The language of the law applying to sanctions is an imprecise one, but it is clear that policy will always trump profit. An increasing number of multinational corporations (MNCs) are being caught up in the evolving and expanding list of US sanctions and they have to be clear on how this arm of American foreign policy impacts on them and their dealings. In recent decades sanctions largely impacted on those doing business – or trying to do business – with Iran. However since early 2014 the Ukraine crisis has seen US sanctions, along with European Union (EU) sanctions, catch an increasing number of companies across the banking, finance and insurance sectors.
A market briefing in the City of London on October 1 organised by the International Underwriting Association (IUA), entitled
‘Evolving and Expanding US Sanctions: The new foreign policy elixir for global ills’
, heard from David J Drummond, counsel at international law firm DLA Piper, and former US Office of Foreign Assets Control (OFAC) senior sanctions advisor – insurance, and colleague Ignacio Sanchez, partner and co-chair of government affairs.
While businesses are currently worrying about the sanctions against Russia, they may not be comforted by the idea that this is not a modern phenomenon for commerce. The history of US sanctions can be traced back to the Non-Importation Act of 1806. That legislation, aimed against Great Britain, was an important part of defining foreign trade and foreign relations and banned a whole list of goods, including leather, woollen goods, glass and silverware.
Even from the start there was uncertainty over which goods were caught by the legislation and which were exempt, as letters from petitioners and reports from the enforcement agencies revealed. Drummond noted that the uncertainty is sometimes as a result of the legislator not knowing the likely impact, while at other times the uncertainty is intentional. “Sanctions have imprecise language in their construction and the policies that drive the sanctions trump the transactions,” he added.
An important part of the enforcement process, which still holds true today, is that when there is a conflict between the policy and the commerce, policy trumps profit. Sanctions are a legal means of prohibiting a business transaction that would otherwise be done. It is a means of punishing or influencing the behaviour of the target country. In addition to sanctions being used to disrupt trade, they can also be used to block property. This blocking was first seen in modern times in the 1970s in the US struggle against drugs cartels and terrorist organisation, but it too has a long antecedence.
Blocking can be back traced to the American Civil War of 1861-65, when Congress passed legislation stopping the bank accounts of traders in Confederacy-held territories to disrupt the supply of goods to Confederate troops.
A Widening Net
Sanctions are first a prohibition on US citizens engaging in commerce, usually exportation of goods or services, with foreign, prohibited persons the specific target. These are primary sanctions, which makes sense as that is over whom the jurisdiction of the US legislators extends. Those three elements, US citizens, transaction and target are always present when the OFAC administers and enforces economic sanctions, although it is not always clear when those three elements come into play. The US president has authority in times of national emergency, not just during wartime, under the International Emergency Economic Powers Act (IEEPA), which allows executive orders. The president declares a threat to the national security and foreign policy of the US and then establishes the appropriate policy response through prohibition.
Recently the US has developed the idea of secondary sanctions, which go beyond just US citizens in applying a prohibition on anyone. The problem for the US is that non-US citizens aren’t subject to American jurisdiction. However, those who do breach secondary sanctions face the possibility of being denied the benefit of doing business with the US, such as using its banking or financial system. The potential penalty was first seen in the Iran Sanctions Act of 1996. These sanctions have provoked controversy with critics labelling them ‘extra- territorial’.
It is under this IEEPA legislation that the US has been acting against Russia in the Ukraine crisis. It is important for companies with business relations in – or related to – Russia to be aware of ongoing developments. In March this year, president Obama issued three executive orders imposing sanctions relating to the Ukraine. The president can identify persons or parties that are the target of sanctions and delegate authority to OFAC to administer the sanction, promulgate regulations and add names to the list of targeted persons or entities.
Many people and entities have been listed as the target of Ukraine-related sanctions and the names have been added to OFAC’s Specially Designated Nationals (SDN) list. US citizens are prohibited from any transaction, and if they were involved in a transaction with someone subsequently added to the list they have an obligation to ‘block’ or stop the transaction. They are also prohibited from ‘facilitating’ a non-US person from dealing with people or organisations on the SDN list.
A final step is ‘sectoral’ standards, which have been used in the context of Russia. Drummond said these were introduced in March this year. While similar to primary sanctions – they are limited to US persons – they provide the US president with a broad range of powers to take action against specific entities. Against Russia, the targets are those in the oil/gas, energy, defence and banking sectors.
Sanchez said that corporates need to think about sanctions in relation to the transactions that their business may be engaged in and the counterparties they may be dealing with. The Russia/Ukraine sanctions situation is likely to change on a relatively frequent basis and companies have to keep abreast of developments. It is clear that once an entity or individual is named, then the sanctions will often escalate – in many cases quickly.
As an example Sanchez spoke of one European entity, which was looking to do a deal with a Russian energy giant. The company wasn’t named at first in the sanctions but the chief executive (CEO) was. The deal was pulled because the CEO would eventually have been required to become involved with, and sign off the transaction. That would have breached sanctions. It is important to understand that the limit of the sanctions can move quickly, largely because of the flexibility that has been granted to the US president in certain areas. According to Sanchez, in addition to industries such as energy and finance the marine and aviation sectors could be soon caught up in sanctions. How long they might remain in place is anyone’s guess.
In response to world events, the US is increasingly turning to economic and trade sanctions. The form and nature of those sanctions is changing; becoming more targeted, more sophisticated and more nuanced. The net is also widening. The end result for businesses across the world involved with international trade is a significant challenge in dealing with sanction-imposed risks.
Europe’s opening banking regulation is finally here. After months of preparation across the continent, the Revised Payment Services Directive comes into effect on January 13.
The revised Payment Services Directive regulation, regarded as one of the most disruptive in Europe’s financial services sector, will begin to make an impact on January 13, 2018.
The cost of compliance efforts for banks has increased exponentially in recent years. This is especially true for those banks that are active in the global trade finance domain, where the overwhelming expectation is for compliance requirements to become even more complex, strict and challenging over time.
This year promises to further the regulatory compliance burden imposed on financial institutions. How are firms in the sector responding to the challenge?