Twenty years ago, international trade sanctions was a niche area, of limited interest to the great majority of commercial organisations. Fast-forward to today and they have become a board-level issue for almost every company engaged in international commerce because of the number of countries targeted by sanctions, the breadth of the restrictions and the consequences if they are breached. There have been a number of high-profile enforcement actions in the past few years, with fines running into millions and billions of US dollars.
Given the developments with respect to Iran, where sanctions were seen as a key factor in bringing about an agreement to resolve the issues surrounding its nuclear programme (and which have now been reintroduced in response to US concerns), and issues with respect to Russia in both the United Kingdom and the United States during 2018, as well as ongoing measures against Venezuela and North Korea, the use of sanctions as a diplomatic tool is expected to continue, with new sanctions likely to be imposed in response to other diplomatic issues. It is also anticipated that there will be increased enforcement of the sanctions that are in place.
I BASIS FOR INTERNATIONAL TRADE SANCTIONS
Trade sanctions are commonly imposed by a multitude of authorities, including the United Nations, the European Union and national governments (including the United States, Switzerland, Australia and Canada).
The UN Charter gives the Security Council 'primary responsibility for the maintenance of international peace and security'2 and requires UN members to 'accept and carry out the decisions of the Security Council in accordance with the Charter'.3 Article 41 gives the Security Council authority to impose measures, including 'complete or partial interruption of economic relations'.
The European Union adopts sanctions and other restrictive measures pursuant to Common Foreign and Security Policy and, in particular, Article 25 of the Treaty on European Union and Article 215 of the Treaty on the Functioning of the European Union. National legislation sets the penalties for breaching sanctions and, in the case of the United Kingdom, this can include up to seven years' imprisonment and unlimited fines.4
There is also scope in the United Kingdom for civil monetary penalties (of up to £1 million or 50 per cent of the estimated value of the funds that breach the sanctions). Deferred prosecution agreements are be available in respect of sanctions breaches.
On 31 March 2016, the UK's Office of Financial Sanctions Implementation (OFSI) was established. The OFSI has a two-pronged mandate: to help ensure that financial sanctions are properly understood, but also to ensure that the sanctions are properly implemented and enforced. There is more information about enforcement in Section V.
II EXTENT OF INTERNATIONAL TRADE SANCTIONS
As at 7 April 2020, there are EU restrictions in place against companies and individuals in or connected with more than 30 countries (including Libya, Venezuela and Sudan). The restrictions that are likely to have most impact on businesses engaged in shipping and international commerce are those restrictions imposed pursuant to the sanctions relating to Iran, Syria, North Korea and Ukraine (including measures affecting trade with Russia).
In January 2016, in a hugely significant development, a large number of the restrictions affecting Iran were suspended, pursuant to the Joint Comprehensive Plan of Action (JCPOA). The JCPOA, commonly referred to as the Iran Deal, was the culmination of many months of negotiation between Iran on the one hand and the P5+15 on the other, and is considered in more detail in Section VI. Following a period of sanction relief, many of the US sanctions against Iran were reimposed in August and November 2018 (see Section VI).
In January 2019, existing restrictions on the government of Venezuela were extended to include the Central Bank of Venezuela and Petroleos de Venezuela SA (PDVSA). In addition, PDVSA was designated on the US Specially Designated Nationals (SDN) List. These restrictions prohibit US persons from conducting virtually all dealings with these entities and have the potential to affect non-US persons (see further discussion of US sanctions and their impact on non-US persons in Section III).
III SCOPE OF APPLICATION OF INTERNATIONAL TRADE SANCTIONS
UN sanctions do not apply directly to companies or individuals, whereas EU sanctions have direct effect on EU companies and individuals, as well as applying to any legal person, entity or body in respect of any business done in whole or in part within the European Union.
