Global Investigations Review - The law and practice of international investigations

The Guide to Sanctions - First Edition

Navigating Conflicting Sanctions Regimes

Simmons & Simmons

Seward & Kissel

Introduction

The ever-increasing globalisation of business means that many companies now operate to some extent in two or more jurisdictions. This requires companies to be cognisant of trade laws in other jurisdictions, in particular export control laws and sanctions regimes. When those regimes conflict, or a jurisdiction’s laws apply extraterritorially, companies are left grappling with decisions about whether it is lawful to proceed with transactions.

This is particularly true of the sanctions regimes in place in the United States and the European Union, which are the focus of this chapter. Measures imposed by each government or body often follow a common policy objective and will typically be agreed collectively by the United Nations Security Council. However, policy objectives sometimes diverge and can be driven by regional political dynamics. This has been the case in the past in relation to measures imposed by the United States on Cuba and the different approaches taken by the United States and the European Union more recently in relation to the reimposition of measures on Iran.

For those regimes in which the United States has implemented secondary sanctions, for example Russia, even companies without a US presence may face punishment – in the form of designation under those sanctions – for carrying on certain business contrary to the US’s Russia sanctions. This is even the case for EU-based companies that are carrying on business in compliance with the EU’s own Russia/Ukraine sanctions. We consider the effects of secondary sanctions on non-US persons below.

For companies subject to both US and EU sanctions regimes, compliance with both is complicated by the EU’s blocking legislation, which has recently been updated in light of the US’s position on Iran.[2] We discuss the background to, and application and enforcement of, the blocking legislation below.

This chapter also considers the US anti-boycott laws and provides guidance on advising clients on managing conflicting regimes in that context. The conduct of risk assessments, due diligence and approaches to contractual sanctions clauses are also covered.

The transition phase following the UK’s withdrawal from the EU ends soon and the UK’s sanctions regime will emerge. We comment at the end of this chapter on the UK’s likely approach following Brexit.

Blocking regulation

Historical perspective

The United States has historically embraced embargoes and economic sanctions to facilitate its foreign policy objectives, including when confronted by the competing foreign policy interests of Europe and other world powers. Notably, in the late 1970s, the United States enacted the Export Administration Act of 1979 (the EAA), which provided the President with broad authority over US exports.[3]

The Reagan Administration used the EAA’s power over US exports to confront the Soviet Union’s interests during the Cold War. Specifically, the Reagan Administration deployed an economic embargo[4] to target the construction of a Europe–Siberia pipeline, fearing that the Soviets would use it to leverage support from western Europe and strengthen its military interests.[5] Despite the US’s efforts to curtail Soviet influence, the embargo was short-lived and by the winter of 1982, it was repealed, due in large part to European protests.[6]

Similar to the US’s efforts to curtail Soviet influence in Europe during the Cold War, the Cuban Liberty and Democratic Solidarity (Libertad) Act of 1996 (known as the Helms-Burton Act) was enacted in an effort to rectify US nationals whose property was confiscated by the Cuban Government following the Cuban revolution, and deter foreign companies from establishing economic relations with Cuba.[7] Notably, the Helms-Burton Act’s most significant provision was the authorisation for US nationals to sue companies or individuals that had confiscated or trafficked in confiscated property from Cuba.[8]

The Helms-Burton Act has a renewed relevance today. Although it is not a formal economic sanctions programme, it certainly has affected US and foreign companies that have previously done business in Cuba and with the Cuban government, and those that seek to do so in the future.

US secondary sanctions

In the mid 1990s, the United States continued to implement economic sanctions targeting non-US companies and individuals who did business in countries hostile to the United States. In 1996, for example, the United States enacted the Iran and Libya Sanctions Act of 1996 (now known as the Iran Sanctions Act), the aim of which is to deter investment by non-US companies in Iran and Libya by imposing sanctions on companies and individuals that made investments contributing to Iran’s or Libya’s petroleum sectors. Like the Trans-Siberian pipeline embargo and the Helms-Burton Act, the Iran Sanctions Act was condemned as ‘extra­territorially’ illegal and a violation of international law by many of the US’s trading partners.[9]

The Iran Sanctions Act opened the door for more expansive secondary sanctions and the United States continued that trend into the twenty-first century, including with implementation of the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 (secondary sanctions targeting Iran’s energy sector and foreign financial institutions that engage in certain transactions with Iran), Countering America’s Adversaries Through Sanctions Act in 2017 (secondary sanctions against Russia, North Korea and Iran), and the US’s withdrawal from the Joint Comprehensive Plan of Action (JCPOA) in 2018, which reimposed many of the secondary sanctions against Iran that had been paused as a result of the Iran nuclear deal. In short, despite the challenges posed by the blocking laws of the European Union and the opposition of other government bodies, the United States has continued to implement and enforce sanctions targeting non-US companies and individuals that transact with countries hostile to the US’s foreign policy interests.

The EU Blocking Regulation

Council Regulation (EC) No. 2271/96 (the Blocking Regulation) was adopted by the European Union in 1996 following enactment of the Iran Sanctions Act by the US government. Its purpose is to protect EU persons against the effects of the extraterritorial application of legislation adopted by a third country that damages the interests of the European Union (in reality, currently, only the United States). In an interpretative note, the European Union explains that protection under the Blocking Regulation concerns ‘international trade; and/or the movement of capital; and related commercial activities between the EU and non-EU countries’.[10]

When first adopted, the Blocking Regulation was designed to counteract the US economic sanctions against Cuba, Libya and Iran (as described above). The relevant US measures are set out in the Annex to the Blocking Regulation and these were extended in June 2018 to include additional US sanctions on Iran following US withdrawal from the JCPOA.[11]

The Blocking Regulation applies to:

