Introduction

A tool of first resort

In February 2022, Russia invaded its neighbour Ukraine. A coalition of nations led by the EU, the UK, the United States and Canada responded with what has quickly become an economic siege of the Russian Federation, a permanent member of the UN Security Council, that is unprecedented in the modern era. Although economic sanctions have been imposed on Russia in response to its conduct in Ukraine since 2014, the measures imposed in 2022 have been of an entirely different magnitude. In addition to imposing an economic embargo on Russian-controlled regions of eastern Ukraine, the coalition adopted never-before-seen restrictions on the Central Bank of Russia, effectively locking up a significant portion of its foreign reserves, and crippling asset freezes on Russia’s largest multinational financial institutions, corporations and prominent individuals – among them, Russian President Vladimir Putin. Belarus, the staging ground for some of the invading forces, has faced equally stringent measures building on those imposed in 2021 against the Lukashenko regime after contested elections and the grounding of Ryanair Flight 4978 and arrest of a Belarusian journalist, in May 2021. At the time of writing, and after three months of heavy sanctions, the war rages on and Russia’s economy is beginning to show strain, with the prospect of a sovereign default growing. The EU, after initial discord, is now debating how to reduce its dependency on Russian energy as quickly as possible. Russia’s invasion of Ukraine has done what US secondary sanctions could not: persuade Germany to withhold certification from the now-bankrupt Nord Stream 2 pipeline. In response, Russia has ramped up its counter-sanctions, including restricting divestment of foreign investors from Russian assets and measures designed to prop up the value of Russia’s currency, such as requiring Russian businesses to convert foreign-earned revenues into roubles and demanding gas payments from foreign companies in ‘unfriendly states’ in roubles. While nothing can compare to the horrors of being in the conflict zones or having to flee from them, the effects of these various sanctions and counter-sanctions are widespread throughout the commercial world and bring their own challenges for sanctions practitioners and their clients. No doubt, by the time this volume is published, the situation in our field will have evolved in new, unprecedented ways.

The first edition of The Guide to Sanctions hit the scene just as the United States was ramping up sanctions in response to the People’s Republic of China’s (PRC) passage of a national security law for Hong Kong. Since then, the Chief Executive of Hong Kong and numerous PRC and Hong Kong officials have been blacklisted and named as specially designated nationals (SDNs) by the US Treasury’s Office of Foreign Assets Control (OFAC). In those days, China’s Xinjiang Province had yet to become a household name, and few outside the Washington, DC, beltway had ever heard of a ‘Communist Chinese military company’. In the first edition, we touted Myanmar as an example of a country that had bounced back from sanctions, while Iran continued to face a barrage of ‘secondary sanctions’ reimposed by the Trump administration after the US withdrawal from the Joint Comprehensive Plan of Action (JCPOA).

Since the publication of the second edition, in 2021, the Biden administration has put its stamp on US sanctions policy. The US Treasury Department published the findings of a ‘top to bottom review’ of US economic and financial sanctions and committed to doing more to lessen the unintended consequences of US sanctions on humanitarian organisations and vulnerable peoples. Where the previous administration was often content to ‘go it alone’, the Biden White House has shown a marked preference for multilateralism. Between January and April 2021, the United States announced a series of coordinated sanctions with the EU, the UK and Canada against targets in China, Myanmar and Russia, with human rights emerging as a shared theme. The new administration wasted no time in reversing actions unpopular with US allies. President Biden quickly terminated sanctions on the International Criminal Court and the Houthi movement in Yemen, while revoking a licence granted under the Global Magnitsky Sanctions programme to an allegedly corrupt billionaire in the Trump administration’s waning days. Still, the White House has shown little interest in rolling back most of the Trump administration’s signature China-related sanctions. While there have been reports in early 2022 of Iran and the United States coming closer to a nuclear deal, the United States has yet to agree to re-enter the JCPOA, and Russia has made demands in the multilateral negotiations to protect its trade with Iran from the effects of the Ukraine-related sanctions.