US sanctions can be split into two broad categories, namely domestic measures that apply to all US nationals and entities (including banks in the United States whose only role in a transaction is to clear US dollar payments) and measures that seek to have extraterritorial effect, by empowering US agencies to impose penalties against non-US companies, such as complete exclusion from the US banking system.
IV NATURE OF RESTRICTIONS
Virtually every sanctions programme includes an asset freeze, the effects of which are twofold: first, the funds and economic resources of the designated individuals and entities are frozen, meaning that they cannot deal with their own assets; second, it is prohibited to make funds and economic resources available, directly or indirectly to or for the benefit of the designated individuals and entities. The United States refers to the designated individuals and entities as SDNs and publishes the SDN List of designated individuals and entities.
The designated entities frequently include politicians (e.g., government ministers) and members of the military and intelligence services, but they may also include prominent businessmen who are supporting the regime via their business activities, and the spouses and children of high-ranking politicians. For example, under the Libya sanctions, the European Union designated not only Muammar Gaddafi but also his daughter and several sons, and there are businessmen designated under the Syria and Ukraine-related sanctions.
Funds and economic resources are defined very broadly in the sanctions legislation (e.g., in Article 1 of Regulation 267/2012 relating to Iran) and will include virtually any asset that has any economic value. In particular, 'funds' includes not only cash, cheques and deposits at banks, but also performance bonds, letters of credit and bills of lading. 'Economic resources' means assets of every kind, whether tangible or intangible, movable or immovable, which are not funds but which may be used to obtain funds, goods or services.
In addition, many of the programmes include bans on the trade in specific items. Some bans are common to many programmes (such as the prohibition on the supply to the sanctioned country of military and dual-use equipment, and equipment for internal repression), but other bans are specific to the sanctions programme and demonstrate a more targeted approach.
By way of example, as at 7 April 2020, it is prohibited to sell, supply, transfer or export to Syria identified equipment, technology or software that may be used for the monitoring or interception of internet or telephone communications.6 Likewise, licences are required for the sale, supply, transfer or export to Russia of listed oil and gas equipment, and no licences may be granted in respect of new contracts for supply to Russian Arctic, deep water or shale projects, other than in the event of an emergency.7
Sanctions imposed against North Korea in April and May 2016 in response to the nuclear test conducted by North Korea on 6 January 2016 and the rocket launch conducted on 7 February 2016 specifically targeted shipping. In particular, they restricted the provision of vessels and crew to North Korea, restricted access by Korean vessels to EU ports and restricted the supply of insurance, vessel registration and vessel classification services to North Korean vessels.8 There are also export bans on commodities such as gold, coal, iron, lead, other metals and seafood.9
Finally, the sanctions against Syria include wide-ranging restrictions on the availability of finance and insurance, and the sanctions relating to Ukraine include restrictions on certain Russian entities' access to debt, equity and capital markets, new loans and credit. These latter restrictions, commonly referred to as 'sectoral sanctions' require businesses to conduct due diligence not only on their counterparties (to see whether they are included on the list of entities that are subject to sectoral sanctions) but also on the specific transaction (to see whether it includes any prohibited activities).
V ENFORCEMENT OF SANCTIONS
As at 7 April 2020, the majority of high-profile international sanctions enforcement has been by US authorities, and particularly the Office of Foreign Asset Controls (OFAC) within the US Treasury. However, in the first quarter of 2020, European authorities, such as the OFSI and the Dutch courts, began to show a greater appetite for enforcement, issuing large fines for sanctions breaches.
