Legalese – the complicated world of sanctions

Published: 31/07/14

Russia, Libya, Syria, Iran ‘ the role of national and international sanctions has serious and profound impacts on project financings in affected countries.  We set out in this edition of Legalese a brief overview of the different types of sanctions that are available to the international community.  The Trinity team are available to respond to any detailed questions in relation to specific sanctions regimes.

1.1              What are sanctions?

(a)                Sanctions or restrictive measures (the two terms are used interchangeably) are an instrument of a diplomatic or economic nature which seek to bring about a change in activities or policies such as violations of international law or human rights, or policies that do not respect the rule of law or democratic principles.  They are increasingly used to prevent the financing of terrorism.

(b)               The assumption that multilateral sanctions operate identically in every jurisdiction is a common cause of inadvertent breach.

(c)                For the purposes of this overview, we concentrate on economic or financial sanctions.

1.2              UN Security Council Resolutions

(a)                Under Chapter V of the United Nations Charter, ‘The Members of the United Nations agree to accept and carry out the decisions of the Security Council in accordance with the UN Charter.’.  This forms the basis for the legal requirement of Member States of the United Nations to implement United Nations Security Council Resolutions under international law.

(b)               Resolutions adopted under Chapter VII are legally binding on Member States under international law.

(c)                In practice, international institutions (like the World Bank) fully comply with UN sanctions and reviews payment and contracts under financed projects to ensure that no loan funds are used to finance goods prohibited by the UN sanctions or payments made to designated entities or individuals.

(d)               Note that generally, UN Sanctions would not stop an institution’s wider humanitarian activities (e.g. payment for medicines etc.) which can be specifically carved-out.

1.3              EU Law

(a)                Council Decision and EU Regulations

(i)                 The Council of the European Union can adopt legislation to implement UN Security Council Resolutions.  It can also unilaterally set its own sanctions. When implementing UN Security Council Resolutions, it can go further than the UN (leading to potential conflicts ‘ see further below).

(ii)               EU Regulations may also be put in place in relation to sanctions.  Provided that EU Regulations are sufficiently clear, precisely stated, unconditional and confer specific rights for citizens EU Regulations have ‘direct effect’ under Article 288 of the Treaty for the European Union (ex. Art 249 EC Treaty).  The principle of ‘direct effect’ means that provisions of EU law will (if appropriately drafted), confer rights and impose obligations on individuals and legal persons which the courts of European Union member states are bound to recognise and enforce.

(iii)             A Council Decision is also binding under the Treaty for the European Union on the parties to whom it is addressed, being all member states of the European Union.

(iv)             In terms of difference with UN Resolutions, as a matter of law, the 2008 European Court of Justice (‘ECJ’) judgment in Kadi v Council provides that as a matter of public international law, UN Security Council Resolutions are binding and take precedence over European Community law.  However, according to the ECJ, UN Security Council Resolutions do not take precedence over the EU Treaty itself or other sources of primary law (e.g. protection of fundamental rights)

(v)               Effectively, the EU takes a sovereignist approach.  On that basis, the ECJ concluded that the obligations imposed by an international agreement cannot have the effect of prejudicing the constitutional principles of the EU Treaty.

(vi)             Given that the question of supremacy of the EU regulations over the UN Security Council Resolution is one that could have academics engaged for years – it is preferable to take a practical look at the situation in hand on a case by case basis.

(vii)           Existing EU sanctions (deriving from Regulations issued in March and July 2014) consist of asset freezes against and prohibition on funds and economic resources being made available to specified individuals whose actions support Russia and undermine or threatens the territorial integrity, sovereignty and independence of Ukraine.

1.4              UK

(i)                 UN Sanctions, the EU Regulations and the EU Council Decision must be implemented by the UK authorities as the UK is a Member State of the UN and the UK.  HM Treasury, the UK’s finance ministry, and in particular its Asset Freezing Unit is the body in charge of implementing sanctions.

(ii)               In relation to Libya, for example, the UK passed two pieces of legislation to accompany the UN Sanctions and EU Regulations, which fleshed out the sanctions in relation to Libya as they apply in the UK ‘ for example in relation to penalties (which include imprisonment and/or fines) and additional reporting requirements.

(iii)             In the UK breaching a sanctions regime is a criminal offence and the maximum prison term is seven years.

(iv)             It is a defence under UK Law that the person did not know and ‘had no reasonable cause to suspect’ that the funds or economic resources were being made to a sanctioned person.

1.5              French

(i)                 Similarly to UK law, the French government can pass specific legislation, e.g. in the form of a licence application form for businesses wishing to conduct transactions in sanctioned countries.

(ii)               The body responsible for investigating certain financial sanctions (known as TRACFIN) can pass on its files to the French criminal prosecutor.  The prosecutor has the power, by virtue of the Monetary and Financial Code to impose penalties on any person or entity, inter alia, making funds available to sanctioned entities.

1.6              US

(a)                Executive Orders and OFAC

(i)                 US sanctions may the form of an Executive Order (‘EO’) issued by the President.

(ii)               OFAC, the US Office of Foreign Assets Control is the governmental body that issues sanctions and sets out rules relating to doing business in a country the subject of sanctions.

(iii)             OFAC, unlike some other US acts, does not have full extra-territorial effect.  OFAC must be complied with by all US legal persons, including all US citizens and permanent resident aliens regardless of where they are located, all persons and entities within the United States, all US incorporated entities and their foreign branches.  In certain cases, foreign persons in possession of US origin goods also need to comply.

(iv)             By way of example, current US sanctions against Russia (deriving from Executive Orders issued by the President) add a series of Russian banks to the Sectorial Sanctions Identifications list (SSI) administered by OFAC. The SSI sanctions also target those companies whose ownership by the Russian state exceeds 50%. In addition, a number of Russian and Ukrainian companies, separatist- related organisations and government officials were added to the Specially Designated Nationals (SDN).

(v)               The SSI list is not as restrictive as the SDN list. For example: it does not impose blocking requirements which means that US financial institutions can maintain correspondent banking accounts and process US dollar clearing transactions as long as the transactions do not involve a new debt with a term longer than 90 days. However, while there are no prohibitions on lending in US dollars, the restrictions may impact their ability to raise funds in U.S dollars. Lastly, the restrictions do not apply to derivative instruments.

(vi)             It is to be noted that while the SSI list requires compliance by US persons, it is likely that the new restrictions will block all new US dollar debt financing with a term exceeding 90 days whether or not the financing is made available by U.S Persons (and U.S Persons in itself has a very wide definition and can include an entity organised under the laws of the U.S).

(vii)           In relation to the SDN list, all property and interests in property of individuals and entities located in the United States or within the possession or control of a US person, wherever located, are considered blocked and may not be dealt in. Any entity in which a blocked party holds a 50 percent or greater ownership interest is itself considered blocked by operation of law. US persons may not engage in any dealings, directly or indirectly, with blocked parties.

(viii)         Finally, entities may also be added to the US Department of Commerce Bureau of Industry and Security Entity List.  Designation on the Entity List imposes a license requirement for the export, re-export or foreign transfer of items to those entities on the Entity List.

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