Following Brexit, the United Kingdom has made its mark with an autonomous sanctions framework that continues to evolve in sophistication. In 2021, the UK government launched an ambitious human rights sanctions programme with targets in China (Xinjiang), Myanmar, North Korea, Russia and Saudi Arabia and an equally ambitious anti-corruption programme with targets in South Africa, Russia, South Sudan and Latin America. Although the extent of these programmes remains limited when compared with established US sanctions regimes, the UK has a clear policy of growth, both as a state user (imposer) of sanctions and an enforcer. Policy documents published for both these UK regimes emphasise the importance of international cooperation. To this end, the UK recently adopted legislation for an ‘urgent procedure’, allowing it to quickly replicate Russia-related sanctions designations to match those of allies such as Canada, the EU and the United States. Beyond the Russia context, we anticipate further divergence from the EU, certainly in terms of the speed with which the UK imposes sanctions on new targets. The UK is also keen to demonstrate its speed and responsiveness in acting to ameliorate negative consequences of sanctions by issuing licences to enable, among other activities, non-governmental organisations to provide humanitarian assistance. The UK has yet, however, to issue any general humanitarian licences. We are also yet to see any litigation from designation decisions under the UK’s autonomous sanctions regimes or from Office of Financial Sanctions (OFSI) enforcement actions. We anticipate that such litigation is simply a matter of time, and eagerly await its analysis in future editions. While the UK’s export control regime remains closely aligned with the EU’s, there are some differences that add a layer of complexity and additional requirements, not least because the UK is now a ‘third country’ requiring authorisations and licences for EU-to-UK exports of controlled goods and vice versa. Already, divergences are emerging in respect of dual-use goods, and (as covered in Chapter 9) the political realities of Brexit within the UK may play out in this area with the position in Northern Ireland currently aligning with the EU under the Northern Ireland Protocol, while England, Scotland and Wales (Great Britain) proceed under their own regime.

The EU – in contrast to the UK – has at times found itself looking slightly cautious when reacting to world events. This is attributable, in part, to the unanimity required from all EU Member States prior to an EU sanctions regime being implemented. And, although the EU has always needed unanimity, the ability of the UK to now act as fast as the United States and Canada in implementing sanctions regimes has perhaps highlighted the difficulties the EU sometimes faces in securing agreement from all 27 of the Member States. This issue was brought into focus when the EU was initially unable to impose economic sanctions on Belarus, in October 2020, due to Cyprus’ objections, which primarily related to issues with Turkey, rather than Belarus. Nevertheless, the EU acted swiftly to impose several packages of hard-hitting sanctions against Russia after the latter’s invasion of Ukraine, in February 2022. Disagreements over sanctions on Russian energy have not prevented the Member States from finding consensus in other areas, including sanctions on financial services, aviation and the military, as well as Russia’s Central Bank and top leaders. It remains to be seen whether the disagreements that remain and, for example, the additional Russia sanctions imposed by Poland, will lead to further fragmentation. The EU joined other jurisdictions in introducing a Global Human Rights Sanctions Regime, first used in March 2021. In a coordinated response with the United States, the EU imposed sanctions on Russian individuals for their role in the arbitrary arrest, prosecution and sentencing of Alexei Navalny. We should note, however, that unlike the UK, the United States and Canada, the EU does not yet have the ability to designate individuals or entities for their involvement in corruption, under a specific Magnitsky-type sanctions regime. Nevertheless, the EU has expanded some country-specific regimes to designate individuals responsible for serious human rights violations and activities undermining democracy in those countries.

While practitioners and corporates alike continue to hope for such coordinated, consistent sanctions policy implementation between the United States, the EU and the UK, companies and individuals are still trying to navigate the conflicting legal requirements of complying with existing US sanctions in relation to Iran and Cuba and the EU and UK’s blocking statutes. The 2021 opinion of Advocate General Hogan in Bank Melli Iran v. Telekom Deutschland GmbH ^[2] was a useful analysis of the problem. The judgment of the court provided some general guidance but left a wide margin to national courts to assess the proportionality of requiring EU operators to reinstate contracts terminated in breach of the Blocking Regulation. We will likely see more litigation in this area in European and English courts, which will hopefully provide greater clarity as to how to navigate these conflicting sanctions regimes.

Since the first edition of The Guide to Sanctions, the EU has implemented the most significant reform to its export control regime since 2009. In May 2021, the EU adopted a revised version of its Dual-Use Regulation. The revised regulations updated the EU system to include sensitive dual-use goods and technologies such as cyber-surveillance tools.