  • any natural person being a resident in the European Union and a national of a Member State;
  • any legal person incorporated within the European Union;
  • any national of a Member State established outside the European Union and any shipping company established outside the European Union and controlled by nationals of a Member State, if their vessels are registered in that Member State in accordance with its legislation;
  • any other natural person being a resident in the European Union, unless that person is in the country of which he or she is a national; and
  • any other natural person within the EU, including its territorial waters and air space and in any aircraft or on any vessel under the jurisdiction or control of a Member State, acting in a professional capacity.[12]

In August 2018, the European Commission (the Commission) sought to clarify the position of EU subsidiaries of US companies and subsidiaries of EU companies in the United States.[13] Subsidiaries of US companies that have their registered office, central administration or principal place of business within the European Union are considered to be ‘EU operators’ and therefore subject to the EU Blocking Regulation. This is not the case for EU branches of US companies since they do not have distinct legal personality from their parent company.[14] Nor is it the case for US-based subsidiaries of EU companies that will be subject to the law under which they are incorporated (i.e., generally US law). Their parent companies will of course be EU operators and therefore subject to the provisions of the Blocking Regulation.

The main provisions of the Blocking Regulation are as follows:

  • EU operators are prohibited from complying, actively or by deliberate omission, with any requirement or prohibition specified in the measures set out in the Annex.[15] However, EU operators may be authorised by the Commission to comply fully or partially with any of the legislation set out in the Annex if to do otherwise would seriously damage their interests or those of the European Union.[16]
  • No decisions of non-EU courts, tribunals or administrative authorities giving effect to the measures set out in the Annex or any actions based thereon or resulting therefrom shall be recognised or enforceable within the European Union.[17]
  • If the economic or financial interests of any EU operator are affected by the legislation set out in the Annex (or by actions based thereon or resulting therefrom), they must inform the Commission (or their own competent sanctions authority) within 30 days of the date on which they obtain that information.[18] The reporting obligation applies to directors, managers and other persons with management responsibilities. In addition, the Commission has the power to request additional information.
  • Penalties for non-compliance with the Blocking Regulation are to be imposed by each Member State. Article 9 requires that any such sanctions ‘must be effective, proportional and dissuasive’.

The terms of the Blocking Regulation are unclear in a number of ways; for example, in respect of the prohibition on European companies from ‘complying’ with the measures set out in the Annex. In this context, ‘complying’ might be interpreted to mean that business should be conducted in line with the requirements of the relevant measures. Does this therefore mean that European businesses are prohibited from actively deciding that they should not do business in Iran or Cuba because to do otherwise might suggest that they are complying with US economic sanctions? In the EU Guidance Note, the Commission’s response is as follows:

EU operators are free to conduct their business as they see fit in accordance with EU law and national applicable laws. This means that they are free to choose whether to start working, continue, or cease business operations in Iran or Cuba, and whether to engage or not in an economic sector on the basis of their assessment of the economic situation. The purpose of the Blocking Statute is exactly to ensure that that [sic] such business decisions remain free, i.e., are not forced upon EU operators by the listed extra-territorial legislation, which the Union law does not recognise as applicable to them.[19]

The impact of the ‘extraterritoriality’ of the US legislation creates another area of uncertainty. Since the purpose of the Blocking Regulation is to counteract the extraterritorial effect of the measures specified in the Annex, the prohibition under Article 5 will apply only to the extent that measures apply extraterritorially to EU operators. Determining this will largely be a question of fact. In addition, it is unclear whether the Article 5 prohibition applies to US secondary sanctions as well as primary sanctions. US primary sanctions typically apply to entities and individuals that have a US nexus (e.g., US persons, companies organised under the laws of the United States, those using the US financial system, among others), while secondary sanctions are intended to target entities and individuals, regardless of their connections to the United States (e.g., companies organised in foreign jurisdictions, individuals not located in, or citizens of, the United States, among others). Given that primary sanctions do not typically apply extraterritorially therefore to EU companies (with the exception of EU-incorporated subsidiaries of US companies), it might be concluded that primary sanctions are not within scope of the Blocking Regulation and, therefore, EU companies are free to conduct their affairs in line with those sanctions if they so desire. However, the Blocking Regulation and the EU Guidance Note do not provide clarity either way on this matter.

Enforcement and penalties

Local transposition of the Blocking Regulation by Member States is varied. Some have implemented criminal penalties for breach of the provisions (e.g., the United Kingdom)[20] and others have imposed administrative penalties (e.g., Germany).[21] Others have not transposed the Blocking Regulation directly into national law (e.g., France).

The risk of the enforcement action being taking for breach of the Blocking Regulation (or local law equivalent) will vary between Member States. However, enforcement risk is generally perceived to be low.[22] This may be, in part, as a result of the legal uncertainties surrounding the terms of the Blocking Regulation.[23] It may also be that enforcement agencies acknowledge that for some companies, principally EU-incorporated subsidiaries of US companies, they will be caught between ‘a rock and hard place’ when deciding whether to comply with the relevant US sanctions or the terms of the Blocking Regulation. Taking into account varying enforcement risks between the European Union and the United States, many companies are likely to opt to comply with US sanctions, if relevant, given the much higher level of enforcement risk for sanctions breaches in the United States.

It is perhaps more likely that EU operators who decide to end business with Iranian or Cuban counterparties may be subject to civil claims by those parties for losses caused as a result of their decisions to terminate existing contractual arrangements.

For example, Bank Melli Iran commenced proceedings against Telekom Deutschland GmbH in Germany following issuance of notice to terminate existing contractual arrangements by the telecommunications company against a German branch of the bank. The termination notice was issued subsequent to the designation by the Office of Foreign Assets Control (OFAC) of Bank Melli Iran on the List of Specially Designated Nationals (SDNs) and Blocked Persons (the SDN List) in 2018. The bank claims that notice to terminate the contracts was issued in breach of Article 5 of the Blocking Regulation as it was issued in purported compliance with US secondary sanctions on Iran. On 2 March 2020, the German court made a request to the EU Court of Justice for a preliminary ruling on interpretation of Article 5.[24] It includes seeking a ruling on whether Article 5 only applies if an EU operator is issued directly or indirectly with an official or court order of the United States, or whether it is sufficient for its application that the action of the EU operator is predicated on compliance with secondary sanctions. A ruling is yet to be made.

