EU AND US SANCTIONS A Comparative Analysis and the Special Case of Iran

Transcription

1 EU AND US SANCTIONS A Comparative Analysis and the Special Case of Iran

2 1 Agenda Introduction to Economic and Trade Sanctions Overview of EU and US Sanctions Regimes Cross-Border Reach Responsibility for Others Consequences of Non-Compliance Case Study Iran

3 INTRODUCTION 2

4 3 Main Objectives of Sanctions Induce change by governments disfavored by international community. For example: Force Iran to stop developing nuclear weapons Foster regime change in Syria Cut off resources to terrorists, drug traffickers, nuclear proliferators, human rights violators and others

5 4 Types of Economic Sanctions Trade embargo/export controls Asset freezes Activity-based sanctions Restriction of financial assistance Travel bans Concept of targeted sanctions

6 5 Importance of Sanctions Now Fast-Evolving Regimes Iran Syria Burma/Myanmar Extra-territorial Reach Global Actions by Regulators US Federal Regulators NY Department of Financial Services

7 EU Sanctions 6

8 US Sanctions 7

9 SANCTIONS OVERVIEW 8

10 EU Sanctions Generally The European Commission proposes restrictive measures and adopts a Common Position and the restrictive measure is given effect Sanctions are given effect in Council Regulations, Council Decisions and Commission Regulations, each of which take direct effect in Member States Member States may implement follow-on legislation, and may goldplate Community law Sanctions are enforced by Member States There are 27 Member States in the EU so there are 27 EU sanctions regimes! 9

11 Types of EU Sanctions Countries subject to EU sanctions may be subject to some or all of these restrictive measures Ban on sale of restricted items Arms/dual use; torture and repression; nuclear/radioactivity Trade embargoes (import/export controls) Usually industry-specific, with humanitarian exceptions Financial sanctions against designated individuals or entities Bans on making funds or economic resources available Restrictions on admission/travel bans Financial sanctions targeted against entire country/industry Restrictions on transfers Restrictions on financial/technical assistance, insurance, banking, brokering, etc. 10

12 EU Designated Persons and Entities Issued in annexes to EU Regulations, Decisions Member States may add further targets E.g., Terrorist Asset Freezing Act 2010 (UK) UK Treasury maintains consolidated list of all targets Regularly updated 11

13 EU Exemptions and Licences Exemptions Grandfather clauses: obligations incurred before designation can sometimes be fulfilled Licences (financial sanctions) Authorisation from HM Treasury (or other domestic body) allowing an activity that otherwise would be forbidden but must be within range of authorisations allowed by EU law Can come with conditions or reporting requirements General or individual and specific Licences (trade sanctions) Export Control Organisation (in UK): OGEL, SIEL, OIEL, more 12

14 OFAC Prohibitions Generally The US Treasury Department s Office of Foreign Assets Control ( OFAC ) administers and enforces US economic and trade sanctions OFAC sanctions generally prohibit: Transactions with, payments to or investments in entities located in countries that are the subject of an OFAC embargo Transactions with, payments to or dealings with persons or entities identified on OFAC s Specially Designated Nationals and Blocked Persons ( SDN ) List Approving, brokering, guaranteeing or otherwise facilitating any of the above transactions Each OFAC sanctions programme is different 13

15 14 OFAC Sanctions Programmes Comprehensive embargoes each is unique Cuba Iran North Korea Sudan (not South Sudan) Syria Lesser restrictions Burma/Myanmar

16 15 The OFAC SDN List OFAC SDN list Available on the web: treasury.gov/sdn Includes individuals, entities, vessels and aircraft List changes frequently Listed entities may appear to be legitimate businesses Some listed persons are located in western countries, including in the US

17 OFAC Exemptions and Licences Exemption: OFAC regulations do not apply Licence: Regulations apply, but OFAC has authorised certain transactions despite the regulations General Licence: General authorisation anyone can use if meeting the qualifications Specific Licence: Special authorisation from OFAC for which a company or individual must apply Time-consuming process to obtain 16

18 CROSS-BORDER REACH 17

19 Global Reach of EU sanctions Applies to everyone in the EU, including foreign entities or individuals acting in the EU Applies to imports to or exports from the EU Applies to EU-registered companies and citizens anywhere in the world Corporate structures EU sanctions generally do not reach as far as OFAC in regulating subsidiaries and affiliates Therefore, non-uk incorporated subsidiary acting outside the UK is not subject to UK sanctions and will not automatically make its parent liable Corporate veil generally not pierced in UK though exceptions Circumvention/facilitation remains a risk 18