China, too, has started to look to sanctions as a tool for advancing its national interests. The PRC is a permanent member of the United Nations Security Council and implements UN sanctions like other Member States. With the exception of limited autonomous sanctions, China has not been known to be a major sanctioning state. However, in early 2021, in response to provocations from the Trump administration and, later, coordinated multilateral sanctions related to the Xinjiang Uyghur Autonomous Region, the PRC Ministry of Foreign Affairs announced commercial and travel restrictions against individuals and entities in the EU, the UK, Canada and the United States. Meanwhile, the PRC Ministry of Commerce is expected to elaborate a framework for the enforcement of sanctions against ‘Unreliable Entities’ and the issuance of ‘prohibition orders’ forbidding compliance with foreign sanctions in China. It will be some time before the PRC’s sanctions regime obtains the same level of regulatory complexity and impact as the US or EU systems, but China’s potential for economic sanctions is rapidly coming into focus. We look forward to chronicling its development in future editions.

The expanding role of sanctions

Whether expressive of the internal politics of nations or the broader geopolitical scene, sanctions, and disagreements about sanctions, have become a defining feature of international law and relations in the 21st century. Conceptualised in the early and mid-20th century as a non-forcible, multilateral means of responding to threats against international peace and security, in the 21st century economic sanctions are again taking on an increasingly unilateral character, with major sanctions programmes, including those imposed against Russia in early 2022, administered well outside the purview of the UN Security Council. The growth of sanctions as tools of foreign policy and security can be explained, in part, by the rapid globalisation of trade and financial services, which has increased the opportunities for nation states to exercise economic leverage over foreign adversaries. The fragmentation of inter­national accord as a consequence of the Cold War and, later, the Iraq, Afghanistan and now the Russia–Ukraine wars, among other factors, has prevented effective regulation by the international community of individual states’ use of sanctions. The UN Human Rights Council’s Special Rapporteur on unilateral coercive measures conducts useful analyses of the negative consequences of this fragmentation but is ill-equipped to do more.

Since the early 2000s, targets of sanctions have overwhelmingly included non-state actors, both entities and individuals, as both multilateral and unilateral sanctions programmes have attempted to get ‘smarter’. Some sanctions could also be seen as an inappropriate substitute for law enforcement (without its commensurate due process) when used to target and punish persons accused (but not necessarily ever convicted) of ‘ordinary’ criminal offences such as drug trafficking, corruption and embezzlement. Examples include the EU’s sanctions against former members of the governments of Tunisia and Egypt accused of misappropriating state assets introduced in lieu of court-supervised asset recovery processes, the US ‘Kingpin’ sanctions against suspected drug traffickers, and ‘US Transnational Criminal Organizations’ sanctions, the latter having even been used against a payment services provider accused of facilitating mail fraud. Such arguments have also been made against the UK’s new Global Anti-Corruption Sanctions.

Unlike other tools of state, such as the military, diplomatic and ideological instruments firmly under the control of governments, economic sanctions derive their force in large part from the private domain. A foreign minister may declare a sanction against a target. However, it is the subsequent withdrawal of goods and services by commercial actors that give that sanction its bite. Without the compliance of private actors, a government’s sanctions are merely hortatory. It follows that the economic success of a sanctions episode depends on two factors: (1) the magnitude and importance of commercial activity available to be withdrawn; and (2) the degree to which individuals and entities comply with the sanctions. It is no wonder, then, that the United States, with its massive domestic market, global financial networks and aggressive law enforcement, has achieved the greatest power potential in this regard. By threatening to deny access to its markets through secondary sanctions, the United States multiplies its leverage by demanding compliance from persons over whom it ordinarily would have no legal jurisdiction.

Other nations are starting to flex their enforcement muscles. The UK inaugurated the OFSI in 2016; to date, it has issued some civil penalties for financial sanctions breaches, one of which was for £20.47 million, with a warning of more to come. The Netherlands, with its engineering prowess, has investigated local companies for exporting machinery to assist in the construction of a bridge across the Kerch Strait in Crimea. Singapore, once a significant trading partner to North Korea, has charged several of its nationals with evading UN sanctions or committing fraud in selling sugar, wine and luxury goods to the hermit kingdom. The PRC, a frequent user of economic statecraft, is fast developing a legal framework for sanctions and counter-sanctions that could rival others. The result: more companies caught in the cross hairs as they navigate conflicting sanctions regimes.