Separately, Article 6 of the Blocking Regulation provides that any EU operator shall be entitled to recover any damages and legal costs caused to that person by the application of the laws specified in the Annex. This provision is broad and leaves open the possibility that a claim could, for example, be made against the US government for losses caused.[25]

Despite the restrictions imposed by blocking measures enacted by the European Union and others, OFAC has not indicated an interest in easing enforcement for US companies or their foreign subsidiaries that operate in sanctioned jurisdictions. In fact, OFAC’s Framework for Compliance Commitments, issued in May 2019, does not reference the Blocking Regulation, and US authorities take the view that companies whose transactions have a nexus to the United States must abide by US sanctions, regardless of the local restrictions that companies or individuals might have.[26]

Drafting contractual provisions

Drafting robust sanctions compliance provisions is crucial to the effective performance of contracts particularly in financing and trade arrangements. The strength of these provisions will vary depending on the sanctions risk (both present and future) to a particular arrangement or transaction. Difficulties will arise when multiple jurisdictions and conflicting sanctions regimes are involved.

Even more challenging is the need to proof contracts from the risk that they might include terms that imply an obligation to comply with sanctions legislation imposed by third countries. For example, the English courts have held that a non-default clause in an agreement governed by English law including the words ‘mandatory provision of law’ was wide enough to include both primary and secondary US sanctions in circumstances where neither party to the agreement was a US person, nor did the transaction have a US connection.[27] This enabled a party to suspend payments under the agreement.

In addition, it is vital that parties do not breach the terms of the Blocking Regulation by agreeing to comply with relevant US measures (as set out in the Annex to the Blocking Regulation). Typically, agreements will require parties to confirm that they have not, and will not, breach relevant sanctions. If a US person is involved in such an agreement, relevant sanctions will be defined to include US sanctions and limits will be placed on dealing with persons designated by OFAC under those sanctions.[28] Article 5 of the Blocking Regulation could be interpreted widely to mean that compliance with such terms amounts to ‘complying’ under Article 5.[29]

To work around the implications of the Blocking Regulation, contractual parties often carve out the terms of that Regulation from an obligation to comply with US sanctions. In those circumstances, a compliance with sanctions clause would not be applicable to the extent that is inconsistent with the Blocking Regulation.

German nationals (legal and natural) are prohibited from issuing or participating in a boycott declaration.[30] Terms that define the breach of a sanctions clause as an event of default under the contract might also fall foul of the anti-boycott legislation since the party in breach would suffer adverse consequences. German contractual parties therefore typically seek to include a carve out from compliance with sanctions that are inconsistent with the terms of the anti-boycott legislation and that either opt in or opt out of particular terms.

An alternative approach is for contractual parties to limit terms relating to compliance with sanctions to the facts of a specific transaction. For example, it may not be necessary for parties to agree to continuing compliance with US sanctions on Iran if they carry out no business in Iran or with Iranian parties. When permitting a counterparty to adopt such an approach, it is recommended that due diligence is undertaken, for example, to obtain a clear understanding of the counterparty’s business, likely use of funds (in a financing arrangement) and to determine the legal possibility and risk of that party breaching US sanctions.

US anti-boycott laws

Overview

The current iteration of the US’s anti-boycott laws were first enacted in the middle to late 1970s with the Ribicoff Amendment to the Tax Reform Act of 1976 (TRA) and the EAA. Both statutes were enacted in response to the Arab League’s boycott of Israel, although neither explicitly referenced Israel or the Arab League’s boycott. The US Department of Commerce’s Bureau of Industry and Security (BIS) administers and enforces the EAA’s anti-boycott provisions through the Export Administration Regulations (EAR), while the US  Department of the Treasury is responsible for administering and enforcing the TRA’s anti-boycott provisions, which are contained in Section 999 of the Internal Revenue Code.[31]

Applicability

The EAR’s anti-boycott restrictions apply to the activities of US persons that do business in the interstate or foreign commerce of the United States.[32] The EAR defines ‘US person’ as ‘any person who is a United States resident or national, including individuals, domestic concerns, and “controlled in fact” foreign subsidiaries, affiliates, or other permanent foreign establishments of domestic concerns’.[33]

Similarly, the anti-boycott provisions of the TRA, which are contained in Section 999 of the Internal Revenue Code, apply to any US person, defined as a citizen or resident of the United States, a domestic partnership, a domestic corporation, any estate (other than a foreign estate), and any trust subject to US supervision or control.[34]

Prohibitions

The EAR prohibits a wide range of conduct relating to unauthorised boycotts. Specifically, US persons may not:

refuse, knowingly agree to refuse, require any other person to refuse, or knowingly agree to require any other person to refuse, to do business with or in a boycotted country, with any business concern organized under the laws of a boycotted country, with any national or resident of a boycotted country, or with any other person, when such refusal is pursuant to an agreement with the boycotting country, or a requirement of the boycotting country, or a request from or on behalf of the boycotting country.[35]

In addition, US persons are prohibited from furnishing, or knowingly agree to furnish, ‘information concerning his or any other person’s past, present or proposed business relationships’ with or in a boycotted country, with any business concern organised under the laws of a boycotted country, with any national or resident of a boycotted country, or with any other person who is known or believed to be restricted from having any business relationships with or in a boycotting country.[36]

