US Administration Imposes Targeted Sanctions on Turkey in Relation to Syria

On October 14, 2019, US President Donald Trump signed an Executive Order (the "Order") authorizing a range of primary and secondary sanctions on the Government of Turkey and affiliated individuals and entities. The Order followed Turkey's launch of its "Operation Peace Spring" military operation in Syria. Following the release of the Order, the US Department of the Treasury Office of Foreign Assets Control ("OFAC") designated the Turkish Ministry of Energy and Natural Resources ("MENR"), Ministry of National Defense ("MND"), as well as three senior Turkish officials (collectively with the MENR and the MND, the "Syria Order SDNs") for inclusion on the Specially Designated Nationals ("SDNs") And Blocked Persons List ("SDN List"). The three named officials include the Minister of National Defense, the Minister of Energy and Natural Resources and the Minister of the Interior.

The Order became effective against the Syria Order SDNs as soon as the latter were designated by OFAC. While the designations made so far under the Order are limited to the Syria Order SDNs, the Order provides broad authority for the Treasury and State Departments to make additional sanctions designations and to impose further restrictions on certain trade involving Turkey. As a matter of US law, an executive order provides the legal basis and authorization for sanctions, but the blocking of property authorized by an executive order only "takes effect" as and when OFAC adds the names of specific individuals or entities to the SDN List.

The Order is of concern both for companies whose business activities bring them into contact with the Syria Order SDNs and those whose activities fall within the much broader authority of the Order.

However, the recently announced temporary agreement pausing military action could lead to the suspension and ultimate withdrawal of the sanctions; the Trump Administration has indicated that new sanctions will not be imposed on Turkey during the pause, and that they will be withdrawn "once a permanent cease-fire is in effect."

Recommendations and Outlook

As noted, the initial designations under the Order are limited to the Syria Order SDNs. In the short term, companies doing business in relation to Turkey should:

• Confirm that they are not transacting business (including the entering into or performance of contracts, receipt of funds or the payment of funds, or other commercial activity) with the SDNs, or otherwise providing financial, material, or technological support, or goods or services, for or on behalf of SDNs. US persons, for example, may be deemed to have violated the Order merely by engaging in negotiations with one of the Syria Order SDNs.
• Review business arrangements with other state-owned entities in the energy and/or defense sectors in Turkey. Under OFAC's 50 percent rule, any entities in which a designated person or entity holds a greater than 50 percent interest will be subject to the same restrictions imposed on the named SDN itself. In general, dealings with state-owned entities that are not directly or indirectly owned by the MENR or the MND should not be impacted by the current designations.
• Consider also applying for specific licenses from OFAC in appropriate cases; while OFAC has authorized certain limited "wind down" activities and transactions for companies until November 13, 2019 pursuant to General License 2, companies may be able to obtain specific licensing where, e.g., sanctions would otherwise undermine Turkey's energy security. To obtain a specific license, a company would apply directly to OFAC. Specific licenses may exempt certain activities of a company from the prohibitions under the Order for a specified duration.

While the initial designations under the Order are relatively narrow, the Order leaves considerable scope for expanding the number of individuals and entities designated. Given the evolving situation, additional action by the Treasury Department or the US Congress remains a strong possibility, although one that is subject to a very dynamic political situation and ongoing negotiations.

For example, companies doing business in Turkey should ensure that, where possible, their business arrangements in Turkey have appropriate contractual protections and exit rights (such as termination rights in the event that continued performance is impeded by sanctions), and should maintain a robust set of sanctions-compliance procedures in relation to Turkey (and more generally). In respect of existing contracts, companies should look to General License 2 and the "wind-down" period, discussed below. For contracts or other business arrangements in connection with Turkey that are currently being negotiated or otherwise contemplated, companies should perform appropriate due diligence and consider the meaningful risk that the numbers of persons and/or entities designated under the Order may be expanded.

In summary, the Order and accompanying measures may signal the forthcoming designation of additional individuals or entities, depending on the outcome of negotiations.

Technical Analysis

The Turkish sanctions Order contains 12 sections covering both primary and secondary sanctions. These provisions provide the Treasury Department with current and ongoing authority to designate persons or companies under the Order, but as noted above, the designations made so far are limited to the five Syria Order SDNs.

• Section 1 – Primary Sanctions

Section 1 authorizes primary blocking sanctions against the property and interests of a broad range of Turkish government actors and affiliates. It includes any person determined to have been "responsible" or "complicit in" "actions or policies that further threaten the peace, security, stability, or territorial integrity of Syria" or the "commission of serious human rights abuse"; as well as any "current or formal official of the Government of Turkey" or political subdivision or agency of Turkey.

In addition, Section 1 authorizes secondary sanctions against any person "operat[ing]" in as yet unspecified "sectors of the Turkish economy," if that person has "materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to or in support of," any person designated under the Order, or where the person is owned, controlled, or acting on behalf of a person so designated. This provision would appear to be without effect unless and until specific sectors of the Turkish economy are first identified by the US Administration.

