Trump On Turkey: Sanctions On A NATO Ally Today, With Escalation Or Removal Possible Tomorrow - Export Controls & Trade & Investment Sanctions

On October 14, President Trump issued an Executive order (“E.O.”) imposing sanctions on Turkey in response to Turkey’s military offensive in northern Syria. New E.O. 13894 authorizes the U.S. Departments of State and the Treasury to sanction Turkish government agencies, officials, and sectors of the economy, as well as to impose secondary sanctions on non-U.S. financial institutions. Accompanying the E.O. were new sanctions by the Treasury Department against a range of Turkish government ministries and officials. Directed toward a NATO ally, these actions represent another dramatic shift in U.S. sanctions policy under the Trump Administration, moving away from historic uses of sanctions against rogue states, terrorist organizations, and other malicious actors and toward sanctions that increasingly threaten international partners. The day after the President issued the new E.O., the U.S. Justice Department indicted one of Turkey’s largest state-owned banks, Türkiye Halk Bankasi A.S. (“Halkbank”), for criminal violations of U.S. sanctions. With the new sanctions in place and the Justice and Treasury Departments escalating their actions against Turkish state-owned enterprises, now is the time for companies with a presence in or activities involving Turkey to review how U.S. sanctions could affect their business.

The key takeaways are:

The recent actions represent a dramatic escalation of sanctions against a NATO ally, measures that would have been virtually unthinkable in previous administrations.
Global businesses need to closely examine their ties to Turkey to avoid violating the relatively modest sanctions imposed so far and to assess the potential risk of punishing U.S. sanctions in the near future.
Only time (or Trump) will tell whether these sanctions will be long lasting – or among the shortest in history – given the continuation of high-level discussions between the two NATO allies and with promises by the President to remove the sanctions if Turkey takes certain actions.
In addition to the sanctions that require compliance by U.S. persons, foreign financial institutions need to closely monitor the “secondary sanctions” that the Administration included in the new E.O., which threaten foreign financial institutions with sanctions if they engage in a “significant transaction” with any of the newly sanctioned parties.

A. Background

On October 6, 2019, the White House released a statement announcing that U.S. forces would withdraw from northern Syria, “having defeated the ISIS territorial ‘Caliphate[.]’” Days after the statement, Turkey began a military offensive in Syria targeting Kurdish populations along its border that had worked with the United States in the fight against ISIS. The consequences of Trump’s withdrawal for both Syria and the broader Middle East are playing out in real time. For example, Kurdish fighters in northern Syria have now reportedly shifted their allegiance to the Russia- and Iran-supported Assad regime (which had been the principal target of U.S. sanctions against Syria).

In a rare show of bipartisanship, leaders of both major political parties criticized the decision to withdraw U.S. forces and Turkey’s military offensive, with the House overwhelmingly passing a resolution of disapproval by a vote of 354 to 60. Speaker of the House Nancy Pelosi described the withdrawal of U.S. forces as “a deeply disturbing development that betrays our Kurdish allies who have been instrumental partners in our mission to eradicate ISIS.” Senate Majority Leader Mitch McConnell stated that he was “gravely concerned” and noted that “withdrawing U.S. forces from Syria would re-create the very conditions that we have worked hard to destroy . . . invite the resurgence of ISIS . . . [and] create a broader power vacuum in Syria that will be exploited by Iran and Russia[.]”

Only a week after his original announcement and seemingly in response to Turkey’s offensive and the Congressional blowback, Trump reversed course by announcing a number of measures against Turkey. These included a statement that U.S. forces would “redeploy and remain in the region to monitor the situation[.]” Trump also stated that he was increasing tariffs on Turkish steel up to 50 percent and “immediately stop[ing] negotiations . . . with respect to a $100 billion trade deal with Turkey.” Finally, Trump threatened Turkey with sanctions, stating that the “United States will aggressively use economic sanctions to target those who enable, facilitate, and finance these heinous acts in Syria. I am fully prepared to swiftly destroy Turkey’s economy if Turkey’s leaders continue down this dangerous and destructive path.”

Scrambling to salvage the situation, Trump dispatched Vice President Pence and Secretary of State Pompeo to Turkey to negotiate a ceasefire. So far the negotiations appear to have achieved some results. On October 17, Vice President Pence announced that Turkey agreed to halt military operations in northeastern Syria for five days to allow Kurdish forces to withdraw from the area in exchange for sanctions relief.

Long before Trump’s withdrawal from Syria, starting in early 2017, the Justice Department (“DOJ”) charged nine individuals associated with Halkbank for conspiring to illegally clear sales of Iranian oil through U.S. financial institutions. Halkbank and its employees purportedly concealed these transactions by purchasing gold for the Government of Iran and facilitating transactions that were fraudulently disguised to be humanitarian purchases of food and medicine for Iranian customers. As the case progressed, one of the co-conspirators, an owner of a network of money transfer businesses related to Halkbank, Reza Zarrab, pled guilty and started to cooperate with DOJ. Then, on January 3, 2018, a jury convicted the former Halkbank deputy general manager, Memet Hakkan Atilla. Now, DOJ has indicted Halkbank itself. Given Halkbank’s status as a large state-owned enterprise with close connections to the Turkish government, DOJ’s indictment has worsened the already strained U.S.-Turkish relations.

