Sanctions: Cooperating without overcompensating
Most sanctions legislation tends to be formulated and rolled out at breakneck speed, making it difficult for businesses and individuals to keep up.
To make matters even trickier, guidelines on complying with these rules are often vague, creating ambiguity and anxiety for even the most diligent compliance officers.
Although the amount and scope of sanctions legislation continues to increase, the good news is that guidance on how to comply is improving.
A decade ago, there was very little, if anything, in the way of compliance guidelines. The terminology of the guidance that exists today for different sanctions regimes is relatively consistent, which makes interpreting and complying with them slightly more straightforward.
Nevertheless, in the current political climate, the role of sanctions lawyers is increasingly important.
The sanctions landscape
When most people think of sanctions, the US' well-publicised restrictions on doing business with Iran, Cuba and Russia usually spring to mind.
Unhelpfully, the Office of Foreign Asset Control (OFAC), which administers US sanctions, does not maintain a discrete list of countries that US persons cannot do business with.
US primary sanctions programmes vary in scope; some are geographical (applying to entire countries, like Iran), while others are "targeted" (counter-terrorism or counter-narcotics measures, for example) and focus on specific individuals and entities.
For a reasonably comprehensive summary of where and to what or whom US primary sanctions apply, OFAC's Sanctions Programs and Country Information is a good place to start. As of October 2019, OFAC listed 32 separate sanctions regimes on this list.
OFAC has also introduced the concept of secondary sanctions, which allow it to target foreign individuals who facilitate transactions with entities sanctioned under US primary sanctions, even if the entity or the transaction has no connection to the US.
Individuals caught by secondary sanctions may find themselves sanctioned, or blocked from using the US banking system – including most major credit card providers.
If the EU is less prominent than the US as a sanctioning authority, it is no less sprawling, currently listing 34 countries subject to its sanctions regimes.
The UK implements its own sanctions, overseen by the Office of Financial Sanctions Implementation (OFSI), as well as EU sanctions.
Most international organisations are more wary of OFAC’s ability to levy multi-billion dollar fines for non-compliance than they are of OFSI's power to impose fines of up to £1 million or 50% of the estimated value of the breach.
OFSI has so far barely flexed its muscles, however the lack of draconian penalties does not necessarily mean that OFSI is toothless, and there is every chance that it will step up the severity of its punishments for sanctions breaches.
In any event, UK and European businesses need to be prepared for a ratcheting up of the complexity, reach and heft of international sanctions policies.
Far from taking a head in the sand approach, sanctions lawyers have observed a propensity in the business community towards over-compliance with both primary and secondary US sanctions in particular.
Although the EU has tried to neutralise the extra-territorial effect of US sanctions by introducing a Blocking Statute and a trade vehicle called the Instrument in Support of Trade Exchanges (INSTEX), anecdotal evidence suggests that businesses have hesitated to take advantage of this framework.
INSTEX is a joint project between the UK, France and Germany, launched in June 2019 as a means for EU companies wishing to trade with Iran to do so without running the risk of breaching US controls (despite the US expressing displeasure at the scheme).
The reluctance to use INSTEX is unsurprising, given the fear of OFAC and huge dependence of most of the world's businesses on the US banking system.
Since this is unlikely to change in the foreseeable future, the US will continue to wield significant power when it comes to enforcing sanctions compliance.
This situation need not unduly stifle trade and economic activity among legally trading entities, however.
While breaching international sanctions could be financially ruinous for a business, over-compliance with sanctions rules can paralyse a business unnecessarily, when a carefully considered proportionate response can minimise, as far as possible, the risk of committing a breach.
For businesses operating in the EU, there is no legal obligation to have a sanctions compliance programme in place.
But, companies that do not have compliance policies leave themselves open to accusations of negligence, in the event that something does go wrong.
Lacking a proper sanctions policy can also scupper M&A deals and other corporate-level transactions, so any business looking to grow or be acquired should consider sanctions compliance as part of its M&A arsenal.
Sanctions compliance need only be proportionate, but has to be carefully thought through.
The five "Ws"
When drawing up sanctions compliance policies, companies need to think about the "five Ws": What? Who? Where? Why? And when?
There are two main forms of sanctions: trade and economic.