20 19 Global Reach of OFAC Applies to everyone in the US, including foreign entities or individuals acting in the US Applies to imports to or exports from the US Applies to US companies including foreign offices or branches anywhere in the world Cuba and Iran sanctions apply to entities owned or controlled by US companies anywhere in the world Applies to US citizens or permanent residents anywhere in the world even if working for a foreign company

21 RESPONSIBILITY FOR OTHERS 20

22 EU: Assistance, Circumvention, Facilitating, Enabling Technical and financial assistance frequently banned Implications for capitalising or advising portfolio companies Circumvention A person commits an offence who intentionally participates in activities knowing that the object or effect of them is (whether directly or indirectly) to circumvent any of the prohibitions in Impact on structuring of transactions, intragroup transfers Facilitating/enabling breaches A person commits an offence who intentionally participates in activities knowing that the object or effect of them is (whether directly or indirectly) to enable or facilitate the contravention of 21

23 OFAC: Facilitation, Approval, Evasion OFAC sanctions ban US persons from facilitation or approval of prohibited business by foreign persons US person cannot approve, finance, facilitate or guarantee transaction that would be prohibited to US person Does not matter whether foreign person is affiliated or unaffiliated with US person Does not matter if transaction is legal for foreign person Transactions with intent or effect of evading sanctions also are illegal Includes actions by foreign persons that cause a US person to violate the sanctions Bottom Line: If you can t do it directly, you can t do it indirectly 22

24 CONSEQUENCES OF NON-COMPLIANCE 23

25 Violations prosecuted by national authorities in criminal courts Criminal penalties Unlimited fines EU Enforcement: UK Example Imprisonment (up to 7 years) Other enforcement/punishment Financial Conduct Authority can punish violations of its Principles of Business : important for firms to have proportionate systems and controls in place HM Treasury can demand information and disclose to prosecutors, EU authorities Export Control Organisation (part of BIS) can refuse licences Challenges to sanctions enforcement are made through national courts, with ultimate recourse to the Court of Justice of the EU 24

26 OFAC Compliance Requirements Strict liability regime Even inadvertent violations can be penalised But having an effective compliance programme is a mitigating factor for OFAC enforcement actions No government agency prescribes a compliance programme or specific diligence No safe harbors But, federal bank regulators have long expected risk-based OFAC compliance programmes and take compliance seriously Many financial institutions use OFAC interdiction software Foreign financial institutions must ensure US transactions comply with OFAC 25

27 Penalties for OFAC Violations Civil fines up to $250,000 or twice the amount of the transaction, whichever is greater For willful violations, criminal fines up to $1 million and imprisonment up to 20 years Reputational consequences Significant enforcement actions Standard Chartered: Penalty of $470 Million HSBC: Penalty of $1.2 Billion Bank of Tokyo Mitsubishi: Penalty of $250 Million 26

28 CASE STUDY: THE EXPANDING SANCTIONS REGIMES AGAINST IRAN 27

29 Subject to Change November 24, 2013 two-stage agreement between Iran and E3EU+3 Over the next six months, if Iran pulls back and opens up its nuclear programme, sanctions will be relaxed: Some repatriation of funds Suspension of petrochemicals, automobile, gold sanctions Suspension of some insurance prohibitions No new sanctions Humanitarian trade facilitated Increase threshold for transfers Details to be worked out Further relaxation to be considered 28

30 EU Regime: A New Type of Sanction UK first instituted sanctions in 1993 EU-wide sanctions from 2007 on: Nuclear proliferation Human rights New measures in move from traditional focus on designated persons and entities to broader brush approach Entire industries targeted All transfers in and out of Iran subject to restrictions 29

31 EU Trade and Industry Sanctions Arms embargo, prohibition on the sale, supply, transfer, import and export of dual-use goods and technology Prohibition on investment in Iranian entities or bodies engaged in the exploration or production of crude oil and natural gas Prohibitions on any investment in the petrochemical sector in Iran or in Iranian or Iranian-owned enterprises engaged in that industry Ban on import of oil and natural gas from Iran into EU, including the import, purchase, transport and finance and insurance related to these activities Prohibitions on the provision of brokering services, technical and financial assistance related to any goods and technology whose supply is prohibited 30

32 EU Financial and Transport Sanctions Asset freeze and travel ban against numerous entities and individuals Restrictions on all transfers to or from Iran Between 10,000 and 39,999: notification required 40,000 and above: permission required Ban on banking services Ban on selling bonds Ban on providing insurance (including brokering) Ban on providing service to Iranian vessels or aircraft 31

33 32 EU Sanctions Exceptions Licences can be granted for certain dual-use items and items used to monitor telecommunications, though the UK government, for example, has made it clear that a Licence will only be issued in exceptional circumstances Grandfather clauses allow the completion of transactions with the oil and gas industries based on contracts in force on or before certain dates (and with certain restrictions)

