back significantly to correspond with evolving diplomacy.  In 1977, Congress passed the International Emergency Economic Powers Act (IEEPA) to redefine the President's authorities to regulate international economic transactions in times of national emergency, until then provided by section 5(b) of TWEA, by eliminating TWEA's applicability to national emergencies and providing such authorities in a separate statute that is narrower in scope and subject to congressional review.

Today there are four types of economic sanctions that are comprised of three elements: who is subject to the sanction, what are the relevant transactions, and what are the targets of sanctions:

1. Primary Sanctions

Subject Persons 

  • U.S. citizens and permanent resident aliens anywhere in the world
  • Individuals, regardless of citizenship, physically located in the U.S.
  • Entities organized under U.S. laws
  • Entities owned or controlled by a U.S. person

Transactions 

  • Dealings in any property in which a designated person or country has any interest whatsoever, direct or indirect.
  • Exportation, reexportation, sale or supply, directly or indirectly, of any goods, technology services; facilitation of same.

Target 

2. Secondary Sanctions

Subject Persons 

  • Any person worldwide, entity, or individual

Transactions 

  • Discreet, narrowly defined transaction or activity
  • Knowledge and materiality required

Target 

3. Sectoral Sanctions

Subject Persons 

  • U.S. citizens and permanent aliens anywhere in the world
  • Individuals, regardless of citizenship, physically located in the U.S.
  • Entities organized under U.S. laws
  • Entities owned or controlled by a U.S. person/entity

Transactions  

  • Very discreet, narrowly defined transaction or activity
  • Transactions linked to specifically identified person or entity

Target - Two Tier Process 

  • Identified sector of the economy
  • Sectoral Sanction Identification (SSI) - individual or entity

4. Cyber Sanctions

On April 1, 2015, President Obama signed an Executive Order establishing the use of cyber sanctions.  These sanctions focus on individuals or entities whose actions in cyberspace result in significant threats to the national security, foreign policy, economic health or financial stability of the United States.  Cyber sanctions are intended to be a deterrent against companies that profit from cyber attacks by knowingly using stolen trade secrets to undermine the economic health of the United States.