International sanctions are by nature a moving feast, but this year’s dynamic and somewhat volatile geopolitical environment has led to restrictions imposed by the US, the EU and elsewhere evolving more rapidly perhaps than ever before.
The US has stepped up sanctions against Russia, and the recent reimposition of US sanctions against Iran has caused many businesses to withdraw from engagement with the Islamic country.
Given the potentially severe regulatory, contractual and reputational penalties for non-compliance, it remains critical that treasurers keep sanctions compliance at the forefront of their agenda.
Keeping abreast of changes in applicable sanctions is, however, increasingly challenging, and assessing their impact on corporate treasury operations even more so. Sanctions rules are often complicated to interpret, requiring treasurers to exercise judgement to ensure compliance in a manner proportionate to the risk profile of their company.
This article does not explore particular sanctions, not least because, by the time of publication, there is every chance they will have been superseded. Instead, it highlights some key issues for treasurers in relation to international sanctions in the context of their financing activities.
Keeping up to date with developments is the first step in ensuring sanctions compliance. With no single comprehensive source of information as a reference point, this has never been straightforward. Companies need to monitor sanctions lists in all relevant countries.
The first question is: which countries’ sanctions regimes are relevant?
The starting point is to assess the geographic footprint of the company in question. This will include restrictions applicable in the company’s countries of operation. It is also normally necessary, however, to consider the extraterritorial effects of rules in other countries.
The US regime has a particularly wide reach, and will be relevant to any company with US nationals in senior positions, with business interests in the US or with aspirations to do business in the US.
In fact, in most cases, the US regime needs to be taken into account, even by non-US companies, and even where the activity or transaction in question has no US nexus.
The US’s withdrawal from the Iran nuclear agreement, for example, has resulted in the reimposition of secondary sanctions against Iran, which essentially prohibit non-US companies from engaging in a wide range of economic and commercial activities with Iran, which are otherwise legal under domestic sanctions regimes.
Having established which regimes require monitoring, the second question is how best to keep track of developments and ensure compliance. For some companies, ad hoc monitoring of sanctions lists may be appropriate.
For those whose activities might be at a higher risk of invoking international sanctions, a software solution might be a proportionate investment.
Whatever monitoring process is put in place should operate to raise red flags, but given the nature of certain sanctions rules, will not necessarily indicate conclusively whether a particular transaction or line of business may or may not proceed.
For example, US and EU sanctions imposed on Russia have targeted specific sectors of the Russian economy, including the energy, defence and financial sectors, so that basic namechecks for counterparties may not by themselves be sufficient. Sectoral sanctions often require more detailed analysis to determine their scope.
Keeping up to date with developments is the first step in ensuring sanctions compliance
In other cases, sanctions rules may be drafted in a somewhat opaque way, requiring interpretation and knowledge of the authorities’ enforcement stance in practice.
Both US and EU sanctions, for example, can be interpreted to extend to entities owned or controlled by a named sanctions target. What constitutes ‘control’ for this purpose can depend on quite specific circumstances.
Treasurers therefore need to work closely with their internal compliance or business integrity teams and, where appropriate, external advisers, to develop sanctions policies and to assess particular situations.
This may include developing a policy on contractual protections in agreements with counterparties that give comfort as to their sanction status and compliance with sanctions laws.
Whether contractual protections are necessary in a particular case will depend on the level of risk assessed, both generally and in relation to the particular counterparty.
There is no ‘market standard’ for such provisions – the broad risks covered, as well as the precise detail of each provision, tend to be negotiable on a case-by-case basis.
Determining the most appropriate approach to sanctions compliance will ultimately require each company to undertake a detailed assessment of risk exposure and to exercise judgement as to what might be a proportionate response.
Whatever approach is taken, it is important that all companies keep their internal sanctions policies up to date and under regular review.
Sanctions policies also need to address the company’s approach to conflicting rules, which are often the result of divergent foreign policy priorities in the US and other countries.
The US’s reimposition of sanctions against Iran prompted the European Commission to expand the scope of the 1996 EU Blocking Regulation (the ‘Blocking Regulation’), which prohibits EU companies from complying with certain extraterritorial US sanctions.
The revised Blocking Regulation, which entered into force in August to coincide with the first phase of reimposition of US measures, in essence prohibits EU companies from complying with the reimposed US sanctions against Iran.
The Blocking Regulation is often described as putting those within its scope (EU companies, nationals and others within the EU) between a rock and a hard place. Non-compliance may give rise to civil and, potentially, criminal penalties.
However, the penalties for a non-US person failing to comply with the US’s secondary sanctions can include being cut off from the US financial system – and being unable to deal with US persons.
This places affected companies in the difficult position of having to choose to comply either with US sanctions policy or EU law, unless waivers can be obtained.
The most appropriate approach will involve assessing the scope of the company’s activities in the affected country and weighing up the risks involved in complying with each set of rules.
In practice, many companies have withdrawn from Iran to avoid being put in the position of having to comply with the Blocking Regulation. A factor in the decision can be that the company’s debt providers prioritise compliance with US sanctions above the Blocking Regulation.
The position taken by debt providers in instances such as this may not, however, and often will not, always align with those of other stakeholders within the business. This can make for difficult and, at times, frustrating internal stakeholder management for treasurers.
In addition to imposing contractual obligations on counterparties, treasurers also need to be aware of the contractual obligations to which their companies are subject in relation to sanctions compliance, and to ensure these dovetail with sanctions policies and procedures.
This will be a relevant consideration for a range of contractual arrangements, including, for example, bank account documentation.
It will be particularly relevant in relation to loan and other debt documentation, which now routinely includes such contractual obligations for the borrower/issuer in favour of the finance providers.
In this context, as in relation to sanctions provisions generally, there is no ‘market standard’ for such contractual obligations, which instead must be settled on a case-by-case basis.
Treasurers must ensure they have a good understanding of the precise scope and detail of the existing contractual provisions relating to sanctions compliance to which they are subject. This will be especially important when assessing the impact on the business of any sanctions-related development.
In a similar vein, treasurers should take extra care when agreeing to sanctions-related contractual obligations going forward. Given the pace of recent developments, it is likely that contractual counterparties, in particular lenders, will be increasingly focused on sanctions provisions when negotiating new documentation or amendments to existing documentation.
It is possible, for example, that lenders might seek to extend the scope of sanctions-related representations and undertakings in loan documentation, arguing that they need to be sure the provisions are broad enough to capture future developments in sanctions policy, whatever these might be.
Treasurers should carefully consider the implications of, and their ability to comply with, any such requests.
While no one knows for certain in which direction the international sanctions landscape is heading, what is certain is the continuing importance of ensuring and monitoring sanctions compliance within each company.
With potentially severe penalties for non-compliance, companies need to focus on putting in place processes and systems to achieve sanctions compliance across the whole business, which are proportionate to the level of risk assessed.
Companies also need to pay careful attention to the contractual restrictions to which they are subject, seeking to ensure that they, too, are proportionate to the risk that their business poses to the relevant contractual counterparty.
For further information on sanctions provisions in lending documentation, please refer to The ACT Borrower’s Guide to the LMA’s Investment Grade Agreements.
Ben Kingsley is a partner, Kathrine Meloni is a special adviser and Latifah Mohamed is a professional support lawyer at Slaughter and May
This article was taken from the October/November 2018 issue of The Treasurer magazine. For more great insights, log in to view the full issue or sign up for eAffiliate membership