What You May Not Know About Sanctions (And How It Can Hurt You) by: Rajika Bhasin Counsel, Global Markets AIG

Transcription

1 What You May Not Know About Sanctions (And How It Can Hurt You) by: Rajika Bhasin Counsel, Global Markets AIG

2 What You May Not Know About Sanctions (And How It Can Hurt You) Introduction Companies navigating the global marketplace must tread carefully in the area of economic sanctions. Sanctions cover a variety of targets, apply to off-shore affiliates, and change frequently. The risk of violating a sanctions program increases as a business expands across borders. An effective compliance policy is therefore critical to sustaining multinational growth. Most, but not all, economic sanctions emanate from the U.S. and Europe. This briefing paper provides a general overview of these sanctions, however, companies should remain equally aware of sanctions within every country they operate. The Nuts and Bolts Economic sanctions are restrictions on the ability of a person or entity to engage in certain activities with targeted persons or entities. They are designed to influence changes in the behavior of their targets by: (1) depriving them of the ability to use their assets (i.e., blocking access or use of money or property), and/or (2) restricting trade with the target. In the U.S., sanctions are administered and enforced by the Office of Foreign Assets Control (OFAC) as part of foreign policy and national security efforts. In Europe, Sanctions Resolutions are passed by the Council of the European Union and enforced by the regulators of each Member State. Sanctions may target governments (and entities controlled by governments), countries, and Specifically Designated Nationals or their equivalent under non-ofac programs (collectively referred to as SDNs), which consist of targeted entities, organizations, people and vessels. SDNs include terrorists and terrorist organizations, narcotics traffickers, persons involved in developing and/or distributing weapons of mass destruction, and persons and entities that the applicable regulator considers to be connected to sanctioned governments. 1 1 Additionally, OFAC maintains a publicly-available SDN list which it frequently updates, often several times a week, with new SDN designations here: 2

3 Sanctions programs generally prohibit any activities with SDNs, no matter where in the world they are located, and require that the property and assets of SDNs be blocked. OFAC further prohibits transacting business with entities owned or controlled by SDNs. Transactions may also be prohibited simply because they have a connection or an association with a targeted country. Therefore, it is important that transactions be reviewed to identify any connections to sanctioned countries, entities or SDNs. Connections are not always readily apparent. An economic sanction can involve any property or asset indeed, anything of value in which the sanction target has an interest. That can include physical property, interest in an insurance policy, claims payments, investment accounts, loans, bank accounts, debt instruments, money, checks, letters of credit, etc. Is your business impacted? The universe of those who must comply with sanctions is very broad. In the U.S., it includes U.S. persons, defined as: companies organized under U.S. law and their non-u.s. branches; employees of a U.S. company, as well as employees of its non-us branches; U.S. citizens or U.S. permanent residents, regardless of where they are located; and non-u.s. companies or people located in the U.S. European sanctions can apply: within the territory of the European Union (EU), including its airspace; aboard any aircraft or vessel under the jurisdiction of a Member State (i.e., a French flagged vessel); to any natural person who is a national of a Member State, irrespective of whether s/he is located within the EU; to any legal person, entity or body that is incorporated or constituted under the laws of a Member State; and to any legal person, entity or body in respect of any business done, in whole or in part, within the EU. 3

4 What You May Not Know About Sanctions (And How It Can Hurt You) Sanctions can fall into three categories: comprehensive country sanctions, limited country sanctions, and list-based sanctions. Comprehensive country sanctions restrict nearly all activities with the sanctioned country, the government of the sanctioned country, and non-governmental entities or individuals acting on behalf of, or controlled by, the government of the sanctioned country, wherever that entity or individual is located. They also apply to any private citizens or companies located in a sanctioned country, regardless of whether the company or individual is connected to the government. Governments may also own or control companies that are located outside the sanctioned country. Some have embassies throughout the world. The Iranian government, for example, owns banks that have offices worldwide. Both Burma and Cuba have embassies in other parts of the world. Because Iran, Burma and Cuba are all targets of U.S. sanctions, without OFAC authorization, U.S. persons are prohibited from engaging in any activities with these companies or embassies, wherever in the world they are located. By contrast, limited country sanctions restrict only certain activities or are only enforced against specifically named targets. For example, a limited country sanctions program might target current or former government officials who have committed human rights abuses, engaged in or supported violence or terrorist acts, or pose a threat to international peace and/or national security and foreign policy. List-based sanctions prohibit all activities with any government, entity, organization, person or vessel that has been identified as an SDN. Examples of Sanctions Programs Cuba Iran Syria Sudan Burma (Myanmar) North Korea Libya Iraq Balkans Belarus Democratic Republic of the Congo Diamond Trading Ivory Coast Lebanon related Liberia Kingpin Narcotics Narcotics Trafficking Non-Proliferation of WMD Somalia Global Terrorism Zimbabwe 4