With regard to the TRA, Section 999(b) of the Internal Revenue Code prohibits agreements to participate or cooperate in international boycotts, which includes instances in which a person agrees to refrain from doing business with a country that is the object of a boycott, refrain from doing business with a US person engaged in trade in a country that is the object of a boycott, or refrain from doing business with any company whose ownership or management is made up of individuals of a particular nationality, race or religion, among other potential grounds.[37]

Reporting requirements

Under the EAR, all US persons are required to report to BIS once a quarter whenever they receive a ‘request to take any action which has the effect of furthering or supporting a restrictive trade practice or boycott fostered or imposed by a foreign country against a country friendly to the United States or against any United States person’.[38] Such a request can either be verbal or in writing, and can include a request to furnish information or enter into or implement an agreement. It may also include a solicitation, directive, legend or instruction that asks for information or that requests a US person to take or refrain from taking a particular action.[39]

Under the TRA, US persons must annually report the receipt of any requests to participate in or cooperate with a boycott, regardless of whether they plan to assent to any request.[40] Section 999’s reach is broad, such that if the taxpayer ‘knows or has reason to know that participation in or cooperation with an international boycott is required as a condition of doing business’ within a boycotting country or with a boycotting entity, the taxpayer must report, regardless of whether it has direct contact with that country or entity.[41]

Penalties and enforcement

Penalties for violations of US anti-boycott laws can be severe. Administrative penalties under the EAR can include a denial of export privileges and the imposition of monetary fines up to US$50,000 per violation.[42] Criminal penalties can include monetary fines of up to US$1 million and up to 20 years’ imprisonment for wilful violations.[43] BIS, in enforcing the EAR, encourages voluntary self-disclosure, which can qualify as a mitigating factor if done properly.[44]

Violating the TRA may result in adverse tax consequences, including the loss of foreign tax credits and the exclusion of extraterritorial income from gross income.[45] Liability attaches under the TRA if a US person fails to report prohibited boycott activity to the Internal Revenue Service.[46] Specifically, any person who wilfully fails to report faces fines of up to US$25,000 and imprisonment for up to one year.[47]

Acceptable forms of contractual language

In drafting agreements for transactions (including letters of credit) in which a boycott-related issue arises, there are several important factors to consider in complying with applicable US law and protecting a company after an agreement is finalised. First, companies should consider whether the parties have a nexus to the United States and, if so, whether they are subject to the US’s anti-boycott laws. Second, if the parties are subject to the US’s anti-boycott laws, then careful attention to the agreement’s contractual language is necessary, including any references to Israel or other unsanctioned boycotts. For example, a reference to Israel in a charterparty agreement for a vessel transporting petroleum in the Middle East could be a red flag that necessitates further enquiry to ensure there is no violation of the anti-boycott laws. Third, attention should be given to requests to furnish information, including, for example, information regarding prior port calls or business activity in Israel or other boycotted jurisdictions. Finally, those subject to US anti-boycott laws should consider the exceptions contained in the EAR and other laws, including those that permit certain activities necessary to comply with local law in foreign jurisdictions.[48]

Advising clients subject to US and EU regimes

Relevance of due diligence and risk assessment

In any commercial setting, performing due diligence for a contemplated transaction and screening the relevant counterparties is an essential component of an effective compliance programme. Due diligence should examine the background of the parties, including a particular focus on those who are nationals of or otherwise resident in sanctioned jurisdictions (for example, Iran).[49] In addition, consideration should be given to the flow of funds, including ensuring that funds do not transit sanctioned jurisdictions, companies or financial institutions. Transactions that involve high-risk jurisdictions should exercise caution in transiting the US financial system, including the use of the US dollar (which may clear through US accounts) as OFAC has targeted non-US companies for ‘causing’ US correspondent banks to violate sanctions by processing otherwise sanctioned payments.[50]

Additionally, in providing credit facilities and other lending transactions, the lender should ensure that the borrower, and any subsidiaries or affiliates that might access the loan proceeds, have controls in place to prevent those proceeds from being used in, or for, activities that violate EU or US sanctions. If a borrower uses loan proceeds to transact with a party subject to sanctions or in a manner that violates sanctions, then the lender could face sanctions liability.

Notably, the concepts of facilitation and predominance are particularly relevant in the context of credit facilities and other large commercial transactions. Under the US’s Burma sanctions, which the Obama administration withdrew in October 2016, US persons were prohibited from investing in a third-country company when that company’s profits were predominantly derived from Burma.[51] In a sense, this rule prevented US persons from doing indirectly what they were prevented from doing directly, and is closely aligned with the concept of facilitation, which prohibits US persons from approving, financing, facilitating or guaranteeing any transaction by a foreign person ‘where the transaction by that foreign person would be prohibited . . . if performed by a [US person] or within the United States’.[52] The concepts of facilitation and predominance differ in the sense that predominance penalises companies that profit from business in sanctioned jurisdictions, whereas facilitation is meant to prevent US companies from enlisting foreign entities or individuals to engage in conduct that they themselves could not otherwise perform. In short, while predominance is a concept to consider when transacting with companies that have a large presence in sanctioned jurisdictions, the risk of facilitation also poses a significant risk, especially with regard to US companies that have foreign affiliates or subsidiaries, or counterparties involved in cross-border transactions in high-risk jurisdictions.

Use of general and specific licences

Under US sanctions administered by OFAC, there are general and specific licences, each of which authorises activities that are otherwise prohibited by US law. General licences authorise a particular type of transaction for a class of persons without the need to apply for a specific licence from OFAC. A specific licence is a written document issued by OFAC to a particular person or entity, following an application process, that authorises a particular transaction or set of transactions.[53] Both general and specific licences are typically limited to a specific period and range of activities and persons. Broadly speaking, activities that are ‘ordinarily incident and necessary’ to a licensed transaction are also often authorised, such as funds transfers and certain shipping transactions.

In relying on a general or a specific licence, companies and individuals should ensure they are performing the precise range of activities authorised by the licence, and doing so within the timeframe specified by the licence (typically two years for a specific licence and often shorter for a general licence). In addition, parties should be mindful of wind-down periods or OFAC’s expectation that the business activity will be wound down prior to expiry of the licence.

