Forecasting International Risk Climate Under President Trump
The article by a former international risk counsel and associate Brendan Hanifin was originally published in Law360 on November 13, 2016.
Niels Bohr famously observed that “predictions are hard, especially about the future.” The results of last week’s presidential election confirmed this adage, as prognosticators in the media, both political parties, and the financial and legal industries seemingly all failed to envisage Donald Trump’s victory. The aftermath of the election has indicated that a corollary to Bohr’s maxim also is true: commentators of all stripes will continue to try to forecast the future, regardless of the difficulty of doing so. In this article, we offer our best guesses about potential regulatory and enforcement changes that might occur in the international risk landscape after Inauguration Day.
On Jan. 16, 2016 (“Implementation Day”), the United States and the European Union lifted or amended many nuclear proliferation-related sanctions against Iran pursuant to the Joint Comprehensive Plan of Action (“JCPOA”). The United States eliminated most of its secondary sanctions, and also scaled back certain parts of its primary sanctions regime. Most notably, the Office of Foreign Assets Control within the U.S. Department of Treasury issued a general license (“General License H”) that permits foreign entities owned or controlled by U.S. companies (“foreign entities”), including foreign subsidiaries of U.S. companies and foreign portfolio companies of U.S. private equity sponsors, to conduct business with Iran, subject to various restrictions.
During the election campaign, Trump sharply criticized the JCPOA. After becoming President, Trump could end the United States’ participation in the JCPOA. As the JCPOA was negotiated in partnership with five other countries, it seems unlikely that President-elect Trump would withdraw the United States from the JCPOA in its entirety. A more plausible scenario is that President-elect Trump may undo certain aspects of the sanctions relief that the United States has granted Iran since Implementation Day, such as revoking General License H. This act alone would have significant consequences, as many foreign entities have spent significant time and money establishing policies and procedures designed to ensure compliance with General License H, developing relationships with Iranian counterparties, and even making capital investments in Iran. Some companies have approached new business opportunities in Iran cautiously, while others have jumped more aggressively. Regardless, a forced and time-limited wind-down of Iranian business dealings would impose financial and operational costs for even the best-prepared companies.
Alternatively, the Trump administration might accuse Iran of violating its obligations under the JCPOA, potentially resulting in the “snap back” of all of the U.S. sanctions that were in place prior to Implementation Day. This strategy — which Trump foreshadowed during an August 2015 interview (“I would police that contract so tough that they don’t have a chance”)1—may earn President-elect Trump the approbation of Republican lawmakers, many of whom vigorously opposed the JCPOA and favored imposing additional, new sanctions on Iran.
Following Russia’s annexation of Crimea in March 2014, President Barack Obama issued an executive order authorizing the Treasury Department to impose sanctions on individuals and entities that operate in certain sectors of the Russian economy. Pursuant to the executive order, OFAC has issued sectoral sanctions targeting Russian financial institutions, defense companies and energy firms. In addition, OFAC has targeted a number of persons in Russian President Vladimir Putin’s inner circle with list-based sanctions and imposed comprehensive sanctions on the Crimean region of Ukraine. The European Union imposed sanctions that are similar to the measures imposed by OFAC.
Trump has indicated that he wishes to improve U.S. relations with Russia, and Trump and President Putin have spoken with apparent admiration for each other.2 In Europe, where the continuation of sanctions against Russia in 2017 will require the approval of all 28 E.U. member states, Russia-friendly countries (including Italy, Cyprus and Greece) and various business interests have advocated for relaxation of the sectoral sanctions targeting Russian companies.3 Senior U.S. government officials in the Obama administration — including Secretary of State John Kerry4 — also have expressed skepticism about the continuing utility of at least some of these sanctions.
Against this backdrop, Trump may unilaterally elect to end the U.S. sanctions on Russia. Alternatively, he could seek to engage the Kremlin in negotiations over sanctions relief in exchange for (1) increased cooperation with respect to the ongoing Syrian conflict and/or (2) Russia’s agreement to reverse its military buildup in the Baltic region. Indeed, both President Putin and President-elect Trump may view a negotiated solution as politically expedient. President Putin would achieve the lifting (or relaxation) of sanctions that have damaged the Russian economy. For his part, Trump could claim that he defused an inherited political crisis.
