ILMA Compoundings June 2019 - 14

INDUSTRY RUNDOWN

International Insight
U.S. Sanctions
Europe's response and its threat
to U.S. companies
By James Eggenschwiler
The U.S. battle terrain in "bad-acting" nations is
entering a new chapter. The U.S. sanctions program
aims at the economic lifeblood of countries that choose
to act threateningly against the U.S. or its allies, or that
defy commonly held principles concerning neighboring
nations or its own citizens. Usually, U.S. allies agree -
not so concerning U.S. sanctions against Iran. In an
unprecedented move, three influential European Union
member states (E3) are leading an attempt to sidestep
U.S. sanctions against Iran, in a manner that imperils
U.S. businesses and others around the world.

the opportunity to test the various qualities of the system,
including the quality of its stealth.

INSTEX
Key to the U.S. claim of jurisdiction is its permeation of the
global financial system. In short, payment and collection of
funds for goods and services, regardless of currency, involve
processing elements controlled or influenced by U.S. entities.
The success of this approach is reflected by the civil penalties
paid by foreign businesses and the commonplace extradition
of individual violators to the U.S. for prosecution.
To combat this jurisdictional claim by the U.S., the E3
have devised an alternate system (INSTEX) that is based
on bartering. It avoids the traditional financial system by
electronically tracking and balancing the value of shipments
among participating parties. Its initial launch is anticipated
to occur by the end of 2020, although predictions vary.
Although the contexts of use are described to be broader,
it is clear that the U.S. sanctions program is its singular
motivation - and Iranian trade its first objective. First, it
will be used to facilitate barter transactions that are currently
not the subject of U.S. sanctions. This activity is already
legitimate pursuant to current U.S. sanctions against Iran.
This safety net affords the E3 and other eventual participants

U.S. RESPONSE
The response by the U.S. is likely to be twofold. Initially, the
U.S. will scrutinize the operation of INSTEX to determine if it
truly operates outside of U.S.-owned or -controlled aspects of
the financial system. Even the E3 and other intended users of
the system acknowledge concern that some aspects of the systems, design or operation might still trigger U.S. jurisdiction.
The fallback position by the U.S. already seems clear -
impose sanctions and secondary sanctions against participants. This approach would undoubtedly raise tensions
between the U.S. and Europe, but its impact would be
salient. Sanctions could prohibit commercial (and some
noncommercial) activity with specific participants, a broader
list of commercial or government persons or entities, or
entire countries. Secondary sanctions could target those who
defy the sanctions with prohibitions against engagement with
any element of the U.S. economy. Currently, U.S. sanctions
against Iran place a commercial prohibition against anyone
interacting with any aspect of the Iranian economy identified
by the sanctions. These prohibitions are extremely broad and
impact the entire Iranian economy, with very few exceptions

14

JUNE 2019

| COMPOUNDINGS | ILMA.ORG


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ILMA Compoundings June 2019

Table of Contents for the Digital Edition of ILMA Compoundings June 2019

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ILMA Compoundings June 2019 - 1
ILMA Compoundings June 2019 - 2
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