OFAC Should Loosen Restrictions On Arbitration Services

By Diaz Reus Partner Javier Coronado Diaz.

Law360 (February 29, 2024, 4:42 PM EST)

The Office of Foreign Assets Control, a vital arm of the U.S. Department of the Treasury, has broad authority to enforce economic sanctions that restrict commercial activities with targeted individuals, entities and countries.

For instance, on February 23, 2024, following the death of Aleksei Navalny and marking the second anniversary of Russia’s further invasion of Ukraine, OFAC designated almost 300 individuals and entities pursuant to its Russia-related sanctions authorities.

Sanctions affect arbitrators, counsel and arbitration centers. Furthermore, they may have an impact on arbitral jurisdiction, arbitrability and award enforcement.

This commentary focuses on one implication of OFAC sanctions on arbitration proceedings: U.S. persons’ inability to provide arbitration services to blocked parties.

Because the violation of sanctions may carry substantial civil and criminal penalties, sanctions deter the participation of U.S. persons in disputes involving blocked parties. However, in practice, these parties may find arbitration services outside the U.S.

For example, earlier this year it was reported that Power Machines, a Russian company under OFAC Sanctions since 2018, had secured a multimillion-dollar victory in an arbitration seated at the Singapore International Arbitration Centre.

While OFAC allows representation of blocked parties in U.S. court proceedings related to arbitration agreements and awards, it generally does not authorize representation in arbitration proceedings outside U.S. courts. Thus, the provision of legal services in such cases requires specific OFAC licensing.

OFAC should amend its regulations to allow the provision of legal services in connection with all U.S-based arbitration. Such an amendment would not only be in line with the U.S. federal policy favoring arbitration of commercial disputes, but might also allow for more streamlined OFAC licensing review.