As the US imposes new restrictions on Russia, and Iran and Cuba open up for business as a result of some of the sanctions against them being lifted, legal experts Louise Lamb, Beth Peters and Aleksandar Dukic explain the compliance implications of the various regimes
“Violations and attempted violations of sanctions can attract severe penalties”
15,200 - entries from 155 countries OFAC’s Specially Designated Nationals List
Financial and trade sanctions are tools used by governments and international bodies to combat terrorism, help enforce international peace and security, and promote foreign policy objectives.
Sanctions are imposed or lifted in response to foreign policy developments. They can be imposed relatively easily compared to military action, which means that this is a fast-moving area. For example, the sanctions against Libya were imposed very swiftly in February 2011 in response to suspected serious human rights abuses during the Libyan uprising, before being expanded and then eased later that year following regime change.i The international nature of sanctions, the speed at which they can be imposed, and the differences between regimes all raise difficult compliance issues for banks, in a climate where the penalties for compliance failings are becoming ever more severe.
Where do sanctions come from?
Resolutions of the UNSC require a majority vote and the support of all five permanent members. As a result, they frequently require a degree of political compromise and it is not always possible to reach agreement on the imposition of sanctions. As a result, the US, the EU and individual countries (including the UK) increasingly introduce their own sanctions which go beyond UN restrictions in order to pursue their own foreign policy goals. For example, both the USii and the EUiii have imposed sanctions against Russia in relation to the conflict in Ukraine.
Territorial versus targeted sanctions
The main types of sanctions
Sanctions come in different shapes and sizes. Key elements of the EU’s toolbox include:
- Asset freezes. These punish listed persons (both individuals and entities) by preventing EU persons from dealing with them or their assets. The asset-freezing restrictions make it an offence for an EU person to (a) deal with the funds or economic resources of any designated person, or (b) make funds or economic resources available to a designated person. ‘Funds’, ‘economic resources’ and ‘dealing with’ are all defined very widely under the restrictions in order to capture almost any type of activity.
- Financial sanctions. Traditionally, these have included prohibitions on providing financial assistance in sanctioned trade; prohibitions on certain funds transfers; and prohibitions on access to financial messaging systems such as SWIFT. However, in response to the situation in Ukraine, these sanctions have become more sophisticated. The EU targeted Russia’s capital reserves by restricting access of key Russian banks and companies to the EU capital markets, forcing them to turn to domestic sources for capital.
- Sectoral sanctions. These restrict trade in specific sectors of the target country’s economy such as oil and gas (which produce significant revenues) to key technology and dual-use goods. For example, the EU has restricted the provision of key products to Russia for use in certain oil exploration projects.
- Arms embargoes. These are typically used against governments found to be committing human rights violations.
- Travel bans. These are often used alongside asset freezes to target an individual in a country subject to a sanctions regime.
The US also has an extensive array of sanctions including:
- Comprehensive territorial sanctions which target an entire country or territory, including the government of that country/territory and all parties within it. These sanctions are currently in place in respect of Iran, North Korea, Syria, Cuba and Crimea. North Sudan was subject to those broad sanctions until January 2017 but they have been temporarily eased (subject to review later in 2017).
- List based’ sanctions imposing asset freezes on parties designated as Specially Designated Nationals (SDNs) and Blocked Persons, including narcotics traffickers, weapons proliferators, terrorists, and agents of targeted governments, among others. These sanctions extend to any entity owned 50% or more, directly or indirectly, by an SDN. The asset freeze extends to any ‘property’ and ‘interests in property’ (broadly defined) that are in the US or in possession of a US person. Dealing with most of these SDNs could also create exposure under secondary US sanctions for non-US persons.iv
- Sectoral sanctions which target specific activities involving parties on the Sectoral Sanctions Identification (SSI) list, and entities 50% or more owned by them, directly or indirectly. Depending on the basis for SSI designation, restrictions may include debt or equity financing, or any goods/services provided in support of targeted oil/gas projects. While the EU and the US have coordinated on SSI sanctions, recent
- US legislation imposing new Russia restrictions creates a divergence between US and EU approaches.
- ‘Secondary’ (extra-territorial) sanctions which target certain activities by non-US persons even when the underlying transaction has no US ‘nexus’. These have been used most notably against
- Iran, but increasingly target certain activities with North Korea, Russia, and Syria and SDNs.
Penalties for breach
In the EU, each member state has its own enforcement regime which can mean that sanctions are interpreted and enforced differently across member states. In the UK, for example, breaches of sanctions can result in unlimited civil and criminal fines and monetary penalties, as well as imprisonment.
Most EU sanctions require some kind of knowledge or reasonable suspicion for an offence to be committed, whereas sanctions breaches in the US are a ‘strict liability’ offence for civil enforcement. In other words, it doesn’t matter if you did not know that you were doing something wrong – you will still be penalised (although the absence of knowledge may be a mitigating factor when assessing the level of penalty). Penalties can include heavy fines running into hundreds of millions of dollars (when there are many breaches), imprisonment, loss of access to US markets and the risk of being designated yourself.
Licences and exemptions
There are also some limited exemptions. For example, in the EU a bank is allowed to credit an account which it holds for a designated person with interest or with funds transferred to the account, provided the interest and funds are frozen and an appropriate report is made. Similarly in the US, sale of pre-existing informational materials (such as books, films, etc) to a sanctioned country such as Iran is authorised, subject to certain conditions.
There is no ‘one size fits all’ compliance programme. Every business needs to understand its legal risks and how to manage them. This will be more complex (and therefore costly) for businesses which operate internationally because they are likely to have to comply with sanctions imposed by multiple countries, and decide whether to apply different standards to different parts of the business. Also, employees may be nationals of one country and subject to its sanctions regime even if working elsewhere (such as a UK citizen working for a Russian company or a US citizen serving as an executive at a UK entity).
It is not an easy path to navigate, but the business which understands its risks, works out which sanctions regimes apply to it, and manages those risks sensibly and appropriately can enjoy an advantage over its competitors who may be more risk averse and choose simply to withdraw from certain countries, sectors or types of business.
Louise Lamb is a partner in Hogan Lovells Financial Services Disputes team in London. Beth Peters is a partner and Co-Director of the firm’s International Trade and Investment Group and Aleksandar Dukic is a partner in the International Trade and Investment Group based in Washington DC
iSee http://bit.ly/2xdxxQm at gov.uk
iiSee http://bit.ly/2gK4mdb at treasury.gov
iiiSee http://bit.ly/1WEhiSX at consilium.europa.eu
ivThe complete SDN list is maintained by the US Department of the Treasury at http://bit.ly/1pXxyQo
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