Notable examples of OFAC enforcement include fines imposed or penalties agreed with a host of international banks, including BNP Paribas,10 HSBC,11 Commerzbank,12 ING,13 Credit Suisse,14 Barclays,15 Société Générale,16 UniCredit Bank AG17 and Standard Chartered Bank.18 In addition, penalties were imposed against businesses involved in shipping and international trade, including PDVSA,19 the American P&I Club,20 Dr Cambis/Impire Shipping21 and Eagle Shipping International (USA) LLC.22
The enforcement actions against banks generally relate to their involvement in processing payments in breach of US sanctions against the likes of Iran, Sudan and Cuba. By way of example, according to the settlement agreement that Commerzbank reached with the OFAC in March 2015 and pursuant to which Commerzbank agreed to pay US$259 million to the OFAC to settle its potential civil liability for apparent violations of US sanctions regulations, the bank processed thousands of transactions through US financial institutions that involved countries, entities or individuals subject to the sanctions programmes administered by the OFAC, the bank engaged in payment practices that removed, omitted, obscured or otherwise failed to include references to US-sanctioned persons in SWIFT payment messages sent to US financial institutions and bank employees, deleted or omitted references to Iranian financial institutions, replaced the originating bank information with Commerzbank's name, and later created a process to route payments involving Iranian counterparties to a payment queue requiring manual processing by bank employees rather than routine, automated processing.
In June 2014, BNP Paribas entered into a plea agreement with the US Department of Justice, pursuant to which BNP Paribas agreed to pay total financial penalties of US$8.9736 billion, including forfeiture of US$8.8336 billion and a fine of US$140 million. As part of the plea agreement, BNP Paribas acknowledged that, from at least 2004 until 2012, it knowingly and wilfully moved more than US$8.8 billion through the US financial system on behalf of Sudanese, Iranian and Cuban sanctioned entities, in violation of US economic sanctions. The conduct also led to penalties being imposed by other US regulators, including the New York State Department of Financial Services, which announced at the time that BNP Paribas had agreed to, among other things, terminate or separate from the bank 13 employees, including the group chief operating officer and other senior executives, and suspend US dollar clearing operations through its New York branch and other affiliates for one year for business lines on which the misconduct centred.
PDVSA was penalised for supplying two cargoes of reformate to Iran between December 2010 and March 2011. The penalties imposed on PDVSA prohibited the company from competing for US government procurement contracts, from securing financing from the Export-Import Bank of the United States, and from obtaining US export licences. These penalties did not apply to PDVSA subsidiaries and did not prohibit the export of crude oil to the United States by PDVSA.
The American P&I Club agreed to pay US authorities around US$350,000 in May 2013 to settle potential liability for 55 apparent violations of US sanctions against Cuba, Sudan and Iran. The violations related to settling P&I claims and providing security by way of letters of undertaking and letters of indemnity. The penalty could have been as high as US$1.7 million, but was reduced because of various mitigating factors.
Dr Dimitri Cambis was added to the SDN List in March 2013 on the basis that he helped the National Iranian Tanker Company (NITC) obtain eight tankers in late 2012 in a manner that concealed the Iranian origin of crude oil by obscuring or concealing the ownership, operation or control of the vessels by the NITC. While the vessels were purchased and seemingly controlled by Dr Cambis and his company Impire Shipping, they were in fact said to be operated on behalf of the NITC, which at the time was on the US SDN List.
In March 2017, Zhongxing Telecommunications Equipment Corporation (ZTE), a telecommunications corporation established in China, agreed to pay US authorities more than US$100 million to settle potential liability for more than 250 apparent violations of US sanctions against Iran. The violations related to direct or indirect sale or supply of goods from the United States to Iran and the re-exportation of controlled US-origin goods from a third country with knowledge that the goods were intended specifically for Iran.23
In January 2020, Eagle Shipping International (USA) LLC, a ship management company registered in the Marshall Islands, agreed to pay US authorities US$1.1 million to settle potential liability for 36 apparent violations of US sanctions against Myanmar. The violations related to dealings by Eagle Shipping's Singapore affiliate with the former US SDN listed entity, Myawaddy Trading Limited, both before and after its application for an OFAC licence was denied.24
On 31 March 2016, the OFSI was established. Part of the OFSI's mandate is to ensure that sanctions are properly implemented and enforced. The March 2015 Budget25 referred to the government's intention to create the OFSI and included the following indication of the direction this might take:
The government will review the structures within HM Treasury for the implementation of financial sanctions and its work with the law enforcement community to ensure these sanctions are fully enforced, with significant penalties for those who circumvent them. This review will take into account lessons from structures in other countries, including the US Treasury Office of Foreign Assets Control.
