Earlier this month, on February 9, 2021, Nicaragua’s reforms to the “Law for the Protection of the Rights of Consumers and Users” (Law 842) entered into force. The updates to Law 842 establish penalties for banks and loan agencies that close accounts or reject clients for any reason, unless their actions are based on Nicaraguan law. Even though the stated purpose of Law 842 does not explicitly refer to US sanctions, Law 842 appears to prohibit banks in Nicaragua from denying services to individuals and entities targeted by US sanctions. The penalties for a bank that violates Law 842 include temporary or permanent closure and / or fines of up to approximately $1.1 million for the most serious violations. (The penalties for violating Law 842 are pegged to Nicaragua’s national average minimum wage, so this may increase over time.)
Since 2018, the United States has imposed sanctions on dozens of Nicaraguan individuals and entities with ties to President Daniel Ortega for corruption, money laundering, and human rights violations. Between July and December of 2020 alone, the US Office of Foreign Assets Control (OFAC) added eleven Nicaraguan individuals and entities to the List of Specially Designated Nationals and Blocked Persons (SDN List), including the son of President Ortega as well as individuals with close personal ties to President Ortega. The reforms to Law 842 have been widely interpreted as a response to these OFAC designations.
Law 842 is just one example of non-US governments’ responses to the extraterritorial reach of US sanctions and other laws. Russia has had such “special economic measures” (i.e., counter-sanctions) since 2014; and the European Union has had a blocking statute in place since 1996 in response to US measures concerning Cuba, Iran, and Libya. As we recently examined, China also passed legislation in September 2020 that establishes a mechanism for imposing penalties on firms that do business with listed entities (and firms may be added to China’s list for complying with US sanctions), although this has had only limited effect to date, since China has not yet listed anyone on the “Unreliable Entity List.” Law 842 is another step in this direction. The timing of this development is especially interesting, however, because it follows very recent changes to US anti-money laundering (AML) law affecting the global financial institutions that connect the US economy to the world — and increasing the risk that those entities may find themselves caught between compliance with US and foreign “blocking”-type laws like Law 842.
As we have previously discussed, many of those changes were codified in the National Defense Authorization Act for Fiscal Year 2021 (NDAA). The expansive and wide-ranging changes adopted in the AML provisions of the NDAA demonstrate that the US government is making more ambitious efforts to use the US banking system as a springboard for disrupting, investigating, and prosecuting conduct that implicates US law — including but not limited to money laundering — regardless of where such conduct occurs. Among other things, the NDAA exposes non-US banks to the potential loss of their US correspondent banking accounts if they fail to comply with subpoenas issued by US agencies investigating possible violations of US laws (including, as may be relevant for Law 842, violations of US sanctions). Global banks — the ones providing the correspondent banking services — are responsible for closing the correspondent accounts when directed to do so.
Other sections of the NDAA further highlight the growing conflict between increasingly expansive prohibitions and procedures of US AML law and the laws that foreign governments have implemented to resist that expansion. For example, section 6313 of the NDAA effectively outlaws lying to a US bank about the nature of the funds or parties involved in a monetary transaction where the transaction involves a “senior foreign political figure” (or someone closely connected to such a person) or a “primary money laundering concern” identified by Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN). Likewise, a recent judicial decision that we covered in an earlier blog post held that a money-laundering scheme involving non-US countries may be prosecuted in US courts on the basis of a single dollar-clearing transaction.
Cumulatively, these developments put global financial institutions in between the US government and the targets of its investigations. For example, US authorities may assess financial institutions’ controls for identifying and excluding FinCEN-flagged “primary money laundering concerns”; global banks may also be directed to close the US correspondent accounts that they operate for non-US banks that do not respond to NDAA subpoenas; or global banks may find themselves responding to US government inquiries as the victim of a section 6313 violation, a bank fraud allegation based on similar conduct, or as a witness to a dollar-clearing transaction that may have furthered unlawful activity.
In all of these ways (and more), the expanding scope of US AML obligations thrusts banks into the middle of the US government’s efforts to combat “dirty” money flows and other conduct implicating US laws that can be applied to conduct occurring in other parts of the world. Law 842 and others like it put the banks between the US government and its foreign counterparts that are resisting that expansion. How the potential conflict between Nicaragua’s Law 842 and US sanctions laws may play out, including any response by US authorities using their expanded authorities under the NDAA, remains to be seen. But the coming months may foreshadow how US authorities and the international financial community will react to similar blocking-type measures in other countries.