International sanctions regimes
Carrying on business across national boundaries brings new dimensions of risk – sometimes in unexpected ways – requiring new levels of care and diligence. When carrying on business across national boundaries, there are a number of national and international law regimes that affect the way in which that business must be carried on. Those national and international law regimes expose companies to potential prosecution and litigation risks.
One of those regimes is the sanctions regime. Many countries, including Australia, have both a UN Security Council Sanctions and autonomous sanctions regime. These regimes preclude dealings not just with named countries or entities but also entities owned or controlled by a sanctioned country or individual. They are rapidly changing and many can have unexpected application.
Two recent cases have highlighted the ways in which the identity of the person with whom you are doing business matters, and how complex means of evading international law responsibilities will not work.
The New York Department of Financial Services (DFS) claimed that for almost 10 years, some 60,000 transactions totalling at least US$250 billion were routed through a New York-based arm of Standard Chartered Bank but were hidden from the US regulators in an effort to circumvent federal and state sanctions regimes.
The conduct complained of included:
- failure to maintain accurate books and records,
- obstructing governmental administration,
- failure to report crimes and misconduct,
- falsification of books and reports,
- offering false instrument for filing,
- falsifying business record, and
- unauthorised Iranian transactions.
Standard Chartered allegedly had a system in place through which any information relating to sanctioned countries, individuals or entities was stripped from wire transfer messages, making it impossible for US regulators to identify such transactions. While the investigation originally focused on Iranian clients of the bank, the regulator found evidence to suggest that dealings with other sanction countries, such as Libya, Myanmar (Burma) and Sudan, have also taken place.
The language of the complaint was colourful, to say the least. The DFS said that the bank's ‘actions left the U.S. financial system vulnerable to terrorists, weapons dealers, drug kingpins and corrupt regimes, and deprived law enforcement investigators of crucial information used to track all manner of criminal activity’.
Demonstrating the powerful negative impact such an allegation might have, the bank agreed to settle the claim eight days after the claim was filed, notwithstanding news reports that a federal Department of Justice investigation was about to clear nearly all the transactions involved. A day before a scheduled meeting with the regulator, at which the bank's licence may have been revoked, the bank agreed to pay a US$340 million fine, to report to the regulator on an ongoing basis on its money-laundering policies and to the placement of Department of Financial Services' examiners on site at the bank.
The position of directors
A case closer to home demonstrates the potential liability of directors if they fail to detect transactions intended to evade the sanctions regimes.
The Iraqi Grains Board owed BHP approximately US$8 million for a shipment of wheat to Iraq. BHP assigned that debt to Tigris. AWB Limited agreed with Tigris that it would assist Tigris recover the assigned debt from the IGB. AWB did so by increasing the price of wheat under two contracts. The UN Office of the Iraq Program was not informed that the price of wheat under the contracts had been inflated to recover this debt when it approved the release of moneys to AWB from an escrow account. Tigris and AWB entered into a written agreement relating to the payment to Tigris by AWB for Tigris and the payment by Tigris of a ‘success fee’ to AWB.
The conduct was contrary to the UN imposed sanctions on Iraq. ASIC successfully commenced proceedings against Mr Lindberg for failing to take sufficient care and diligence in the management of the company. The failure of company officers to take care and diligence to identify the conduct was a breach of the provisions of the Corporations Act: Australian Securities & Investments Commission v Lindberg  VSC 332 (9 August 2012).
The court imposed a pecuniary penalty of $100,000 and disqualified Mr Lindberg from managing corporations until 2014.
Implications for your business
Failing to comply with the sanctions regimes can lead to criminal prosecution (both imprisonment and fines) under those regimes and also, as the Lindberg case shows, civil consequences in relation to the conduct of the officers of the company.
Liability under the sanctions regimes is strict, that is, it does not depend on an intention to breach the sanctions. The conduct prohibited includes both doing an act and omitting to perform an act. However, there is a defence available if the company took ‘reasonable precautions, and exercised due diligence, to avoid contravening’ the relevant prohibition.
These regimes are both rapidly changing and increasingly enforced. Sophisticated methods of dealing with prohibited countries or persons will not evade detection.
Directors and officers can be personally liable both under the sanctions regimes and pursuant to broader corporate law. It is critical that companies have appropriate compliance and training programs in place and mechanisms for detecting and dealing with prohibited dealings.