B. New Sanctions Targeting Turkey

Shortly after threatening to “destroy Turkey’s economy,” Trump issued new E.O. 13894 authorizing the Treasury to designate any person determined by the Secretary of the Treasury, in consultation with the Secretary of State, to:

be responsible for or complicit in any actions or policies that threaten the peace, security, stability, or territorial integrity of Syria, or that commit serious human rights abuses in Syria;
be a current or former official of the Government of Turkey;
be a subdivision, agency, or instrumentality of the Government of Turkey;
operate in a sector of the Turkish economy specified by the Treasury Secretary (so far, no such sectors have been identified);
have materially assisted, sponsored, or supported any person designated under any of (a) (d) above; or
be owned or controlled by, or to have acted or purported to act for or on behalf of, directly or indirectly, any of the persons designated under any of (a)-(d) above.

As soon as the new E.O. was issued, the Treasury’s Office of Foreign Assets Control (“OFAC”) immediately sanctioned three Turkish government officials and two Turkish government agencies. Specifically, OFAC designated Turkey’s Ministries of National Defence and Energy and Natural Resources, as well as its Ministers of National Defence, Energy and Natural Resources, and the Interior for endangering innocent civilians and destabilizing the region. Such designations have the following effects: Any property or interests in property of the designated persons in the United States, or the possession or control of a U.S. person anywhere in the world, must be blocked (i.e., frozen), and U.S. persons – usually defined as any U.S. citizen, permanent resident alien, entity organized under U.S. law (including foreign branches), or any person in the United States – are prohibited from engaging in virtually all dealings with designated persons.

In addition to the blocking sanctions above, the Syria-related E.O. authorizes the Secretary of State, in consultation with the Secretary of the Treasury, to impose so-called “menu-based sanctions” (because they provide the Secretary with a menu of sanctions to choose from, get it?) – up to the same blocking sanctions described above – on any person determined to:

be responsible for or complicit in the obstruction, disruption, or prevention of a ceasefire in northern Syria;
engage in the intimidation and prevention of displaced persons from voluntarily returning to their places of residence in Syria;
engage in the forcible repatriation of persons or refugees to Syria;
engage in the obstruction, disruption, or prevention of efforts to promote a political solution to the conflict in Syria;
be an adult family member of any person designated under (a)-(d) above; or
be responsible for or complicit in, or directly or indirectly engaged in, the expropriation of property for personal gain or political purposes in Syria.

Finally, the Syria-related E.O. authorizes the Secretary of the Treasury, in consultation with the Secretary of State, to impose sanctions restricting or prohibiting correspondent account access on non-U.S. financial institutions that knowingly conduct or facilitate a significant financial transaction for or on behalf of any person designated by OFAC. This means that the new Syria/Turkey-related sanctions program will join the secondary sanctions club with Iran, North Korea, Russia, and the global terrorism sanctions.

C. General Licenses

OFAC narrowed the effects of its recent designations, albeit only slightly, by issuing three general licenses (“GLs 1-3”) simultaneously with the new E.O. GL 1 authorizes U.S. government employees, grantees, or contractors to engage in all transactions and activities prohibited by the new E.O. that are for official U.S. government business. GL 2 authorizes all transactions that are ordinarily incident and necessary to the wind down of operations, contracts, or other agreements involving the Turkish Ministry of National Defence or Energy and Natural Resources (including entities in which they own a 50 percent or greater interest) through November 13. Finally, GL 3 authorizes all transactions and activities involving the Turkish Ministry of National Defence or Energy and Natural Resources (including entities in which they own a 50 percent or greater interest) that are for the United Nations and several other international organizations, such as the World Bank and the International Monetary Fund.

D. Conclusions

Taken together with the indictment of Halkbank, the new E.O. and the designation of Turkish government officials and ministries represents a shot across the bow of a NATO ally and a departure from sanctions practice under previous administrations. In recent decades, U.S. sanctions targeted rogue states like Iran, North Korea, Syria, Venezuela, and Russia that flouted international norms and committed human rights abuses against their populations. Turkey is different. Turkey has been a NATO ally since 1952. Turkey is also integrated into the global economy with large automotive and shipbuilding industries that export heavily to European countries. This has led many U.S. and European businesses to invest billions in Turkey’s economy.

Turkey is not just different as a sanctions target. The new E.O. also departs from historical sanctions practice in terms of the scope of the sanctions it authorizes. Historically, the United States would start a new sanctions program by outlining designation criteria targeting specific individuals within a country. Then, if the situation worsened, additional sanctions would be added piecemeal, ranging from additional designation criteria to sectoral sanctions, and finally to a full embargo. This pattern can be seen recently with the sanctions against Venezuela and Russia and historically with the sanctions against Iran. However, the new E.O. dispenses with this incremental approach and goes immediately to a sectoral program with individual designation criteria and secondary sanctions. This new approach leaves little room for the President to escalate the sanctions in the future other than for his Administration to ramp up the pace and significance of sanctions targets, actually target sectors of the economy, or impose a full embargo.

As the new sanctions have been implemented thus far, their effects will be limited. U.S. businesses that have to work with or through the Turkish Ministry of Defence and Ministry of Energy and Natural Resources have until November 13 to wind down those activities. U.S. financial institutions must freeze the assets of the designated ministers and ministries. After November 13, non-U.S. financial institutions will need to ensure that they do not process significant financial transactions for these persons to avoid the risk of secondary sanctions. However, given the limited number of designations so far, most businesses can carry on in Turkey as normal.

The greatest potential effect of the sanctions will be on businesses considering whether to invest in Turkey. Any new investment must now price in the possibility that a Turkish industry or company related to that investment will be designated. Some companies, such as Volkswagen, have already decided to cancel significant investments in Turkey. Going forward, the Trump Administration’s willingness to act, often in an inconsistent manner, will likely continue to be a driver of this process. In this difficult environment, MoFo’s team of national security and sanctions experts stands ready to assist.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.