Companies operating internationally need to be aware of sanctions regimes and how to comply with them.
This guide was last updated in January 2014
The consequences of being found guilty of breaching sanctions are serious. A number of major financial institutions have been subject to multi-million dollar fines and settlements with US and UK regulators for sanctions breaches.
Insurers are also concerned about the impact of sanctions violations. Lloyd’s of London has reviewed the issue following suspicions that some members may have breached international sanctions through insurance and reinsurance contracts. In turn, increased pressure is being applied to exporters of products and services to ensure that they do not expose their lenders and insurers to sanctions risks.
Sanctions as a compliance issue came to the fore when a number of international companies were identified by the UN as breaching sanctions against Iraq under the Oil-for-Food Programme. Numerous oil and gas service, infrastructure and engineering companies were subsequently prosecuted and convicted for sanctions breaches.
What are embargoes and sanctions?
Embargoes and sanctions can take a number of forms, but the most relevant types of sanctions for businesses are financial sanctions and trade sanctions.
Financial sanctions generally involve asset-freeze measures affecting the provision of funds and economic resources to certain entities or individuals (‘designated persons’). They may also include restrictions on the use of assets by designated persons, receipt and transfers of funds to particular types of persons – for example, Iranian nationals – and prohibitions on the provision of financing or financial assistance connected to designated persons and prohibited transactions.
Trade sanctions prohibit trade in certain goods from affected countries, usually arms and commodities such as oil, timber, gold and diamonds; and equipment for use in the nuclear, oil and gas or petrochemical sector. Activities related to such trade may be prohibited.
It is also broadly prohibited to engage in any activities the object or effect of which is to circumvent sanctions. As a consequence, companies should not structure transactions to avoid international sanctions. For example, an EU based oil and gas business which supplied equipment to a company in the UAE, knowing that in turn the UAE company supplied that equipment to end users in Iran, may well have breached EU trade sanctions against Iran.
Breach of financial or trade sanctions law can result in the commission of a criminal offence punishable by imprisonment, a fine or both.
EU and UK regimes
The EU and the UK currently have sanctions in place against numerous countries, or certain individuals and entities from or within those countries. There are also measures in place in respect of terrorist organisations and associated individuals. EU and UK sanctions are particularly onerous in respect of Iran and Syria. Other countries affected include Afghanistan, Egypt, Iraq, North Korea, Sudan, and Libya. Extra care is needed when doing business in these countries or with people from or connected to these countries.
The jurisdictional reach of EU sanctions is extremely wide as they apply
- within the EU;
- to an person inside and outside the EU who is a national of a member state;
- to any company which is incorporated in an EU member state; and
- to any person or business in respect of any business done in whole or in part within the EU.
Long lists of designated persons and entities are published by national governments. These are persons and entities to whom, for example, certain products should not be provided, or from whom payment should not be received, whether directly or through a third party.
HM Treasury in the UK publishes a list called the ‘consolidated list of financial sanctions targets in the UK’, or ‘Consolidated List’ for short. This list includes all of the individuals and entities currently included on all financial sanctions lists applicable to the UK. There are currently around 2,700 individuals and entities on the list, including UK incorporated companies.
Trade embargoes and enhanced export controls usually also apply to countries which are the targets of sanctions. In the UK the Export Control Organisation (ECO) is responsible for issuing licenses to export controlled goods and for goods which, although not generally controlled, may be caught by a country specific embargo.
It should be noted that a licence to export does not necessarily allow products and services to be supplied where suppliers have reasonable cause to suspect that a designated person may be benefitting from the provision of the product or service, even if that benefit is only indirect. There is also still a need to make certain notifications to HM Treasury, and in some circumstances to obtain approvals from HM Treasury, for the transfers of funds to and from an Iranian person, including where an intermediary may be involved.
US sanctions are administered by two agencies,the Office of Foreign Assets Control (OFAC) which handles licensing and oversight of the economic sanctions, and the Bureau of Industry and Security (BIS) which handles licensing of certain exports and re-exports of US-origin technology and goods, or foreign manufactured goods using US technology.
The US has implemented financial sanctions against countries, regimes, individuals, and companies. Comprehensive sanctions – often referred to as ‘country wide sanctions’- are in place against Iran, Syria, Sudan, Cuba, and North Korea.
Specific individuals and companies that have been identified as connected with those activities, or with terrorism or narcotics, are identified on the ‘Specially Designated Nationals’ (SDN) list maintained and published on OFAC’s website.
Jurisdiction under OFAC sanctions usually extends to ‘US persons’, which is generally defined as:
- any US citizen or permanent resident overseas national, wherever situated in the world;
- any person while in the US;
- any US organised company and its foreign branches;
- any US subsidiary of a foreign company;
- any foreign company with a branch or other presence in the US; and
- for Cuba, any foreign subsidiary of a US company.
