Cherie Spinks, Bruce G Paulsen and Andrew Jacobson, Simmons & Simmons LLP and Seward & Kissel
This is an extract from the second edition of GIR's The Guide to Sanctions. The whole publication is available here.
The ever-increasing globalisation of business means that many companies now operate to some extent in two or more jurisdictions. This requires companies to be cognisant of trade laws in other jurisdictions, in particular export control laws and sanctions regimes. When those regimes conflict, or a jurisdiction’s laws apply extraterritorially, companies are left grappling with decisions about whether it is lawful to proceed with transactions.
This is particularly true of the sanctions regimes in place in the United States and the European Union, which are the focus of this chapter. Measures imposed by each government or body often follow a common policy objective and will typically be agreed collectively by the United Nations Security Council. However, policy objectives sometimes diverge and can be driven by regional political dynamics. This has been the case in the past in relation to measures imposed by the United States on Cuba and the different approaches taken by the United States and the European Union more recently in relation to the reimposition of measures on Iran.
For those regimes in which the United States has implemented secondary sanctions, for example Russia, even companies without a US presence may face punishment – in the form of designation under those sanctions – for carrying on certain business contrary to the US’s Russia sanctions. This is even the case for EU-based companies that are carrying on business in compliance with the EU’s own Russia/Ukraine sanctions. We consider the effects of secondary sanctions on non-US persons below.
For companies subject to both US and EU sanctions regimes, compliance with both is complicated by the EU’s blocking legislation, which has recently been updated in light of the US’s position on Iran. We discuss the background to, and application and enforcement of, the blocking legislation below.
This chapter also considers the US anti-boycott laws and provides guidance on advising clients on managing conflicting regimes in that context. The conduct of risk assessments, due diligence and approaches to contractual sanctions clauses are also covered.
Following the UK’s withdrawal from the EU, the UK’s autonomous sanctions regime has emerged creating potential further conflicts for businesses operating globally. We comment at the end of this chapter on the UK’s blocking provisions following Brexit.
The United States has historically embraced embargoes and economic sanctions to facilitate its foreign policy objectives, including when confronted by the competing foreign policy interests of Europe and other world powers. Notably, in the late 1970s, the United States enacted the Export Administration Act of 1979 (the EAA), which provided the President with broad authority over US exports.
The Reagan Administration used the EAA’s power over US exports to confront the Soviet Union’s interests during the Cold War. Specifically, the Reagan Administration deployed an economic embargo to target the construction of a Europe–Siberia pipeline, fearing that the Soviets would use it to leverage support from western Europe and strengthen its military interests. Despite the US’s efforts to curtail Soviet influence, the embargo was short-lived and by the winter of 1982, it was repealed, due in large part to European protests.
Similar to the US’s efforts to curtail Soviet influence in Europe during the Cold War, the Cuban Liberty and Democratic Solidarity (Libertad) Act of 1996 (known as the Helms-Burton Act) was enacted in an effort to rectify US nationals whose property was confiscated by the Cuban Government following the Cuban revolution, and deter foreign companies from establishing economic relations with Cuba. Notably, the Helms-Burton Act’s most significant provision was the authorisation for US nationals to sue companies or individuals that had confiscated or trafficked in confiscated property from Cuba.
The Helms-Burton Act has a renewed relevance today. Although it is not a formal economic sanctions programme, it certainly has affected US and foreign companies that have previously done business in Cuba and with the Cuban government, and those that seek to do so in the future.
US secondary sanctions
In the mid 1990s, the United States continued to implement economic sanctions targeting non-US companies and individuals who did business in countries hostile to the United States. In 1996, for example, the United States enacted the Iran and Libya Sanctions Act of 1996 (now known as the Iran Sanctions Act), the aim of which is to deter investment by non-US companies in Iran and Libya by imposing sanctions on companies and individuals that made investments contributing to Iran’s or Libya’s petroleum sectors. Like the Trans-Siberian pipeline embargo and the Helms-Burton Act, the Iran Sanctions Act was condemned as ‘extraterritorially’ illegal and a violation of international law by many of the US’s trading partners.
The Iran Sanctions Act opened the door for more expansive secondary sanctions and the United States continued that trend into the twenty-first century, including with implementation of the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 (secondary sanctions targeting Iran’s energy sector and foreign financial institutions that engage in certain transactions with Iran), Countering America’s Adversaries Through Sanctions Act in 2017 (secondary sanctions against Russia, North Korea and Iran), and the US’s withdrawal from the Joint Comprehensive Plan of Action (JCPOA) in 2018, which reimposed many of the secondary sanctions against Iran that had been paused as a result of the Iran nuclear deal. In short, despite the challenges posed by the blocking laws of the European Union and the opposition of other government bodies, the United States has continued to implement and enforce sanctions targeting non-US companies and individuals that transact with countries hostile to the US’s foreign policy interests.
