How Sanctions Work, From a Presidential Order to a Frozen Bank Account

Sanctions are announced like a thunderclap and enforced like a tax audit. The press release says the government is "imposing severe costs." Meanwhile, somewhere in Columbus, a compliance officer is staring at an ownership chart with seven layers of shell companies and saying, to nobody in particular, "I need the names of the people at the bottom."

That gap between the headline and the paperwork is where most of the confusion lives. People ask whether sanctions "work" without ever asking how they are made, who runs them, what the law lets a president do on his own, and where Congress comes in. If you understand the machinery, you can judge a sanctions policy the way you would judge any other tool: by what it can reach, what it cannot, and who pays. So let's open the hood. This is an explainer, and I'll try to keep the plumbing readable.

The basic idea

A sanction is a government's decision to cut off a person, a company or a country from something they want: access to your market, your banks, your technology, your territory. The most common American version freezes a target's property in the United States and bars Americans from doing business with it.

Notice the structure. It works only as far as the sanctioner's reach goes. That is why the American version is so potent: the dollar is the world's most widely used currency for trade and finance, and the American financial system sits at the centre of a huge amount of global payments. A sanction by a small economy is a gesture. A sanction by the country whose banks clear much of the world's dollar payments is a weapon.

Step one: the legal authority, IEEPA

Where does the President get the power? The workhorse statute is the International Emergency Economic Powers Act, passed in 1977 and known by its initials, IEEPA. It lets the President regulate commerce and freeze property of foreign parties after declaring a national emergency in response to an "unusual and extraordinary threat" that comes substantially from outside the United States.

Two features matter.

1. It starts with a declaration. The President must declare a national emergency under the National Emergencies Act of 1976, which also sets up the paperwork: the declaration is published, reported to Congress, and has to be renewed every year or it lapses.
2. It has a lineage. IEEPA replaced the use of the World War I-era Trading with the Enemy Act for peacetime purposes. Congress meant to narrow the President's emergency powers and put them on a statutory footing. It is a good story about the way a limit can turn into a licence, because IEEPA has become one of the most heavily used tools in the foreign-policy toolbox.

The first major use came in November 1979, when Iranian militants seized the American embassy in Tehran and took hostages. President Jimmy Carter froze Iranian government assets in the United States. When the hostages were released in January 1981 under the Algiers Accords, those frozen assets were part of the bargain. The Supreme Court upheld President Reagan's implementation of that settlement in Dames & Moore v. Regan (1981). You can read the larger story in From the Shah to the Hostages, the Real History of America and Iran.

Step two: the Treasury's OFAC and the SDN list

Presidents sign orders. Treasury does the work. The agency in charge is the Office of Foreign Assets Control, OFAC, part of the Treasury Department. It has roots going back to the Second World War era and was formally set up in 1950, when President Truman froze Chinese and North Korean assets after China entered the Korean War.

OFAC does three jobs: it writes the regulations that implement the President's orders, it decides who is added to the lists, and it enforces the rules with civil penalties.

The best known list is the Specially Designated Nationals and Blocked Persons List, the SDN list. When OFAC adds a person or a company to it, that party's property in the United States, or in the hands of Americans, is blocked. Americans are generally forbidden from dealing with anyone on the list.

Three rules make it bite.

• The 50 percent rule. An entity owned 50 percent or more, in the aggregate, by one or more blocked persons is itself treated as blocked, even if its name does not appear on the list. This is the reason that ownership charts matter.
• Strict compliance. American banks and businesses must screen their customers and block any property they find. If you hold blocked property, you have to report it to OFAC within ten business days. Civil penalties do not depend on whether you meant to break the rules.
• Licences. OFAC can grant general licences, which cover whole categories of activity, and specific licences for one party. That is how humanitarian shipments, wind-downs and exceptions are handled.

Step three: the dollar as the pipe

Why does a sanction on a foreign company in a faraway country bite at all? Because of how money moves. When a bank in one country pays a bank in another and the payment is in dollars, the transaction usually passes through a bank in the United States, through what is called a correspondent account. American banks are subject to American law. So a transaction that touches a blocked party can be stopped in New York even if every person involved is abroad.

That is the dollar's role in clearing. It is the pipe, and the Treasury holds the valve. You don't need to take over a foreign bank to freeze its customers' dollars. You just need the bank on the other end to say no.

Secondary sanctions: reaching the third party

The next layer reaches beyond Americans. A secondary sanction threatens non-American parties, such as a foreign bank, with penalties if they do business with a primary target. The penalty is usually the loss of access to the American financial system. The threat is aimed at the third-party bank's choice between two customers: the sanctioned party, or the whole American market.

Congress has used this heavily. The Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 is one example, targeting foreign banks that deal with certain Iranian parties. Secondary sanctions are powerful and controversial. They work because the stakes for the third party are high, and they annoy allies for the same reason. A European company that never wanted a quarrel with Washington suddenly finds that it has to choose.

Two laws that put Congress in the room: Magnitsky and CAATSA

Presidents can act alone under IEEPA, but Congress has not been content to leave everything to the executive. Two statutes show how.

