Do sanctions have a “spirit”?  U.S. sanctions officials seems to think so, as they argue that it is not enough for U.S. financial institutions to observe the law as written, but also the “spirit” underlying those laws.

In a headline article in the Wall Street Journal last week, U.S. officials at the U.S. State and Treasury Department have called on U.S. banks to forgo involvement in Russia’s upcoming bond sale.  Despite not being specifically prohibited under the operative U.S. law from doing so, U.S. officials are nonetheless telling major U.S. financial institutions that the purchase of Russian bonds would be anathema to U.S. foreign policy interests vis-a-vis Russia.

In other words, U.S. officials are saying that, while the purchase of Russian bonds might not violate the plain language of U.S. laws sanctioning Russia, it certainly does violate the “spirit” (or intent) of those laws.  The significance of this is not altogether clear for U.S. financial institutions, which are still considering whether to bid on the Russian bonds in contradiction to the expressed interests of the U.S. government.

This episode brings to light an interesting aspect of U.S. sanctions and compliance therewith.  Strictly speaking, it should be enough to interrogate the applicable law relating to a proposed transaction to determine whether such transaction is permissible under existing U.S. sanctions.  Yet, doing such and no more would prove inadequate to the task of ensuring that a firm does not experience negative repercussions from a proposed transaction.  For example, while U.S. banks are permitted to bid on the Russian bonds, doing so will invite potential risks — not the least of which is reputational — that could be serious.  That is why full and adequate compliance with U.S. sanctions laws often takes more than a strict legal reading.

Similar issues abound in interpreting the scope of applicable U.S. sanctions regulations elsewhere.  Take, for instance, the issue of what constitutes a prohibited facilitation under 31 C.F.R. § 560.208.  OFAC has left the issue soak in ambiguity since the advent of the Iranian Transactions and Sanctions Regulations (“ITSR”), 31 C.F.R. Part 560, which has the intended effect of rendering the prohibition as broad as possible.

Nonetheless, if we look beyond the plain language of the 31 C.F.R. § 560.208 and consider the underlying motive (or “spirit”) of the prohibition on the facilitation by U.S. persons of transactions by foreign persons with Iran, then we begin to reveal a more specific understanding of the intended scope of the prohibition.  For example, the underlying policy behind the ITSR was not simply to restrict U.S. trading activities with Iran, but to restrict all (U.S. and foreign) trading activities with Iran — the U.S. imposing a comprehensive trade and investment embargo with Iran as an exemplary measure to convince its close allies in Europe and Asia to do the same.  As such, the ITSR is keen on limiting all trading activities with Iran.  This helps inform the scope of the prohibition on facilitation by leading us to the core question: Does the proposed transaction support trading activities by a foreign person with Iran?  If so, then it is likely a violation of the ITSR’s prohibition on facilitation.

The lesson of all this is that it is important not just to know the plain language of U.S. sanctions, but to also understand the underlying policy for which U.S. sanctions regulations are but an expression.  Not all U.S. sanctions lawyers are equipped to handle such matters, but nonetheless a clear understanding of U.S. policy is a prerequisite to accurately and comprehensively informing clients of the possible scope of U.S. sanctions and their potential application to a client’s proposed activities.