34 A Rapidly Evolving US Regime Statutory Developments ISA: Iran Sanctions Act CISADA: Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 NDAA: National Defense Authorization Act of 2012 ITRSHRA: Iran Threat Reduction and Syria Human Rights Act of 2012 IFCPA: Iran Freedom and Counter Proliferation Act of 2012 (effective 1 July 2013) Past 4 Years: 30+ New Regulations and Executive Orders 33

35 34 US Sanctions Projected Abroad Sanctions are being projected beyond the United States Primary Sanctions: OFAC restrictions apply to US firms and their non-us offices Non-US sub of US company generally covered by US sanctions Foreign firms also covered in their dealings with the US Secondary Sanctions: Non-US firms (including those that lack any US connection) can be sanctioned for certain types of dealings with Iran Broad disincentive to engage with Iranian entities Firms that file periodic reports with the SEC must publicly disclose certain Iran-related dealings by their affiliates

36 Outreach of US Iran Sanctions 35 US Companies Foreign Subsidiaries of US Companies SEC-Reporting Companies Non-US Financial Institutions Non-US Companies

37 Primary Sanctions: US Companies and Subsidiaries 36 US companies and individuals must not deal, directly or indirectly, with: The Government of Iran and its controlled entities Companies and individuals in Iran Goods and services of Iranian origin Goods and services for export to Iran SDNs of Iran Also applies to foreign companies acting in the US, or in their dealings with US companies and individuals New: Generally applies to companies owned or controlled by a US person that is, non-us subsidiaries (including PE portfolio companies)

38 Penalties for Violating Primary Sanctions Violations are punishable by civil monetary penalties For willful violations, criminal fines and imprisonment are also possible The same penalties can be imposed on non-us companies that cause violations of law in the US For example, scrubbing Iran references from wires to cause US offices or US banks to process illegal transactions US parent can be liable for civil penalties for foreign subsidiary s violations 37

39 SEC-Reporting Companies Wherever Located Companies that file reports with the US SEC must report activities of affiliates Parent companies Subsidiaries Companies under common control (including portfolio companies of same PE sponsor) Control includes a significant minority stake Reportable activities include: Dealings with the Government of Iran and its entities Dealings with Iranian parties who were put on the SDN list for terrorism or nonproliferation reasons Certain transactions related to the energy sector of Iran 38

40 39 SEC-Reporting Companies (cont.) Reporting requirement only, but SEC is required to transmit report to US President and certain committees of Congress President is required to investigate for possible imposition of sanctions

41 Secondary Sanctions: Non-US Financial Institutions 40 Foreign financial institutions can be barred or restricted from maintaining US correspondent accounts Sanctionable activities include: Significant financial transactions with any Iranian bank Significant financial transactions involving Iranian rials (effective July 2013) Significant financial transactions for supply of goods and services related to Iran s auto, energy, shipping and ship-building sectors Facilitating development of weapons of mass destruction or terrorism Facilitating activities of persons on UN sanctions list or activities of Islamic Revolutionary Guard Corps and its designated agents

42 Non-US Financial Institutions The term foreign financial institutions includes: Banks and other depository institutions Securities broker-dealers Commodities futures and options broker-dealers Investment companies Affiliates and subsidiaries of the above As a general rule, insurers and reinsurers are not included within the term 41

43 Secondary Sanctions: Other Non-US Firms (including Insurers) Effective July 1, 2013, sanctions applicable against those knowingly providing support, goods or services (including insurance or reinsurance): With respect to Iran-related activities for which sanctions already have been imposed under US law To persons in the auto, energy, shipping, ship-building or ports sectors of Iran To persons with respect to the sale or transfer to Iran of certain materials (e.g., graphite, aluminum, steel, coal) To persons designated as SDNs Represents significant expansion of secondary sanctions 42

44 Consequences for Violating Secondary Sanctions Sanctions applied may include, among others: Blocking of all property subject to US jurisdiction Ban on US persons buying debt or equity in the sanctioned party Prohibition on loans from US financial institutions to the sanctioned party Prohibition on FX and banking transactions in the US involving the sanctioned party Denial of US government contracts, Ex-Im financial assistance and other US government dealings Sanctions may apply to principal executives of a sanctioned party Principal executives can be denied entry into the US US bank accounts of principal executives can be frozen 43

45 Special Exception: Non-US Insurers/Reinsurers Special insurance exception exists: US President may determine not to impose sanctions if an insurer or reinsurer exercised due diligence and had controls to avoid engaging in sanctionable conduct Exception is special for insurance industry; other industries generally do not benefit from such a due diligence exception Places a premium on having a well-developed sanctions compliance regime and controls 44

46 Contact Details Matt Getz