• Section 2 – Secondary Sanctions

By its express terms, Section 2 notably applies solely to "foreign persons." Section 2 represents the core of the Order's secondary sanctions provisions, authorizing the imposition of sanctions on any foreign person "responsible for or complicit in" or who is otherwise "directly or indirectly engaged in, or attempted to engage in, or financed," any one of the following actions:

(A) the obstruction, disruption, or prevention of a ceasefire in northern Syria;

(B) the intimidation or prevention of displaced persons from voluntarily returning to their places of residence in Syria;

(C) the forcible repatriation of persons or refugees to Syria; or

(D) the obstruction, disruption, or prevention of efforts to promote a political solution to the conflict in Syria, including:

(1) the convening and conduct of a credible and inclusive Syrian-led constitutional process under the auspices of the United Nations ("UN");

(2) the preparation for and conduct of UN-supervised elections, pursuant to the new constitution, that are free and fair and to the highest international standards of transparency and accountability; or

(3) the development of a new Syrian government that is representative and reflects the will of the Syrian people.

Any "adult family member" of a person designated under the provisions cited above may also be sanctioned, as well as any person otherwise directly or indirectly engaged in "the expropriation of property, including real property, for personal gain or political purposes in Syria."

Section 2 authorizes menu-based sanctions against designated persons, including (i) a block on US government procurement for the named individual or entity, (ii) a mandatory denial of visas for entry into the United States, and (iii) a range of financial measures. The financial measures authorized by Section 2(c) include barring US financial institutions from extending loans or credit totaling more than $10,000,000 in any 12-month period to a designated person, with limited humanitarian exceptions; prohibiting any transactions in US currency or transfers of credits or payments through US banks for any designated person; blocking the designated person's US property and interests (e.g., designation as an SDN); prohibiting US persons from extending "significant" debt or equity to the designated person; and restricting the designated person's ability to import into the US.

In addition, Section 2(c) authorizes the imposition of sanctions upon "the principal executive officer or officers, or persons performing similar functions with similar authorities," for any person designated under that section.

• Section 3 – Secondary Sanctions (Foreign Financial Institutions)

Section 3 specifically targets "foreign financial institutions" that have "knowingly conducted or facilitated any significant financial transaction for or on behalf of any person" designated pursuant to Section 1. It authorizes restrictions on the opening of correspondent accounts and/or payable-through accounts by foreign institutions in the United States.

The remaining sections of the Order authorize a range of additional measures, including (i) the suspension of immigrant and non-immigrant entry into the United States by any persons designated under Sections 1(a) or 2(a) (Section 4); (ii) the making of certain donations for the benefit of persons designated under Section 1 (Section 5); (iii) a "primary sanctions" prohibition on extending or receiving funds, goods, or services from any person designated under Sections 1 or 2 (Section 6); and (iv) a prohibition of any transaction or conspiracy that "evades or avoids, has the purpose of evading or avoiding, causes a violation of, or attempts to violate" any provision of the Order (Section 7).

General and Specific Licenses

Along with the initial designations under the Order, OFAC issued three General Licenses ("GLs"). The second of these, GL 2, will be most significant for companies with business arrangements involving Turkey, as it authorizes a limited scope of transactions and activities necessary for companies to wind down affected operations. The following summarizes the scope of the General Licenses:

• GL 1 authorizes all transactions and activities "for the conduct of the official business of the United States Government by employees, grantees, or contractors thereof" that would otherwise be prohibited by the Order.
• GL 2 authorizes "all transactions and activities . . . that are ordinarily incident and necessary to the wind down of operations, contracts, or other agreements involving" the Syria Order SDNs for the period through November 13, 2019 at 12:01am eastern standard time. GL 2 extends the authorization to or any entity in which "one or more of such ministries [i.e., MENR or MND] own, directly or indirectly, a 50 percent or greater interest . . . ."
• GL 3 authorizes "all transactions and activities that are for the official business of the United Nations involving the Ministry of National Defense or the Ministry of Energy and Natural Resources of the Government of Turkey, or any entity in which one or more of such ministries own, directly or indirectly, a 50 percent or greater interest."

Finally, in OFAC's press release announcing the initial designations of the Syria Order SDNs, it indicated that it is "prepared to issue authorizations, such as general or specific licenses, as appropriate, to ensure that today’s action does not disrupt Turkey’s ability to meet its energy needs."

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Conclusion

The sanctions designations are relevant to the activities of both US and non-US companies doing business in Turkey, insofar as US primary sanctions may apply in practice to non-US companies whose business involves the United States or US persons, where transactions are conducted in US dollars (such that a US bank would ultimately be involved in US dollar clearing related to the transactions), or where a non-US company has undertaken obligations to lenders, insurers, investors or other parties to comply with US sanctions requirements. In addition, as noted above, non-US persons may face a risk of sanctions designation under the Order if they provide material assistance or support for the Syria Order SDNs.

Given the uncertainty surrounding the scope of the Order, US or non-US companies doing business in Turkey should review their activities to identify potential sanctions risks, and should seek appropriate counsel regarding the impact of the Order.

Should you have any questions concerning the above, please contact your regular HSF contact.