Finally, when a US company or its foreign affiliate transacts with a counterparty that relies on a specific licence, the US company or foreign affiliate should request a copy of the licence before engaging in the business relationship. Upon receipt of the licence, it is important to confirm that the licence is valid, the business activity contemplated is covered by the licence and that the timeframe of the anticipated business transactions will not extend beyond the expiration date set forth in the licence. OFAC will often renew a specific licence but there is no guarantee, and OFAC is under no obligation to do so.

Moreover, although OFAC will generally not grant specific licences for activities that have no US nexus, non-US companies are still permitted to seek formal written guidance from OFAC through the licensing process and informal guidance from OFAC via its hotline. In addition, EU operators cannot request a licence from OFAC to be exempt from the application of extraterritorial sanctions listed in the Blocking Regulation. To seek a licence is very likely to demonstrate ‘compliance’ with the US sanctions under Article 5. However, the Commission acknowledges that it does not consider conversations with OFAC to understand the effects of the sanctions to amount to compliance.[54]

Representations and warranties

In negotiating cross-border transactions, it is often prudent to consider sanctions-related written representations and warranties as a way to mitigate against future risks. For example, in lending transactions, the lender should consider requiring that the borrower affirmatively represent and warrant that it will not use the loan proceeds for purposes that violate applicable sanctions (e.g., a ‘use of proceeds’ clause). This representation and warranty can often apply to the borrower’s subsidiaries, affiliates, employees, officers and directors, and any others that might have access to the loan proceeds.

Additionally, parties in cross-border transactions can protect their interests by including contractual provisions that govern what will occur if a sanctions violation is suspected or detected. For example, a lender should consider including information request and notification clauses in the applicable loan agreements, whereby if the borrower learns of a potential sanctions violation, it will be required to report that to the lender and the lender will be permitted to request additional information, as necessary to ensure the loan has not been used for sanctioned purposes or that the loan principle is at risk of being frozen.

Finally, to the extent that a party to a transaction has a sanctions-related problem, there should be some mechanisms built into the transaction to permit an orderly exit. For example, in the context of a revolving credit facility, the lenders should have the option to exit the facility following notice that the borrower violated sanctions or itself is subject to sanctions. These types of incidents frequently qualify as events of default.

Foreign subsidiaries of US persons

Foreign subsidiaries of US companies are generally subject to OFAC jurisdiction under certain sanctions programmes (e.g., Cuba and Iran), and, as discussed below, there is risk to foreign subsidiaries under additional theories of liability.[55]

First, US citizen employees, officers and directors can face individual liability for failing to comply with US economic sanctions, even if they are employed by a non-US company and are located outside the United States. For example, US citizens are required to block an SDN’s property and interests in property that they possess or control, regardless of where they are located. Thus, if a US citizen is an officer or director of a foreign company, and possesses or controls property of an SDN, then that US citizen must block that property. In those circumstances, an officer, director or employee who is a US citizen might consider recusal out of an abundance of caution.

Second, foreign subsidiaries of US companies face risks doing business even in sanctioned jurisdictions other than Iran and Cuba. For example, foreign subsidiaries could face US regulatory exposure for doing business in a sanctioned jurisdiction (other than Iran or Cuba) if the transaction transits the US financial system or otherwise has a nexus to the United States. If the US parent company is a public company, then this could also trigger a public reporting requirement if an enforcement investigation is initiated, an apparent violation is voluntarily self-reported to OFAC or an SDN designation occurs. Additionally, if operations are coordinated between the US entity and the foreign entity, or there are dual-hatted employees, then that could also raise the risk of sanctions exposure, including under facilitation, conspiracy to evade sanctions or ‘causing’ theories of liability. Notably, OFAC has advised of the risk that companies subject to US jurisdiction face in referring business opportunities, approving or signing off on transactions conducted by, or otherwise facilitating dealings between their company’s non-US locations and sanctioned jurisdictions, regions or persons.[56]

Third, the US government has aggressively targeted non-US persons for designation who have ‘materially assisted’ or otherwise provided financial support to SDNs. For example, although there is no formal secondary sanctions regime for Venezuela, OFAC has targeted non-US persons for transacting and otherwise supporting the government of Venezuela and other sanctioned entities that the US has a foreign policy interest in isolating from the world economy.[57]

Finally, credit agreements and other material contracts can subject foreign subsidiaries of US companies to more stringent regulatory requirements than the strict letter of the law. As part of a risk-based approach, US companies and their foreign subsidiaries should review their material contracts to ensure they are in compliance with their contractual obligations, and not simply rely on a strict letter of the law approach as it relates to US sanctions.

Brexit and the EU Blocking Regulation

As with other EU sanctions, the Blocking Regulation is directly applicable in UK law. However, for criminal penalties to be imposed for breach, it has been transposed into UK law,[58] and was retained following the UK’s withdrawal from the European Union on 31 January 2020.[59]

Draft amendments to the Blocking Regulation and the UK transposing legislation have been set out[60] and are expected to come into force after the transition period.[61] These amendments principally ensure the continued effectiveness of the existing legislation by, for example, removing references to ‘the EU’ and ‘Commission’. Going forward, the United Kingdom will be free to make additional changes to the Blocking Regulation but is unlikely to do so in the short term. In the Explanatory Memorandum accompanying the draft legislation, the UK government states:

We will continue to work with our European partners on matters of significance to the UK, even as we leave the EU. We intend to uphold the policy intent of the Blocking Regulation in our statute book once we have left the EU, so that we can mitigate the impact of extraterritorial sanctions on our trading interests. The UK will assume responsibility for listing extraterritorial sanctions legislation with which UK businesses must not comply.[62]

Footnotes

1 Cherie Spinks is of counsel at Simmons & Simmonds LLP. Bruce G Paulsen is a partner and Andrew Jacobson is an associate at Seward & Kissel.