Focus on Iran
There are extensive trade and financial sanctions in place against Iran as a result of the imposition of EU and United Nations (UN) sanctions and embargoes.
Under UK law (the laws of all EU Member States will be similar), the restrictions include:
- prohibitions on the sale, supply, transfer or export of certain equipment and technology for the oil and gas industry, with a limited exemption for transactions required by, or obligations arising from, contracts that were in place before 27 October 2010;
- prohibitions on investment in Iranian entities or bodies engaged in the exploration or production of crude oil and natural gas, the refining of fuels or the liquefaction of natural gas;
- prohibitions on any new investment in the petrochemical sector in Iran or in Iranian or Iranian owned enterprises engaged in that industry outside Iran, with a limited exemption on transactions for key equipment and technology for the petrochemical industry required by contracts which were in place before 23 January 2012;
- prohibitions on the sale, supply, transfer or export to, and the purchase, import or transfer from Iran of gold, precious metals and diamonds;
- prohibitions on the export of materials relevant to the Iranian nuclear and ballistic programmes or to industries controlled by the Iranian Revolutionary Guard Corps. This concerns the sale, supply or transfer to Iran of graphite, raw or semi-finished metals, such as aluminium or steel, and software of integrating industrial processes. The prohibition includes related technical or financial assistance;
- a ban on the import of natural gas, crude oil and petroleum products from Iran into the EU. This concerns the import, purchase and transport of these products as well as finance and insurance related to these activities;
- prohibitions on the sale, supply, transfer, import, transport or export of dual-use goods, ie items that can be used for civilian and military purposes and technology;
- prohibitions on the provision of brokering services and technical and financial assistance related to any goods and technology whose supply is prohibited;
- an asset freezes against listed individuals and entities and a prohibition on making economic resources available to them, including by the supply of goods and services which may be used to obtain funds;
- restrictions on transfers of funds to and from Iran and Iranian persons – transfers of funds to or from an Iranian person or entity equal to or above EUR10,000 must be notified to HM Treasury. Transfers of sums of EUR40,000 or more usually require to be approved by HM Treasury. The rules apply to one off and linked transactions. Structuring transfers to go via third parties with the aim of not notifying HM Treasury may well breach the anti-circumvention provisions;
- restrictions on Iran’s access to the insurance and bond markets;
- restrictions on Iranian ships and cargo aircraft providing certain services;
- a prohibition on the supply of vessels designed for the transport or storage of Iranian oil and petrochemical products. Participation in the construction of new oil tankers for Iran or for Iranian persons or entities is also prohibited.
In addition to the Consolidated List, ECO publishes an ‘Iran List’. The Iran List provides a listing of organisations in Iran of potential concern from an end-use perspective. If any exporter wants to export to, or is contacted by, any of the organisations on the Iran List, they are advised to contact ECO for specific advice.
US sanctions against Iran are generally wider reaching than the EU sanctions. Importantly, the US has implemented regulations which apply extraterritorial jurisdiction to the activities of foreign financial institutions that participate in certain transactions that involve sanctioned countries, and any party, either foreign or domestic, that provides goods or services to any Iran SDN on the OFAC list. The effect of the US regulations is that an overseas company which supplies any person on the OFAC SDN List may itself be added to that list.
Pending relaxation of sanctions
As of early 2014, recent negotiations with Iran will lead to a relaxing of Iran sanctions relating to the prohibition of oil-related insurance and transport costs and a suspension of the prohibition of the imports of petrochemicals, gold and precious metals. US sanctions on the Iranian auto industry and airlines are also to be relaxed. It should be noted that these relaxations need to be implemented into national law and that core sanctions on Iranian oil and gas and the bulk of international sanctions will remain in place, at least in the short term.
Sanctions compliance programmes
In order to avoid breaching sanctions, businesses which import or export from overseas should have in place a compliance programme based around a robust policy on sanctions and comprehensive systems to implement the policy effectively.
Such a programme should include
- customer and transaction due diligence and screening against applicable financial sanctions target lists, including HM Treasury’s Consolidated List, the Iran List and OFAC’s SDN List;
- assessing if equipment and products are on export control lists such as the UK’s Strategic Export Control List and ensuring that all necessary licences to export are obtained;
- checking if imported goods are in any way restricted;
- maintaining a list of countries which are subject to wider embargoes and ensuring that equipment, good and services are not supplied to persons and entities in those countries, including via a third party distributor or otherwise indirectly, unless an exemption applies;
- contractual controls, including sanctions exclusions and warranties;
- training in policies and procedures; and
- regular monitoring of transactions and periodic audits of sanctions compliance.
Written by Tom Stocker