Since December 2014, President Obama has significantly changed the United States’ policy toward Cuba through modifications to the Cuban Asset Control Regulations and the Export Administration Regulations. These changes have created significant new opportunities for U.S. companies and some foreign companies to engage in certain types of business in and with Cuba and to export particular types of U.S.-origin products to Cuba.5 With the most recent amendments to the Cuban Assets Control Regulations, announced in October 2016, President Obama has taken virtually every step within his authority to relax the Cuban embargo; any further loosening — or the termination of — the Cuban sanctions would require congressional action (for which there appears to be limited political appetite).
During the election campaign, Trump pledged to “reverse” President Obama’s executive orders related Cuba,6 thereby reverting to the U.S. policy of nonengagement that prevailed from the early 1960s through 2014. This shift in U.S. policy toward Cuba would represent a significant setback for U.S. companies — including airlines and hospitality companies — that have made sizeable investments in anticipation of increased engagement with Cuba.
Scrutiny of Foreign Investors and Investments in the United States
Throughout his campaign, Trump repeatedly denounced the impact of foreign government and foreign commercial interests on the U.S. economy. One way in which President Trump may seek to address these perceived problems is by mandating increased scrutiny of prospective foreign investors and investments through the Committee on Foreign Investment in the United States (“CFIUS”) and Defense Security Service (“DSS”) review processes.7
After Trump becomes President, CFIUS might have the authority to review a wider range of transactions. Indeed, during the last few months, some (mostly Republican) Congress members have sought to increase the scope of CFIUS’s power in order to allow the interagency committee to address perceived national security concerns more effectively. Trump’s victory increases the likelihood that CFIUS’s power will be expanded.
Even if CFIUS’s or DSS’s jurisdiction remains the same, each may adopt a more aggressive approach when reviewing relevant transactions. Importantly, CFIUS and DSS each exercise considerable discretion in reviewing transactions within their jurisdiction. The Trump administration may encourage increased scrutiny of proposed transactions involving foreign entities, which, in turn, may result in CFIUS blocking more covered transactions and DSS imposing more onerous mitigation measures on transactions that result in U.S. companies coming under foreign ownership or control. Based on comments made during Trump’s campaign, it seems possible that CFIUS and DSS could take a particularly hard look at transactions involving foreign investors from China.
During his campaign, Trump signaled dramatic changes to U.S. foreign policy that, if implemented, could produce significant financial, operational and compliance-related consequences for U.S. and international companies. While it is too early to assess the impact of a Trump presidency on U.S. foreign policy, the next 70 days present an opportunity for companies to consider how to respond to the potential changes outlined above.
1 Donald Trump on ‘Meet the Press,’ annotated, Washington Post (Aug. 17, 2015), https://www.washingtonpost.com/news/the-fix/wp/2015/08/17/donald-trump-on-meet-the-press-annotated/.
2 Timeline: Donald Trump’s praise for Vladimir Putin, CNN (July 29, 2016), http://www.cnn.com/2016/07/28/politics/donald-trump-vladimir-putin-quotes/.
3 Other European countries have signaled that a relaxation of sanctions is unlikely until Russia has demonstrated improved compliance with the Minsk Agreement, which calls for a cessation of hostilities in eastern Ukraine.
4 John Kerry signals removal of some sanctions against Russia, Financial Times (Jan. 22, 2016), https://www.ft.com/content/56643a00-c12b-11e5-9fdb-87b8d15baec2.
5 Even with these recent changes, primarily accomplished via executive orders, the Cuban sanctions continue to prohibit most transactions by U.S. companies (as well as U.S. companies’ foreign subsidiaries) involving Cuba.
6 Trump Says He’ll Reverse Obama’s Executive Orders on Cuba, Bloomberg Politics (Oct. 12, 2016), http://www.bloomberg.com/politics/trackers/2016-10-12/trump-says-he-ll-reverse-obama-s-executive-orders-on-cuba.
7 CFIUS is an interagency committee of the U.S. government authorized to review transactions that could result in control of a U.S. business by a foreign person. DSS is responsible for administering facility clearances (i.e., permission to access classified information of the U.S. government). When a foreign entity obtains a five percent or greater interest in a U.S. company that holds a facility clearance, the foreign entity’s interest must be reported to DSS, which may require the U.S. company to implement mitigation measures.