A practitioner’s guide

In recognition of the ineluctable role compliance plays in the sanctioning process, we sought to create a ‘practitioner’s guide’ encapsulating the experiences of the yet small community of international experts in sanctions. Their contributions offer a guide to problem-solving about sanctions in daily practice. Though highly political, sanctions are a product of law and amenable to the lawyer’s usual toolkit: interpretation, application, negotiation, investigation and defence, among others. We have selected topics relevant to each of these skills as illustrated from the perspective of corporations and financial institutions. We draw on the insights of lawyers and forensics firms with reputations for leadership in the field, having been involved in significant recent matters. Though the ‘right answer’ to many sanctions problems eludes us, as exemplified by conflicts imposed by US secondary sanctions, the EU Blocking Regulation or China’s Anti-Foreign Sanctions Law, the ‘risk-based’ framework offers some welcomed clarity for decision makers and their advisers. Beyond knowledge of sanctions law, today’s practitioners require commercial, technological and geopolitical savvy.

We intend this guide to fulfil multiple aims. For the reader who is new to the topic of sanctions, we hope to provide an accessible introduction to the essential legal concepts and challenges faced by practitioners the world over. A young lawyer opening this guide today may very well contribute to the next edition. For the seasoned experts, we believe the chapters that follow will affirm for them many of the principles central to the practice of sanctions law. Often, simply having one’s understanding confirmed can be helpful. Nonetheless, we believe every reader, no matter their experience, will find something new herein.

The 25 chapters in this edition (up from 21 in the second edition) take a thematic approach to sanctions, categorised broadly across legal regimes and select practice topics. Chapters 1 to 7 offer an overview of the major features of the UN, EU, UK and US sanctions regimes and their enforcement. While individual perspectives shine through, the authors helpfully arrange each chapter along similar outlines, for ease of comparison. Chapters 8, 9 and 10 provide an overview of EU, UK and US export controls, a complex but increasingly important topic as countries seek to regulate the movement of sensitive goods and technology, often in conjunction with the imposition of financial sanctions. Chapters 11 and 12 offer perspectives from the Asia-Pacific region, particularly China and Hong Kong, where practitioners face special challenges in navigating developing, sometimes conflicting, rules, such as China’s Anti-Foreign Sanctions Law and related measures. Chapter 15 offers a principled guide to building sanctions compliance programmes according to risk, in light of guidance from OFAC and other agencies. Chapter 16 discusses the technical and unavoidable challenges of implementing effective sanctions name screening across complex organisations. Chapter 17 deals with the ever-thorny subject of balancing conflicting sanctions regimes, notably those of the US and the EU. Chapters 18, 19 and 20 explore sanctions in the context of three areas of special concern to the practitioner – corporate transactions, litigation and disputes, and in financial institutions and regulated entities. Chapter 21 brings attention to the impacts on sanctions and export controls on increasingly stretched global supply chains. Chapter 22 focuses on the emerging and increasingly strategic world of cyber-related sanctions. Chapter 23 examines the role of forensics and technology in sanctions compliance, with recommendations of best practices. This edition of The Guide to Sanctions explores new topics in four chapters that were not featured in the first two editions: Chapter 13 sizes up China’s Anti-Foreign Sanctions Law and related measures; Chapter 14 considers the practical applications of international sanctions and export controls in France; and Chapters 24 and 25 discuss strategies for representing sanctioned persons, from both a UK and US perspective.

Change is an almost constant feature in sanctions law, as regimes develop in response to events in states’ international relations and domestic politics. Inevitably then, the sanctions regimes described in this guide will have developed by the time of publication. The law is stated as at 1 April 2022, unless otherwise indicated.

Debts of gratitude

On behalf of the editors, we extend our deepest thanks to Neil Whiley, Director of Sanctions at UK Finance, for his foreword to the third edition and invaluable work in helping industry understand and adapt to new sanctions, and to Global Investigations Review, in particular Mahnaz Arta, Hannah Higgins and Georgia Goldberg for their consistent and ever-enthusiastic support of this guide, and for once again gently nudging the contributors (editors included) to bring the project to a successful and timely conclusion – all while practising on the front lines of economic history. To each of the contributors, we thank you for sharing your time and unique expertise, generously reflected in the thoughtful and thought-provoking pieces that follow.

Footnotes