2 In January 2019, the E3 (the governments of France, Germany and the United Kingdom) established a special purpose vehicle, the Instrument in Support of Trade Exchanges [INSTEX], designed to facilitate legitimate trade between European businesses and Iran to mitigate the effect of the US Iran sanctions. INSTEX creates a ledger that offsets balances between its members (which also now include Belgium, Denmark, Finland, the Netherlands, Norway and Sweden) when goods are traded – the intention being that payments will only be made between the businesses importing and exporting from Iran, with no transfer of funds to Iran from the European Union. On 31 March 2020, the UK government confirmed that the first transaction had been completed on INSTEX (see https://www.gov.uk/government/news/instex-successfully-concludes-first-transaction).

3 Export Administration Act of 1979, Pub. L. No. 96-72, 93 Stat. 503 (1979) [EAA]. Specifically, the EAA provided the President with authority to ‘prohibit or curtail the exportation of any goods, technology, or other information subject to the jurisdiction of the United States, to the extent necessary to further significantly the foreign policy of the United States or to fulfill its declared international obligations’. id., § 6(a)(1).

4 The US trade embargo required US companies to obtain a licence before exporting certain commodities and technologies relating to oil and gas transportation to the Soviet Union, and the restrictions were eventually expanded to include the dissemination of goods and technology by European-based subsidiaries and licensees of American businesses. See Patrizio Merciai, ‘The Euro-Siberian Gas Pipeline Dispute – A Compelling Case for the Adoption of Jurisdictional Codes of Conduct’, 8 Maryland J. of Int’l L. 1, 11-12 (1984); Jae-Seung Lee and Daniel Connolly, ‘Pipeline Politics between Europe and Russia: A Historical Review from the Cold War to the Post-Cold War’, 14 Korean J. of Int’l Studies [Lee and Connolly] 105, 111 to 113 (April 2016); Joseph Roussel, ‘The Pipeline Revisited’, 21 Gov. & Opposition [Roussel] 218, 219 (Spring 1986); Sarah J Cogswell, ‘In the Wake of the Pipeline Embargo: European-United States Dialogue’, 12 Fla. St. U.L. Rev. [Cogswell] 73, 78 (Spring 1984); Gary H Perlow, ‘Taking Peacetime Trade Sanctions to the Limit: The Soviet Pipeline Embargo’, 15 Case W. Reserve J. of Int’l L. 253, 253, 254 (1983).

5 See Lee and Connolly (footnote 4, above), at 112.

6 See Emmanuel Mourlon-Druol and Angela Romano, ‘The Iran nuclear deal crisis: Lessons from the 1982 transatlantic dispute over the Siberian gas pipeline’, at https://www.bruegel.org/2018/05/the-iran-nuclear-deal-crisis-lessons-from-the-1982-transatlantic-dispute-over-the-siberian-gas-pipeline/ (23 May 2018); Roussel (footnote 4, above), at 221; Cogswell (footnote 4, above), at 79.

7 Named after its original sponsors Senator Jesse Helms (North Carolina – R) and Representative Dan Burton (Indiana – R), the Helms-Burton Act was signed into law on 12 March 1996, shortly after Cuban fighter jets shot down two private planes operated by a Miami-based humanitarian organisation flying over international waters. See David M Shamberger, ‘The Helms-Burton Act: A Legal and Effective Vehicle for Redressing U.S. Property Claims in Cuba and Accelerating the Demise of the Castro Regime’, 21 B.C. Int’l & Comp. L. Rev. 497, 497, 500 (1998); Jeffrey A Meyer, ‘Second Thoughts on Secondary Sanctions’, 30 U. Pa. J. Int’l L. [Meyer] 905, 928 (2014).

8 Helms-Burton Act, Title III provides for a private right of action, whereby US nationals can bring suit in federal court against any person that traffics in property confiscated by the Cuban government on or after 1 January 1959. 22 U.S.C. § 6082. Title III’s private right of action had been suspended by each US presidential administration since 1996, although the underlying causes of action were permitted to accrue. However, on 2 May 2019, despite the Obama Administration’s efforts to ease relations with Cuba, the Trump Administration declined to extend the suspension of Title III.

9 See Meyer (footnote 7, above), at 929.

10 ‘Effects of foreign legislation on the EU’s financial interests’, at https://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=LEGISSUM:l24400.

11 Commission Delegated Regulation (EU) 2018/1100 amends the Annex to the Blocking Regulation. It came into force on 6 August 2018 to coincide with expiry of the first of two wind-down periods put in place following reintroduction of nuclear-related sanctions against Iran by the United States. The Blocking Regulation now blocks: (1) National Defense Authorization Act [NDAA] for Fiscal Year 1993, Title XVII Cuban Democracy Act 1992, Sections 1704 and 1706; (2) Cuban Liberty and Democratic Solidarity Act of 1996; (3) Iran Sanctions Act of 1996; (4) Iran Freedom and Counter-Proliferation Act of 2012; (5) NDAA for Fiscal Year 2012; (6) Iran Threat Reduction and Syria Human Rights Act of 2012; and (7) Iranian Transactions and Sanctions Regulations. It is possible that the Blocking Regulation may be extended to apply to additional measures. On 25 June 2020, Josep Borrell (High Representative and Vice President of the European Commission) indicated that the EU may take steps to counteract possible US sanctions against Nord Stream II (see NDAA for Fiscal Year 2020, Title LXXV, Section 7503, Protecting Europe’s Energy Security Act of 2019); see https://www.europarl.europa.eu/doceo/document/E-9-2020-001783-ASW_EN.html.

12 Collectively referred to as EU operators – see Article 11 of Council Regulation (EC) No. 2271/96 [Blocking Regulation].