Trade sanctions are similar to export controls, in that they impose restrictions on where products can be sent, and what sorts of products are not allowed to be traded.
Products with dual civilian and military use, such as certain minerals and electronic devices, are particularly problematic, but restrictions can be navigated by applying for a relevant licence.
Trade sanctions go beyond export controls in that they forbid providing technical assistance, financing or training around certain goods and technologies.
Economic sanctions prevent any economic "benefit" being conferred, directly or indirectly, on any sanctioned person or entity, and are very broadly defined.
Knowing who you are dealing with seems an obvious point to consider when it comes to sanctions compliance.
Different countries maintain extensive (and highly changeable) lists of sanctioned countries, organisations and individuals which can be accessed online to check the status of a potential business partner.
Open source data only provides a starting point, however, and discovering who is the ultimate beneficial owner of a company or asset can be very difficult, especially where complicated corporate structures are involved.
How a company deals with this requires a cost-benefit analysis of whether the commercial opportunity is worth the time and expense involved in the due diligence needed to find out who is in ultimate control of the business or asset concerned.
The "who" also requires a company to consider whether the nationality of staff involved in relevant transactions exposes the business to sanctions.
A company may have done everything right in terms of due diligence on its partners, structuring its business and making currency arrangements, but can still be caught out if a staff member's nationality conflicts with sanctions rules.
In addition to where you are doing business, the locational aspect of sanctions compliance includes where a company and its business partners are based, its supply chain geography, and where its banking providers are headquartered.
This can be complicated if any one of these operates through subsidiaries and may have a foot in a sanctioned jurisdiction.
Dealing with this risk involves forensic due diligence and careful structuring of commercial ecosystems to ensure that that the whole network is on the right side of sanctions.
Having a clear understanding of, and ready explanation for, a transaction will prove extremely helpful if the transacting entity ever needs to apply for a licence or, in a worst case scenario, finds itself being investigated by the authorities, or in a contractual dispute with a counterparty.
Most sanctions regimes offer licences for legitimate activities, so being able to prove a company meets the licence criteria should mean they can obtain one without too much difficulty.
That said, if a legitimate activity, such as a legally exported consignment of crude oil, ultimately ends up with a sanctioned entity, licences and proof of legal intent are unlikely to save a business from being penalised by a sanctioning authority – although having these readily available may mitigate any fine received.
Another issue to bear in mind is litigation over frustrated contracts.
If a company seeks to claim that a contract cannot be fulfilled due to sanctions, it is important to be able to show that it has done everything possible to try to fulfil the contract, including applying for a licence.
Sanctions legislation and the list of designated entities change constantly, and the direction of travel is towards greater complexity and more restrictions.
This means businesses and individuals have to keep up with changes and amend their internal policies and structures accordingly.
Contracts that are automatically renewed, such as insurance policies and supplier agreements, need to be checked to ensure they are still valid if sanctions rules are updated.
There will be cases where commercial contracts have to be suspended, because a particular part or person in a transaction has been sanctioned.
But even in cases where contracts are paused for long periods, courts have tended to take the view that they have not been frustrated.
Sanctions compliance is ultimately a risk management exercise.
While risks can only be minimised rather than eradicated, this should not prevent a legal business from functioning properly.
Developing a workable compliance approach to sanctions involves:
Knowing the regulatory landscape and understanding exposure to sanctions;
Establishing policies and procedures to help identify red flags;
Having a training programme for all staff around compliance policies;
Providing clear leadership from the top and channels for directing difficult commercial decisions to compliance officers;
Implementing active screening processes for all customers and service providers across the supply chain;
Monitoring changes to sanctions rules and obtaining advice on how to respond.
There has been increasing litigation around contract frustration due to sanctions and the introduction of more stringent sanctions policies and clauses as a result.
Companies should think about refreshing commercial relationships with these in mind, to ensure there is adequate protection built into contracts.
It is important that these protections do not stifle deal-making, however, and for M&A in particular it is about reaching a level of comfort both sides are happy with, usually through patient negotiation and expert advice.
Vivien Davies, Andrew Hood and Vanessa Wilkinson are members of the sanctions team at European law firm, Fieldfisher. For more information on the firm's sanctions and trade restrictions expertise, please visit the relevant pages on the Fieldfisher website.