5 Fines and Penalties Failure to comply with sanctions programs can have serious legal, financial and reputational implications for a company and its employees. Fines and penalties may apply even if the individual or company did not know the activity violated a sanctions program and had no intention of doing so. In the U.S. alone, penalties for individuals may include criminal fines up to USD 5 million and imprisonment up to 30 years and/ or civil fines of USD 1.1 million for each violation. A company may also be penalized for its employee s actions with fines up to USD 10 million. Sanctions violations and penalties are often widely publicized; missteps can therefore have a lasting negative impact on a company s reputation and drag down profitability and shareholder value. A Sound Compliance Program Active compliance with sanctions programs is imperative, everywhere a company operates. Compliance is not always as straightforward as it sounds. To begin with, restricted activities span both direct dealings, such as entering into a business arrangement with a target, and indirect dealings, such as referring business with a sanctions target to a third party. In addition, employees that engage in business on a company s behalf may encounter sanctions issues in a variety of ways from soliciting business, to entering into contractual relationships, from closing accounts, to authorizing payments and/or retaining a third party to perform services for the company. Making detection even trickier, sanctions programs change frequently; a new sanctions target might become involved in a transaction midstream. A comprehensive compliance policy and ongoing due diligence are essential to avoid carrying out any activities, directly or indirectly, with sanctions targets. A comprehensive screening program that ensures employees are fully aware of transactions being contemplated and performed is just the beginning: employees must undertake full due diligence before they enter into transactions, evaluate these transactions throughout their life cycle, and have adequate resources to act when a potential target is discovered. 5

6 What You May Not Know About Sanctions (And How It Can Hurt You) Screening: The Cornerstone of Compliance Employees should systematically identify potential sanctions issues, including transactions with prohibited countries and the presence of SDNs, throughout the life of a transaction or business relationship particularly before accepting, authorizing or making payments of any kind. This is often referred to as screening. Screening is central to sanctions compliance. The personnel more likely to encounter a sanctions target are typically best suited to conduct screening whether that be a customer service professional or a financial officer. Generally speaking, the screening process should include: examining the names and addresses of the parties and countries involved, including without limitation: customers, beneficiaries, counterparts, vendors, employees, and vessels (and destinations of shipments); evaluating transactions for connections to sanctioned countries and/or SDNs; determining if there are other sanctions programs in the country your operation is located or doing business in, and screening for compliance with those as well. Screening should occur each time your business enters into a new transaction or renews a transaction. Screening should also be performed periodically during the life of the transaction. Any changes made to client data, such as the name, address, or country of domicile, should trigger screening. So should the authorization, acceptance, or issuance of any payment as part of a transaction. Along with screening, an effective sanctions compliance program should encompass education and training that keeps your company, its affiliates and employees aware of all applicable sanctions and keeps pace with fast-changing sanctions programs. Legal and compliance resources should be readily available to employees with specific questions or concerns. A dedicated Sanctions Officer, responsible for handling sanctions issues, should be integral to your team. A compliance program is recommended whether you operate in one or 100 countries. Screening is just the beginning; employees must continue exercising due diligence throughout the transaction s life cycle and renewal, and have access to adequate resources when a potential target is discovered. Given the diversity and fluidity of sanctions, the consequences of not doing so are far-reaching and severe. 6

7 Biography As Counsel to Global Markets, Rajika Bhasin advises AIG s global operations and clients on multinational issues across innumerable product lines. Her responsibilities include evaluating international trends and developing compliant business solutions in sophisticated and emerging markets. Prior to assuming this role, Rajika was Assistant General Counsel of Chartis International, responsible for advising on a wide range of multinational corporate and insurance matters. Before joining AIG in 2006, Rajika was an Associate with Nixon Peabody LLP, where she represented multinational clients in business transactions and litigations. Rajika has 10 years of experience in multinational business and insurance. She earned a B.A., cum laude, from the State University of New York at Buffalo and a J.D., cum laude, from Fordham University School of Law. 7

8 AIG Property Casualty 175 Water Street, New York, NY American International Group, Inc. (AIG) is a leading international insurance organization serving customers in more than 130 countries. AIG companies serve commercial, institutional, and individual customers through one of the most extensive worldwide property-casualty networks of any insurer. In addition, AIG companies are leading providers of life insurance and retirement services in the United States. AIG common stock is listed on the New York Stock Exchange and the Tokyo Stock Exchange. Additional information about AIG can be found at YouTube: LinkedIn: AIG is the marketing name for the worldwide property-casualty, life and retirement, and general insurance operations of American International Group, Inc. For additional information, please visit our website at All products and services are written or provided by subsidiaries or affiliates of American International Group, Inc. Products or services may not be available in all countries, and coverage is subject to actual policy language. Non-insurance products and services may be provided by independent third parties. Certain property-casualty coverages may be provided by a surplus lines insurer. Surplus lines insurers do not generally participate in state guaranty funds, and insureds are therefore not protected by such funds. 03/13