13 See ‘Guidance Note: Questions and Answers: adoption of update of the Blocking Statute’ (2018/C 277 I/03) [EU Guidance Note], Question 21.

14 Although employees working at an EU branch who are EU nationals would need to comply with the Blocking Regulation.

15 Blocking Regulation, Article 5.

16 id., at Articles 5, 7 and 8. The EU Guidance Note (Question 16) makes clear that ‘not every nuisance or damage suffered by EU operators will entitle them to obtain an authorisation. This is a consequence of the fact that the Union does not accept that the listed extra-territorial legislation should govern the conduct of EU operators in its territory, and the possibility to do so remains an exception. . . . The authorisation procedure should not be used in order for EU operators to seek so-called “letters of comfort” from the Commission’.

17 id., at Article 4. The EU Guidance Note (Question 4) states that, in addition, ‘no decision requiring, for instance, seizure or enforcement of any economic penalty against an EU operator based on the aforementioned acts will be executed in the EU’.

18 id., at Article 2.

19 EU Guidance Note – Questions and Answers: adoption of update of the Blocking Statute, Question 5.

20 Extraterritorial US Legislation (Sanctions against Cuba, Iran and Libya) (Protection of Trading Interests) Order 1996, Article 2.

21 The German Foreign Trade and Payments Ordinance.

22 Only one enforcement case has been reported. In 2007, an Austrian Bank (BAWAG) was subject to administrative proceedings for breaching the Blocking Regulation following closures of accounts held by Cuban nationals. The bank allegedly closed the accounts to facilitate its acquisition by a US private equity firm. Proceedings were ultimately dropped following reinstatement of the customers’ accounts.

23 The Commission has acknowledged that EU operators might decide not to engage in certain activities as a result of commercial business considerations rather than to comply with US legislation, and furthermore that it will not usually be possible to establish that the decision is as a direct result of US legislation rather than commercial considerations (answer given by Vice President Mogherini to parliamentary questions E-007804/2014 on 1 April 2015).

25 The EU Guidance Note leaves open that possibility (see Question 13: ‘From whom can EU operators claim compensation for those damages? Can EU operators sue the US authorities to recover damages?’).

26 The US government has made extradition requests for EU individuals alleged to have breached US sanctions. How these requests are treated by EU jurisdictions varies. For example, English courts have determined that the double criminality requirement necessary for an extradition order to be made has been met notwithstanding that there has been no breach of EU sanctions (for example, the cases of Christopher Tappin (2012) and Ahmad Feras Diri (2015) who were extradited to the US in respect of illegal exports to, respectively, Iran and Syria. More recently, the Blocking Regulation was raised as a possible bar to extradition. In April 2020, the Dutch Supreme Court held that the Regulation did not protect an Iranian national from extradition to the US since his alleged conduct was determined to also give rise to a breach of EU sanctions on Iran (see ECLI:NL:HR:2020:623). The individual had argued that the Article 4 provisions of the Blocking Regulation (no judgment of a court outside the EU giving effect to a blocked measure shall be recognised within the EU) ought to prevent an indictment of a federal grand jury in the District of Columbia, US.

27 Lamesa Investments Ltd v. Cynergy Bank Ltd [2020] EWCA Civ 821. In this case, the Court of Appeal upheld a declaration made by the High Court that permitted Cynergy Bank (a UK company) to rely on a ‘non-default’ clause in a facility agreement [the Agreement] between the parties if Cynergy failed to make loan repayments in compliance with any ‘mandatory provision of law’. US Department of the Treasury’s Office of Foreign Assets Control [OFAC] designated Lamesa’s ultimate beneficial owner as a specially designated national [SDN], meaning that Lamesa fell within the scope of US secondary sanctions. Cynergy refused to make repayments under the Agreement, as continuing to do so carried a risk that Cynergy itself might be sanctioned as the payments might be categorised as a ‘signification financial transaction’ with a US-sanctioned entity. The Agreement did not expressly define US secondary sanctions within scope of the term ‘a mandatory provision of law’; however, Cynergy argued that they were and therefore an implied obligation could be read into the Agreement not to knowingly facilitate significant financial transactions on behalf of a secondary sanctioned entity. Among other things, Lamesa argued that US secondary sanctions had no legal effect in the United Kingdom and therefore Cynergy faced exposure to penalties or the risk that it could become subject to sanctions itself.

28 Consistent with comments made earlier in this chapter, it is possible that agreement to comply with US primary sanctions would not fall foul of Article 5 since US primary sanctions do not typically apply to EU operators.

29 However, the English High Court in Mamancochet Mining Ltd v. Aegis Managing Agency Ltd & Ors [2018] EWHC 2643 (Comm) stated on an obiter basis that the Blocking Regulation was not engaged if an insurer’s liability to pay a claim was suspended under a sanctions clause, as an insurer was not ‘complying’ with a third country’s prohibition, but was simply relying on the terms of the policy to refuse payment of a claim.

30 German Foreign Trade and Payment Act, Section 7. Sanctions imposed by the United Nations, European Union or German government are outside the prohibition.

31 In 2018, Congress enacted the Export Control Reform Act and the Anti-Boycott Act of 2018, which provided permanent statutory authority for the Export Administration Regulations [EAR]. See NDAA for Fiscal Year 2019, P.L. No. 115–232 (21 August 2018); see also 50 U.S.C. §§ 4812, 4841 to 4843.

32 Examples of ‘interstate or foreign commerce’ of the United States include the sale, purchase or transfer of goods or services (including information) between two or more states, any state and any territory or possession of the United States, two or more territories or possessions of the United States, or a state, territory or possession of the United States and any foreign country. See 15 C.F.R. § 760.1(d)(1), Guidance (1).