The Policing and Crime Act 2017 includes, at Section 146 onwards, powers for HM Treasury to impose monetary penalties for sanctions breaches. The penalties can be up to £1 million or, where the relevant offence involves a breach of the asset freeze, up to 50 per cent of the value of the relevant funds or economic resources, whichever is the higher. Rather than having to satisfy the criminal burden of proof (beyond reasonable doubt), HM Treasury only needs to satisfy the civil standard, namely that HM Treasury is satisfied on a balance of probabilities that there has been a breach of the EU sanctions. OFSI published guidance on the new powers in April 2017.26
In January 2019, OFSI announced that a monetary penalty of £5,000 (reduced from £10,000) had been imposed on Raphaels Bank for breaching the EU sanctions against Egypt by dealing with funds (only £200) that belonged to a target of the asset freeze.27
In March 2019, OFSI announced that a monetary penalty of £10,000 had been imposed on Travelex UK for dealing with funds of the same asset freeze target in breach of EU sanctions against Egypt.28
In September 2019, OFSI announced that Telia Carrier UK Ltd had been issued with a monetary penalty of £146,000 (reduced from £300,000) for facilitating phone calls to SyriaTel, a designated person under the EU Syria regime.29
On 7 February 2020, the Limburg Court in the Netherlands imposed penalties of €600,000 and €4 million, respectively, on the Dutch company Euroturbine BV and its Bahrain-based subsidiary Euroturbine SPC for breaching EU and Dutch export controls on Iran.30 The penalties represented the value obtained by each entity as a result of their illegal transport of gas turbine components to Iran without an export licence. The Court found that Euroturbine BV structured the Iranian trades via its Bahrain subsidiary in an attempt to circumvent national and international export control legislation, with Euroturbine SPC acting as the crucial link for the delivery of the goods and receipt of payment in most instances.
On 18 February 2020, the Limburg Court convicted Euroturbine BV and its subsidiary for exporting gas turbine parts to Iran without a licence and imposed further fines of €500,000 and €350,000, respectively.31 It also imposed custodial sentences on two individuals.
In March 2020, OFSI's £20.47 million penalty on Standard Chartered Bank was upheld. The penalty was reduced from £31.5 million and was imposed in respect of Standard Chartered's breach of EU financial sanctions on Sberbank and its former subsidiary Denizbank AS.32
VI IRAN SANCTIONS – RELIEF AND RENEWAL
The full details of the Iran Deal under the JCPOA are outside the scope of this short chapter, but in essence the deal provided Iran with staged relief from the sanctions imposed by the United Nations and the European Union, and many of the sanctions imposed by the United States, in return for continued commitments by Iran in respect of its nuclear programme.
The JCPOA envisaged a 10-year time frame, with the agreement not fully performed until 2025. There were two main phases of sanctions relief, the first occurring on Implementation Day, which was 16 January 2016, and the second not occurring until Transition Day, which is in October 2023.
The first phase of sanctions relief was triggered by verification by the International Atomic Energy Authority that Iran had complied with its JCPOA commitments. This resulted in the suspension of those EU restrictions that had been characterised as being 'nuclear-related' (as opposed to 'proliferation-related') as well as equivalent US extraterritorial sanctions. It did not significantly affect the US sanctions that apply to US persons.
Some of the most significant changes from an EU perspective were the delisting of numerous individuals and entities, including Islamic Republic of Iran Shipping Lines, the NITC and Iran Insurance Company, and the suspension of prohibitions relating to the purchase, import or transport of crude oil, petroleum products, petrochemical products and natural gas of Iranian origin.
