Risks of Sanction Law Violations

Navigating the world of sanctions law successfully demands a laser-sharp approach.

Overlapping laws and sources and, in some instances, contradictory obligations between jurisdictions create a high probability of falling foul of one or more sanctions systems and domestic prohibitions, resulting in an increased risk of both civil and criminal liability for companies and individuals involved in international transactions. Interestingly, although certain sanctions are imposed to punish individuals and entities responsible for human rights violations, the misapplication of the sanctions systems can, in itself, lead to the violation of human rights.

As a direct result of Brexit, the UK recently implemented its distinct sanction regime, which in broad terms regulates transactions with certain designated persons and within certain industries. The UK maintains a list of designated individuals and entities, who may be subject to financial sanctions such as an asset freeze or travel bans. In addition, the UK imposes sanctions in relation to the import and export of certain goods and services with certain jurisdictions. However, cases in which there is a sanctions law issue are of an international nature and, more often than not, there are other sanctions frameworks from other jurisdictions that may bite on a proposed transaction. It is, therefore, often inadequate to only consider UK sanctions law when advising in relation to an international transaction.

In addition to the UK’s sanctions framework, there are EU and UN sanctions to consider in cases where the proposed transaction touches any of these jurisdictions either because a citizen of these jurisdictions is involved in the transaction or the transaction passes through them. Moreover, the EU and UK will impose sanctions pursuant to UN sanctions in accordance with their international obligations and, indeed, the EU and UK sanctions may even go beyond UN sanctions because of the veto system at the UN Security Council. Each of these bodies maintain their own sanctions frameworks and publish their own list of designated persons and designated activities. And, of course, within the EU, there are also member states that operate their own sanctions systems, and this too needs to be considered.

Finally, US Sanctions must be considered for two reasons. First, US sanctions regulate the activities of US persons which include US companies and, in some instances, their subsidiaries. Second, US sanctions often have extraterritorial effect meaning they also regulate transactions by non-US persons such as UK nationals having no US legal status or other connections with the US. In both cases, where these laws are violated, the individual or entity can face heavy civil and criminal penalties imposed by Office of Foreign Assets Control (OFAC) and/or the Department of Justice.

To further demonstrate the interplay of these laws in multiple jurisdictions, let us consider an example. Imagine a UK company with a German branch which decides to enter into an agreement with a Cuban merchant to purchase and sell fine cigars within the UK. In this case, although the transaction is between the UK company and the Cuban company, it would be necessary to consider the potential breach of the sanctions frameworks of the UK, EU, UN, Germany, and the United States.

To add to these complexities of multiple layers of laws and regulations, sanctions laws continuously change and evolve in the same way politics do. A recent example of the continuous and sudden changes in sanctions laws is the recent sanctions package imposed on Russia in respect to Ukraine. The UK has so far passed 9 Amendments in 2022 to change the Russia (Sanctions) (EU Exit) Regulations 2019 which came into force on 31 December 2020. Another example was the US withdrawal from the JCPOA with Iran after which the US re-imposed its sanctions on Iran.

As with the example of the re-imposition of US sanctions on Iran, there are at times contradictions between the sanctions laws of different countries that are involved in one transaction. Currently, the US, EU and UK sanctions regimes on Iran differ significantly and can even be in contradiction to each other.

On 7 August 2018, the United States re-imposed some of its secondary sanctions on Iran, which had been lifted pursuant to the JCPOA. Further sanctions were re-imposed on 5 November 2018. These sanctions target non-US persons and their financial connections with Iran with the ‘goal of applying financial pressure on the Iranian regime in pursuit of a comprehensive and lasting solution to the full range of the threats posed by Iran, including Iran’s proliferation and development of missiles and other asymmetric and conventional weapons capabilities, its network and campaign of regional aggression, its support for terrorist groups, and the malign activities of the Islamic Revolutionary Guard Corps and its surrogates …’.[1]

Also on 7 August 2018, the EU blocking regulation 2018/1100 came into force. The basic principle of the blocking regulation is ‘that EU operators shall not comply with the listed extra-territorial legislation, or any decision, ruling or award based thereon, given that the EU does not recognise its applicability to/effects towards EU operators’.[2] Article 5 and 11(2) of the regulation states, no legal person incorporated within the EU ‘comply, whether directly or through a subsidiary or other intermediary person, actively or by deliberate omission, with any requirement or prohibition, including requests of foreign courts, based on or resulting, directly or indirectly, from the laws specified in the Annex or from actions based thereon or resulting therefrom’.[3] Therefore, while US sanction law prohibits certain transactions with Iran, EU law prohibit abiding by these US laws.

Post-Brexit, the EU blocking regulation has been incorporated into UK law and, therefore, currently the UK also prohibits compliance with the re-imposed US secondary sanctions on Iran.[4] Violation of these UK laws means that the UK company/national can face criminal charges within the UK as well as civil claims by the protected person under Article 6 of the regulation. On the other hand, compliance with the UK laws means that the company may become subject to sanctions and penalties by US authorities.

There are, in many cases, exceptions and mechanisms to address the above issues so that international transactions can proceed in line with the various sanctions systems. However, this requires investment in a detailed compliance plan and process which is regularly updated and carefully implemented. Some companies, however, choose to save costs and avoid risks of sanction law violations by completely avoiding any connection with sanction sensitive countries and their citizens. This, however, creates a potential risk of a civil claims by claimants who assert that they have been unfairly discriminated against and that human rights have been violated. In addition, where the Blocking Regulation is involved, there is a risk that the companies could become the subject of a civil claim under Article 6 of the Blocking Regulation.

It is possible to abide by applicable sanctions laws and despite the hard work that is involved, the aim should always be to do so.

About Us:

For over seventy years, Ronald Fletcher Baker LLP has been providing expert legal advice from its offices in the City of London, the West End, Manchester and now Exeter, and internationally. The firm has considerable experience acting for medium to large national and international companies, domestic and international governments, financial institutions, high net worth individuals and families, and substantial corporate investors, many of whom are based overseas.

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Disclaimer

This article provides only general information and does not constitute legal advice. Every case is different and has to be evaluated on its own merit. To learn more about your rights and the options available to you, please contact our Sanctions and Banking Specialist, Rokhsareh Vahid at r.vahid@rfblegal.co.uk.

[1]‘Executive order 13846 of August 6, 2018: Reimposing Certain Sanctions With Respect to Iran’ available at https://www.treasury.gov/resource-center/sanctions/Programs/Documents/08062018_iran_eo.pdf.

[2]‘Guidance Note – Questions and Answers: adoption of update of the Blocking Statute’ available at https://eur-lex.europa.eu/legal-content/EN/TXT/?toc=OJ:C:2018:277I:TOC&uri=uriserv:OJ.CI.2018.277.01.0004.01.ENG.

[3]‘’Council Regulation (EC) No 2271/96 of 22 November 1996 protecting against the effects of the extra-territorial application of legislation adopted by a third country, and actions based thereon or resulting therefrom’ available at https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A31996R2271

[4]‘Protection of Trading Interests (retained blocking regulation)’, available at https://www.gov.uk/guidance/protection-of-trading-interests-retained-blocking-regulation

Published 1 June 2022

Additional Info

• News Author:Rokhsareh Vahid