INSIGHT: Covid-19’s Impact Through the Lens of Sanctions and Export Controls

The first quarter of 2020 included significant economic sanctions and export controls developments related to the global Covid-19 pandemic. Kirkland & Ellis attorneys discuss these actions and what they may indicate for the remainder of the year.

There were several key takeaways regarding economic sanctions and export controls during the first quarter, including:

• The U.S. Department of the Treasury Office of Foreign Assets Control (OFAC) general and specific licenses authorize certain humanitarian assistance to Iran during the Covid-19 pandemic. However, usage of such authorizations will depend on banks’ willingness to support such transactions given heightened enforcement concerns.
• The political situation in Venezuela appears to have reached a stasis, and Covid-19 could prompt openness to new policy approaches, lest the country be left to combat a pandemic without cohesive national leadership.
• The Trump administration’s use of the Defense Production Act (DPA) to restrict the export of certain personal protective equipment (PPE) could portend additional export restrictions issued under the DPA, as well as possible countermeasures from other countries.
• Covid-19 may add complexity to the ongoing U.S. strategic competition with China, as U.S. concerns now surfacing about whether China was forthright about the scale of the outbreak may get coupled with preexisting national security concerns.

Iran Sanctions

On Jan. 10, during a deterioration in U.S.-Iran relations following the U.S. drone strike on Qasem Soleimani, President Donald Trump issued an executive order authorizing sanctions targeting actors in the Iranian construction, mining, manufacturing, and textile sectors, and secondary sanctions on parties knowingly engaged in significant transactions in support of such sectors. A few weeks later, the first Covid-19 cases appeared in Iran.

Though the U.S. Iran sanctions remain strict overall, Covid-19’s rapid spread within Iran prompted OFAC to issue FAQs on March 6 that reaffirm existing “broad exceptions” for most export and sales transactions involving food, medicine, and medical devices, as well as exemptions for humanitarian donations of food and medicine.

As in past humanitarian crises, OFAC may also on a case-by-case basis issue specific licenses for additional categories of non-governmental organization (NGO) transactions not authorized by existing general licenses. Notwithstanding OFAC’s apparent openness to allowing certain transactions with Iran under these emergency circumstances, it is unclear to what extent banks—which often may be reluctant to participate in even licensed humanitarian transactions given OFAC’s active approach to financial industry sanctions enforcement—will be willing to engage in such transactions.

Venezuela Sanctions

On Feb. 18 and March 12, OFAC sanctioned two Swiss-incorporated trading arms of Russia’s state-controlled energy giant, Rosneft, for handling oil exports on behalf of Venezuela’s national oil company, Petroleos de Venezuela. OFAC stated that these entities handled a large percentage of Venezuela’s oil exports that were subject to sanctions, inconsistent with the Trump administration’s efforts to catalyze a democratic transition toward a new government led by Juan Guaidó. Notably, since these designations, Rosneft has announced that it has terminated operations in Venezuela and sold its interests in Venezuela business to the Russian government.

On March 31, U.S. Secretary of State Mike Pompeo outlined a plan to lift U.S. sanctions if Venezuela established a transitional government, stating the need for new leadership was urgent given “the Maduro regime’s failure to adequately prepare for and address the global Covid-19 pandemic.” Under the plan, Venezuela’s executive branch would become a “Council of State,” in which neither Maduro nor Guaidó would serve.

Defense Production Act Export Restrictions

In March and April, President Trump issued several executive actions under the DPA, including an export ban on certain PPE items. The DPA, enacted during the Korean War but only selectively used in subsequent decades, gives the president authority to designate certain critical materials and, among other powers, to establish priority in contracting for the federal government regarding such materials, and to issue orders providing for their allocation.

On April 3, Trump issued a memorandum under the DPA directing the secretary of the Department of Homeland Security to “allocate to domestic use” N-95 and certain other respirators, related filters and cartridges, surgical masks, and surgical and other PPE gloves.

On April 10, the Federal Emergency Management Agency (FEMA) issued a temporary final rule prohibiting export from the U.S. of the items identified in the April 3 memorandum without FEMA authorization, subject to certain exemptions. The rule is in effect through Aug. 10, 2020.

Trade With China

U.S. government officials continued to discuss further tightening of export restrictions on Huawei Technologies Co. (Huawei) in the first quarter, including plans to strengthen U.S. export controls on foreign-produced items that incorporate U.S.-controlled content or are the direct product of U.S. technology.

In addition, proposed legislation would authorize the president to impose “blocking” restrictions on Huawei akin to those applicable to parties on the OFAC List of Specially Designated National and Blocked Persons.

Charged rhetoric between the U.S. and China regarding the initial handling of the Covid-19 outbreak and China’s criticism of President Trump’s decision to temporarily restrict U.S. funding for the World Health Organization may slow progress in U.S.-China trade negotiations, and could drive proposals for additional trade restrictions.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Mario Mancuso is a partner at Kirkland & Ellis and leads the firm’s International Trade and National Security practice. A former member of the president’s national security team, he specializes in guiding private equity sponsors and companies through the CFIUS process and resolving crises involving economic sanctions and export control-related investigations by the U.S. government.

Sanjay Mullick, a partner in Kirkland’s Washington, D.C., office, regularly represents clients on investigative, regulatory and transactional matters related to economic sanctions, export and import controls, anti-money laundering, and anticorruption.

Anthony Rapa, a partner in Kirkland’s Washington, D.C., office, counsels companies, financial institutions, and private equity sponsors worldwide regarding U.S., U.K., and EU economic sanctions and export control issues.

Abigail Cotterill, of counsel in Kirkland’s Washington, D.C. office, regularly provides legal advice to companies, financial institutions, and private equity sponsors on the regulatory and other risks of operating or investing across international borders, with a focus on economic sanctions, export controls, and anticorruption.