33 15 C.F.R. § 760.1(b). However, the concept of ‘US person’ does not include an individual US national who is a resident outside the United States and who is either employed permanently or temporarily by a non-US person or assigned to work as an employee for, and under the direction and control of, a non-US person. 15 C.F.R. § 760.1(b)(v)(4). The definition of ‘US person’ under the EAR is therefore narrower than the concept under the US’s economic sanctions laws, regulations and executive orders, which typically define US persons to include US citizens, regardless of whether they are located within or outside the United States. In short, the EAR applies to US residents and nationals, including those travelling outside the territory, but US residents and nationals that are employed by non-US persons are generally exempted from the EAR’s anti-boycott requirements.

34 See 26 U.S.C. § 7701(a)(30); Issuance of New Boycott Guidelines, 43 Fed. Reg. 3454 (25 January 1978). Unlike the EAR, the Tax Reform Act of 1976 generally applies to any US taxpayer or member of a controlled group, including a foreign subsidiary with more than half of its shares owned by a US parent company, and its consequences are not restricted by a US commerce test. See 26 U.S.C. §§ 999(a)(1), 993(a)(3), 1563(a).

35 15 C.F.R. § 760.2(a)(1). Unlike the strict liability standard applied for violations of US sanctions, ‘intent’ is a necessary element for an EAR anti-boycott violation; § 760.1(e)(3). Specifically, the EAR prohibits US persons from taking or knowingly agreeing to take certain actions with the ‘intent to comply with, further, or support an unsanctioned foreign boycott’; § 760.1(e)(1). Thus, a US person who ‘inadvertently, without boycott intent, takes a prohibited action’, does not violate the EAR’s anti-boycott prohibitions contained in Section 760.2; § 760.1(e)(3). Notably, the EAR states that ‘intent’ does not mean that one has to agree with the boycott in question, desire that the boycott succeed, or seek that the boycott be furthered or supported; § 760.1(e)(4). Rather, the reason or purpose for an action can be proved by circumstantial evidence; § 760.1(e)(5).

36 15 C.F.R. § 760.2(d)(1). However, the prohibition on furnishing information does not apply to the furnishing of normal business information in a commercial context, including information regarding financial fitness, technical competence, or professional experience; § 760.2(d)(3).

37 26 U.S.C. § 999(b)(3).

38 15 C.F.R. § 760.5(a)(1). Notably, there are certain requests or actions that are not required to be reported under the EAR, which are set forth in Section 760.5(a)(5). For example, US persons who are the owner, master, charterer or employee of a vessel, aircraft, truck or certain other mode of transportation, are not required to report requests that they provide a certificate demonstrating their eligibility to enter a particular port; 15 C.F.R. § 760.5(a)(5)(viii).

39 15 C.F.R. § 760.5(a).

40 26 U.S.C. § 999(a)(2).

41 26 U.S.C. § 999(a)(1)(B).

42 15 C.F.R. Appendix Supplement No. 2 to Part 766, Note to Paragraph (c)(1), at https://www.law.cornell.edu/cfr/text/15/appendix-Supplement_No_2_to_part_766.

43 50 U.S.C. § 4843(a).

44 See 15 C.F.R. § 764.8(a); 15 C.F.R. App’x Supp. No. 2 to Part 766(d)(2)(i)(A).

45 See 26 U.S.C. § 999(b)(1); IRS Form 573 (Rev. Sept. 2018); see also Rufus Von Thulen Rhoades and Marshall J Langer, U.S. International Taxation and Tax Treaties, §§ 11.01, 11.03 (2020).

46 26 U.S.C. § 999(f).

47 id.

48 The EAR contains several exceptions that apply and determining whether an anti-boycott violation has occurred is often dependent on the particular facts and circumstances of the conduct. See, generally, 15 C.F.R. §§ 760.2, 760.3.

49 While transactions with non-SDN nationals of certain sanctioned jurisdictions might be permissible if done outside those territories, the US’s sanctions against Cuba, for example, generally prohibit transactions with Cuban nationals, wherever located.

50 See, e.g., CSE Global Limited/ CSE TransTel Pte Ltd Settlement, US Treasury Department’s Office of Foreign Assets Control [OFAC] (27 July 2017), at https://www.treasury.gov/resource-center/sanctions/CivPen/Documents/20170727_transtel.pdf).

51 31 C.F.R. § 537.412 (repealed by Exec. Order No. 13,742, 81 Fed. Reg. 70,593 (12 October 2016)); see Perry S Bechky, Sanctions and the Blurred Boundaries of International Economic Law, 83 Mo. L. Rev. 1, 11, 12, n.62 (2018).

52 31 C.F.R. § 560.208.

53 See OFAC FAQ 74.

54 EU Guidance Note, Question 23.

55 See, generally, 31 C.F.R. § 560.215 (Iranian Transactions and Sanctions Regulations); 31 C.F.R. §§ 515.201(b), 515.201, 515.209, 515.329 (Cuban Asset Control Regulations).

56 See OFAC, ‘A Framework for OFAC Compliance Commitments’, 2 May 2019, at https://www.treasury.gov/resource-center/sanctions/Documents/framework_ofac_cc.pdf; see also Settlement Agreement between OFAC and BIOMIN America, Inc, 6 May 2020, at https://www.treasury.gov/resource-center/sanctions/CivPen/Documents/20200506_biomin.pdf.

57 See, e.g., US Department of the Treasury designation of TNK Trading International SA, press release, at https://home.treasury.gov/news/press-releases/sm937.

58 See footnote 19, above.

59 European Union (Withdrawal) Act 2018, Section 3.

60 The Protecting Against the Effects of the Extraterritorial Application of Third Country Legislation (Amendment) (EU Exit) Regulations 2019.

61 At the time of writing, the transition period ends on 31 December 2020.

62 Explanatory Memorandum to the Extraterritorial US Legislation (Sanctions Against Cuba, Iran and Libya) (Protection of Trading Interests) (Amendment) Order 2018, paragraph 7.5.

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