The Magnitsky Act of 2012. Sergei Magnitsky was a Russian lawyer who died in a Moscow detention centre in 2009 after alleging a large tax fraud involving Russian officials. In December 2012 Congress passed, and President Obama signed, the Russia and Moldova Jackson-Vanik Repeal and Sergei Magnitsky Rule of Law Accountability Act. That ungainly title packed two things together: it ended the old Jackson-Vanik trade restrictions for Russia, which we discuss in Trade Is Foreign Policy and Every President Has Treated It That Way, and it created authority for visa bans and asset freezes against individuals involved in Magnitsky's death and in gross human rights violations. In December 2016 Congress passed the Global Magnitsky Human Rights Accountability Act, extending the model worldwide.

CAATSA, 2017. The Countering America's Adversaries Through Sanctions Act, signed in August 2017, covered Russia, Iran and North Korea. For Russia it did something unusual: it wrote existing sanctions into statute and restricted the President's ability to lift them. If the President wants to terminate or waive certain Russia sanctions, he has to report to Congress, which gets a review period to pass a joint resolution of disapproval. The review is thirty days, with a longer period if the notice arrives in summer.

The reason is simple. Many in Congress, of both parties, did not trust a President to ease pressure without being watched. Whatever you think of that judgment, it shows the constitutional balance at work: the President has broad emergency authority under IEEPA, and Congress holds the power over foreign commerce and the power of the purse. A statute can narrow the door.

Congressional review in general

Let's be exact about where Congress sits.

• Under the National Emergencies Act, Congress can end a declared emergency by passing a joint resolution. But a joint resolution goes to the President, who can veto it, so ending an emergency over a President's objection takes two-thirds of each chamber. The earlier version of the Act used a concurrent resolution that avoided the veto, and the Supreme Court's 1983 decision in INS v. Chadha struck down that kind of device.
• Under specific sanctions statutes such as CAATSA, review provisions apply to particular actions, such as waivers.
• Under the Constitution, Congress writes the law. Congress can narrow, direct or end the sanctions authority whenever it can pass a bill the President signs or a bill it can pass over a veto.

If you care about the proper role of Congress, as every constitutional conservative should, the review provisions are worth knowing. See A Five-Question Constitutional Test You Can Run on Any Federal Law for a method.

A worked example: one asset block

Here is a hypothetical, and I'll label it so, which follows one asset from order to freeze. The names are made up.

The order. Suppose the President has declared an emergency over a foreign government's aggression and has authorized sanctions on those who support it. OFAC investigates and designates a fictional company, Volga Maritime LLC, as a blocked person. The designation is published and added to the SDN list.

The bank. A regional bank in Ohio holds $4.2 million in an account for Volga Maritime. Its compliance system flags the match on the SDN list. The bank must block the account: it cannot let the money leave, and it holds it in a blocked account. It must report the blocked property to OFAC within ten business days. Volga Maritime cannot withdraw a cent without a licence.

The subsidiary. Now suppose Volga Maritime owns 60 percent of a ship-management firm, Neva Shipping, which is not on the list. Because 60 is more than 50, Neva Shipping is treated as blocked as well. Change the facts: suppose Volga Maritime owns 30 percent and another blocked party owns 25 percent. Together they own 30 plus 25, which is 55 percent, so the 50 percent rule applies even though neither party alone reaches 50. If instead they owned 30 and 15, the total is 45, below the threshold, so the rule does not automatically block the firm, though a careful bank would still ask questions.

The third party. Finally, suppose a bank in a third country keeps processing Volga Maritime's dollar payments. The threat of a secondary sanction is that this bank could lose its correspondent account in New York, which would cripple its dollar business. Most banks decide that one customer is not worth it.

That is how a sentence in a press release becomes a frozen account in Ohio and a policy dilemma in Dubai.

What sanctions can do, and what they cannot

Having seen the machinery, we can be honest about the limits.

1. They can raise costs and restrict access. They can cut a target off from dollars, technology and markets.
2. They cannot, by themselves, change a regime's mind quickly. They work best when they are focused, backed by allies, and tied to clear demands that the target can actually meet. Our post When Sanctions Worked, When They Failed, and Why the Difference Matters goes through the record.
3. They leak. Targets find workarounds, third countries fill gaps, and the pipe the dollar provides is a reason others try to build new pipes.
4. They have costs at home. American businesses lose customers, and compliance costs fall hardest on small firms with no legal department. An honest sanctions policy counts those costs.
5. They need an exit. A sanction with no stated way to lift it is a punishment, not a strategy. Our discussion of the 1994 Ukraine assurances in What America Promised Ukraine in 1994 and What It Did Not shows how important it is to write down what each side is promising.

What this means for a family or a small business

If you run a business that sells overseas, the rule of thumb is simple: know your customer and know their owners. Screen buyers against the SDN list on OFAC's website, which is free and public, and look past the name on the contract to who owns the company. If you are a voter, ask whether your senators have read the sanctions statutes they voted for and whether the review provisions are being used. And whenever a politician promises "crushing sanctions," ask three questions: under what authority, enforced by whom, and what would make them stop.

The bottom line

• Sanctions run on law, not on press releases. IEEPA gives the President the power to act after declaring an emergency, the National Emergencies Act sets the paperwork, and Congress can narrow or end that power by statute.
• OFAC at the Treasury does the work: the SDN list, the 50 percent rule, ten-day reports of blocked property, and licences.
• The dollar's role in clearing is the source of American leverage, and secondary sanctions extend it to foreign banks at the price of friction with allies.
• Congress put itself into the process through the Magnitsky Act of 2012 and CAATSA of 2017. A constitutional conservative should welcome that.
• Judge any sanctions plan by its authority, its enforcer, its cost to Americans and its exit. If a politician cannot answer those four, he is selling a press release.