There were due to be further delistings on Transition Day, as well as further lifting of trade restrictions, but on 8 May 2018, President Trump withdrew the United States from the JCPOA. On 6 August and 5 November 2018, all of the US secondary sanctions on Iran that the JCPOA had removed were reinstated.
A number of difficult challenges continued to arise even when the sanctions were suspended, including the fact that the US domestic sanctions (i.e., those that apply to US persons, and therefore US banks processing US dollar transactions) were largely unaffected by the JCPOA, with the result that US persons were still largely prohibited from trading with Iran.
The US withdrawal from the JCPOA creates new challenges for non-US businesses that want to engage in trade with Iran. They risk exclusion from US markets, as well as challenges finding banks and insurers that are willing to support lawful trade with Iran. The EU Blocking Regulation was also expanded to make it unlawful for EU businesses to comply with these US secondary sanctions.
At the time of writing, the EU continues to uphold its commitments under the JCPOA despite the US withdrawal and reports that Iran has increased its stockpiles of enriched uranium in breach of the deal. In light of this, in January 2020, the E3 (the United Kingdom, Germany and France) announced that they were initiating the JCPOA's dispute resolution mechanism in an attempt to resolve allegations of Iran's non-compliance. In January 2019, the E3 created a new payment mechanism or special purpose vehicle, called INSTEX, which is intended to facilitate financial transactions with Iran. The E3 announced that the first INSTEX transaction facilitating the export of medical goods from Europe to Iran had successfully taken place in March 2020.
VII SANCTIONS – IMPACT OF BREXIT
The United Kingdom left the European Union on 31 January 2020. EU sanctions will continue to have a direct effect on UK companies and individuals during the transition period, which ends on 31 December 2020. After this date, EU sanctions will no longer have any direct effect on UK companies or individuals. From this time new UK sanctions regimes will come into force under the Sanctions and Anti-Money Laundering Act 2018. The UK government has, however, indicated that some sanctions regimes currently governed by EU law will continue as retained EU law after 31 December 2020.
It is not anticipated that these changes will have a major impact on UK businesses, as it is expected that the United Kingdom will adopt national measures under the Sanctions and Anti-Money Laundering Act 2018 that closely mirror those adopted by the European Union (in a manner analogous to the approach that Norway and Switzerland currently adopt).
While it is possible that domestic sanctions could diverge from EU sanctions in particular areas (where, for example, the United Kingdom considers that the economic cost to the nation of adopting particular restrictions outweighs the benefits of those measures), it seems unlikely that there will be wholesale differences, given the United Kingdom's long-standing support for EU sanctions, including those against Iran and Russia.
In accordance with international law, the United Kingdom will regardless implement UN sanctions into UK domestic law.
VIII COMPLIANCE WITH INTERNATIONAL TRADE SANCTIONS
Companies that are at risk of infringing sanctions by reason of the areas in the world where they trade and operate need to have processes in place to screen counterparties and other parties involved in the transaction (including banks) to check that they are not included on any sanctions list. They also need to review the products that are being traded and be aware of any relevant restrictions.
Finally, they need to work closely with their banks and insurers to check that those institutions can support the trade, and they need to think carefully about contractual protections to deal with existing and future sanctions risks.
1 Daniel Martin is a partner at HFW.
2 Article 24 of the UN Charter.
3 Article 25 of the UN Charter.
4 Per the UK Policing and Crime Act 2017 and the European Union Financial Sanctions (Enhanced Penalties) Regulations 2017.
5 The five permanent members of the United Nations Security Council (China, France, Russia, the United Kingdom and the United States) plus Germany.
6 Article 4 of Council Regulation (EU) No. 36/2012 (as amended).
7 Article 3 of Council Regulation (EU) No. 833/2014 (as amended).
8 Articles 39 and 43 of Council Regulation (EU) No. 2017/1509 (as amended).
9 Articles 3, 16a and 16b of Council Regulation (EU) No. 2017/1509 (as amended).