Blocked Persons: What a Listing Does to Property and Dealings

A designation under a United States sanctions program produces two distinct legal effects, and confusing them causes most of the mistakes. The first is blocking: property is frozen where it sits. The second is a prohibition on dealings: United States persons may not transact with the designated person at all. A holder can comply with one and violate the other.

What blocking actually does

The authority comes from the International Emergency Economic Powers Act, which permits the blocking of property and interests in property in which a foreign country or a foreign national has an interest, where that property is subject to United States jurisdiction. The implementing programs sit in 31 CFR Chapter V, each with its own part and its own scope.

Blocking is not confiscation. Title does not pass to the government. The property remains the designated person's, and it is simply immobilized: it may not be transferred, paid, exported, withdrawn or otherwise dealt in. Blocked funds must be placed in an interest-bearing account at a United States financial institution, so the value is preserved rather than eroded while the designation stands.

The distinction from forfeiture matters legally as well as practically. Blocked property can be released if the designation is removed or if an authorization permits a transfer, and it remains on the owner's balance sheet throughout. Forfeiture, by contrast, changes title and requires its own proceeding. Confusing the two leads holders to write off assets that are merely frozen.

The prohibition on dealings

The second effect is broader than the first and is what usually catches ordinary businesses. United States persons are prohibited from engaging in transactions with a designated person: selling to them, buying from them, providing services to them, or receiving services from them. The prohibition extends to the provision of anything of value, which reaches unpaid services, discounts and forbearance as readily as it reaches cash.

Because the prohibition attaches to the person rather than to any particular property, it operates even where nothing is blocked. A consulting firm with no funds of the designated person in hand still may not do the work. The reach of these prohibitions to affiliates and to non-United States parties is treated in facilitation and the reach to non-United States parties.

Two consequences follow that are easy to overlook. Existing contracts do not carry an exemption; performance stops when the counterparty is designated, and a wind-down usually requires an authorization that is time limited. And the prohibition covers receiving as well as giving, so accepting payment, goods or services from a designated person is prohibited in the same way as providing them. Businesses that focus only on outbound flows regularly miss inbound exposure.

Choosing between blocking, rejecting and licensing

The reporting duties that follow

Section 501.603 requires holders of blocked property to report it. An initial report is due within a short period after the property is blocked, and a comprehensive annual report follows, covering holdings as of the date the regulation fixes. The obligation continues for as long as the property remains blocked, and it belongs to the holder rather than to the owner.

Section 501.604 imposes the parallel duty for rejected transactions. That duty has broadened over time and now reaches rejections outside the banking sector, so a company that declines an order because of a sanctions prohibition may have a filing obligation it does not expect. Section 501.605 adds a reporting duty concerning litigation, arbitration and other dispute resolution proceedings involving blocked property.

Recordkeeping runs alongside. Records of blocked property, rejected transactions and licensed activity must be kept for the period the regulations specify and produced on demand. In practice the records are what determine whether an eventual enforcement inquiry is short or long.

The duties fall on whoever holds the property, which is often a party with no relationship to the underlying dispute. A bank that stops a wire, a warehouse holding goods, an insurer sitting on unpaid proceeds and a transfer agent holding shares are all holders. None of them chose the exposure, and each is nonetheless responsible for the report, for maintaining the blocked account and for refusing instructions from the owner. Contracts rarely address who bears the administrative cost of that position.

Challenging or removing a designation

A designated person may petition the administering office for administrative reconsideration under the delisting provisions of Part 501. The petition argues either that the basis for designation was mistaken or that the circumstances have changed: ownership sold, control relinquished, conduct ceased. The process is documentary and can be slow, and the office may ask questions in writing over an extended exchange.

Judicial review is available but narrow. Courts examine whether the agency acted arbitrarily on the administrative record, much of which may be classified and summarized rather than disclosed. The standard of review questions this raises are the ordinary ones described in mixed questions and which standard applies. Where a designated entity is not itself listed but is owned by one that is, the analysis instead runs through the fifty percent ownership rule, and any dealing a party hopes to continue has to be tested against the general authorizations and how to read them.