Restrictions on where your company can do business, prohibitions on those entities and individuals with whom you can engage, and wider measures relating to export and investment activity implemented under EU and US sanctions legislation trigger a wide range of offences. Companies on both sides of the Atlantic, and European and US, nationals employed or acting on behalf of companies outside of the EU and US need to consider and comply with these measures in order to manage both corporate and individual personal liabilities.
Given the heightened sensitivity following:
- the recent expansion of sanctions across a range of destinations and activities; and
- the headlines regarding prosecutions, fines and punitive settlements for failure to implement robust risk management procedures.
Companies will have been bombarded with information and general advice regarding sanctions issues such as economic sanctions aimed at freezing the funds of designated entities and individuals, arms embargoes and restrictions on the provision of associated technical assistance, training, insurance, logistics and financing.
However, many companies are less familiar with the finer nuances and risks of unwittingly committing offences under facilitation and circumvention measures and the associated risks for your organisation based on the actions of board members, employees and third parties.
Do you think facilitation offences only apply in the US and if you are an EU or wider non-US company you are safe?
This update considers the offences of facilitation and circumvention and the key issues that all companies need to ensure that the business and its employees are aware of.
US sanctions apply to all “US Persons”, which includes:
- US citizens and permanent resident aliens of the US, wherever located so including any US citizen working for a US or non US company;
- Persons within the US regardless of nationality so including non US citizens working for US based companies; and
- Companies incorporated under the laws of the US or of any state, territory, possession of the United States, including foreign branches.
Many US sanctions programmes will contain so called “facilitation” provisions. These measures make it an offence for any US Person to approve, finance, facilitate or guarantee any transaction by a foreign person where the transaction by that foreign person would be prohibited if performed by a US Person.
For example, a multinational company which has established a centralized system for management functions, such as order processing, marketing, logistics or IT, which are located or performed in the United States, would be prohibited from providing these services to a non-US subsidiary or affiliate in connection with a sanctioned country or person. The company would also be prohibited from outsourcing these functions to a non-US jurisdiction for the purpose of allowing the transaction to proceed.
“Approving”, “financing” and “guaranteeing” a transaction are straightforward concepts. However, “facilitating” is very often a more difficult activity to spot, manage and reconcile. What is meant by facilitation and what are the consequences for your business?
Facilitation can include:
- The involvement of, or approval by, any US parent company or US citizen working for that parent company of a transaction by a foreign subsidiary that would be prohibited under US sanctions. For example, US nationals who are directors or Board members of non-US entities would be prohibited from approving a transaction by that entity with a sanctioned country.
- The involvement of a US citizen working for a non-US company in a transaction which would be prohibited under US sanctions. These employees would be individually liable for participating in the negotiation, performance or wider decision-making in relation to a prohibited transaction — even where the transaction had been approved and licensed by the relevant domestic authorities.
- The involvement of US Persons in altering operating policies or procedures to permit a foreign subsidiary to do business that a US parent cannot undertake due to sanctions considerations. For example, a US manager may not modify existing business procedures to avoid or avert his involvement, or that of other US persons, in a particular transaction.
Recent litigation in the US reinforces the fact that US companies cannot avoid liability by simply turning a blind eye to the actions of their foreign subsidiaries. The US Treasury Department’s Office of Foreign Assets Control (OFAC) has made it clear that a U.S. company will be subject to civil or criminal penalties of up to $250,000 or twice the value of the transaction (whichever is higher) if it facilitates the actions of a foreign subsidiary that run counter to OFAC prohibitions.
What should your company be doing?
It is critical that all companies, wherever they are located or incorporated know whether any of their employees are US citizens — due diligence on all employees is therefore necessary. Compliance policies, procedures, training and general awareness raising are also critical to ensuring compliance with US sanctions legislation.
Specifically, companies should consider:
The implementation of robust recusal policies and procedures for any US Person employed by the company to recuse themselves from, for example:
- Attending meetings where there are discussions related to business in sanctioned countries;
- Participating in any telephone calls where business with sanctioned countries is discussed; and
- Receiving, initiating or forwarding any correspondence, documents or other materials related to business with a sanctioned country.
All employees should receive training on how to properly respond to any inquiries about business opportunities related to a sanctioned destination.
US Persons should know that they should not refer any matters or business opportunities related to a sanctioned country to non-US persons.
Non-US Persons should know that they should not:
- Provide or forward any correspondence, documents or other materials related to business with a sanctioned country to a US Person;
- Refer any matters or opportunities related to a sanctioned country to a US Person;
- Discuss any matters or opportunities with a US Person, in meetings, telephone calls or private conversations; or
- Request any assistance from a US Person.
Given the aggressive stance taken by US enforcement agencies to investigate and prosecute violations, many US and non-US companies often lose sight of extra-territorial obligations under European trade law. The perception is that US trade law is broader and more complex than that in the EU and therefore compliance with US regulation is enough to protect your business worldwide. However, confining compliance to a single jurisdiction can carry significant risks for your business.
Whilst EU sanctions do not currently extend to “facilitation” offences, offences under EU legislation implementing restrictive measures include the equally wide ranging offence of circumvention of sanctions measures.
EU sanctions apply to:
- Any EU national wherever located. Therefore, they extend to any EU national working for an EU or non EU company;
- Any legal person, group or entity doing business within the Community so including non-EU nationals working for EU companies or the activities of non-EU companies which take place in whole or in part in the EU; and
- Entities incorporated or constituted under the law of an EU Member State, for example the branches or wider representative offices of EU incorporated entities.
EU sanctions provisions contain anti-circumvention provisions aimed at prohibiting those to whom the legislation applies from knowingly and intentionally participating in activities which circumvent the wider sanctions measures. These anti-circumvention provisions could therefore catch, in the same way as facilitation provisions operate, EU companies transferring business that would be prohibited under the EU Regulation to non-EU affiliates, or structuring a particular transaction to avoid or evade EU sanctions.
In today’s economic climate, the temptation to circumvent sanctions can be great, for example structuring a transaction through a company subsidiary incorporated outside of the EU and, therefore not subject to EU sanctions. However, any company or individual employee that knowingly diverts business via a subsidiary risks committing an offence.
What should your company be doing?
Again, it is important that all companies, wherever they are located or incorporated know whether any of their employees are EU nationals. Avoiding circumvention offences then comes down to ensuring that robust systems and procedures are in place to manage risk and guide the actions of your employees — awareness raising, training and ongoing monitoring, testing and refreshing of sanctions knowledge is key.
Do your employees understand the scope of sanctions measures and how they apply on both a corporate and individual basis?
Does your sales team fully understand what they should and should not be doing in the context of sanctions compliance when pitching for business overseas?
Does your Board and senior management know what considerations they have to give to sanctions restrictions when approving transactions?
There are both substantial civil and criminal penalties for breaching sanctions. In the UK, the maximum penalty is seven years imprisonment, an unlimited fine or both. However, the wider reputational damage is often very difficult, if not impossible to repair.
Compliance is therefore crucial.