The EU Blocking Regulation
Council Regulation (EC) No. 2271/96 (the Blocking Regulation) was adopted by the European Union in 1996 following enactment of the Iran Sanctions Act by the US government. Its purpose is to protect EU persons against the effects of the extraterritorial application of legislation adopted by a third country that damages the interests of the European Union (in reality, currently, only the United States). In an interpretative note, the European Union explains that protection under the Blocking Regulation concerns ‘international trade; and/or the movement of capital; and related commercial activities between the EU and non-EU countries’.
When first adopted, the Blocking Regulation was designed to counteract the US economic sanctions against Cuba, Libya and Iran (as described above). The relevant US measures are set out in the Annex to the Blocking Regulation and these were extended in June 2018 to include additional US sanctions on Iran following US withdrawal from the JCPOA.
The Blocking Regulation applies to:
- any natural person being a resident in the European Union and a national of a Member State;
- any legal person incorporated within the European Union;
- any national of a Member State established outside the European Union and any shipping company established outside the European Union and controlled by nationals of a Member State, if their vessels are registered in that Member State in accordance with its legislation;
- any other natural person being a resident in the European Union, unless that person is in the country of which he or she is a national; and
- any other natural person within the EU, including its territorial waters and air space and in any aircraft or on any vessel under the jurisdiction or control of a Member State, acting in a professional capacity.
In August 2018, the European Commission (the Commission) sought to clarify the position of EU subsidiaries of US companies and subsidiaries of EU companies in the United States. Subsidiaries of US companies that have their registered office, central administration or principal place of business within the European Union are considered to be ‘EU operators’ and therefore subject to the EU Blocking Regulation. This is not the case for EU branches of US companies since they do not have distinct legal personality from their parent company. Nor is it the case for US-based subsidiaries of EU companies that will be subject to the law under which they are incorporated (i.e., generally US law). Their parent companies will of course be EU operators and therefore subject to the provisions of the Blocking Regulation.
The main provisions of the Blocking Regulation are as follows:
- EU operators are prohibited from complying, actively or by deliberate omission, with any requirement or prohibition specified in the measures set out in the Annex. However, EU operators may be authorised by the Commission to comply fully or partially with any of the legislation set out in the Annex if to do otherwise would seriously damage their interests or those of the European Union.
- No decisions of non-EU courts, tribunals or administrative authorities giving effect to the measures set out in the Annex or any actions based thereon or resulting therefrom shall be recognised or enforceable within the European Union.
- If the economic or financial interests of any EU operator are affected by the legislation set out in the Annex (or by actions based thereon or resulting therefrom), they must inform the Commission (or their own competent sanctions authority) within 30 days of the date on which they obtain that information. The reporting obligation applies to directors, managers and other persons with management responsibilities. In addition, the Commission has the power to request additional information.
- Penalties for non-compliance with the Blocking Regulation are to be imposed by each Member State. Article 9 requires that any such sanctions ‘must be effective, proportional and dissuasive’.
The terms of the Blocking Regulation are unclear in a number of ways; for example, in respect of the prohibition on European companies from ‘complying’ with the measures set out in the Annex. In this context, ‘complying’ might be interpreted to mean that business should be conducted in line with the requirements of the relevant measures. Does this therefore mean that European businesses are prohibited from actively deciding that they should not do business in Iran or Cuba because to do otherwise might suggest that they are complying with US economic sanctions? In the EU Guidance Note, the Commission’s response is as follows:
EU operators are free to conduct their business as they see fit in accordance with EU law and national applicable laws. This means that they are free to choose whether to start working, continue, or cease business operations in Iran or Cuba, and whether to engage or not in an economic sector on the basis of their assessment of the economic situation. The purpose of the Blocking Statute is exactly to ensure that that [sic] such business decisions remain free, i.e., are not forced upon EU operators by the listed extra-territorial legislation, which the Union law does not recognise as applicable to them.
The impact of the ‘extraterritoriality’ of the US legislation creates another area of uncertainty. Since the purpose of the Blocking Regulation is to counteract the extraterritorial effect of the measures specified in the Annex, the prohibition under Article 5 will apply only to the extent that measures apply extraterritorially to EU operators. Determining this will largely be a question of fact. In addition, it is unclear whether the Article 5 prohibition applies to US secondary sanctions as well as primary sanctions. US primary sanctions typically apply to entities and individuals that have a US nexus (e.g., US persons, companies organised under the laws of the United States, those using the US financial system, among others), while secondary sanctions are intended to target entities and individuals, regardless of their connections to the United States (e.g., companies organised in foreign jurisdictions, individuals not located in, or citizens of, the United States, among others). Given that primary sanctions do not typically apply extraterritorially therefore to EU companies (with the exception of EU-incorporated subsidiaries of US companies), it might be concluded that primary sanctions are not within scope of the Blocking Regulation and, therefore, EU companies are free to conduct their affairs in line with those sanctions if they so desire. However, the Blocking Regulation and the EU Guidance Note do not provide clarity either way on this matter.
Enforcement and penalties
Local transposition of the Blocking Regulation by Member States is varied. Some have implemented criminal penalties for breach of the provisions (e.g., while a member of the EU, the United Kingdom) and others have imposed administrative penalties (e.g., Germany). Others have not transposed the Blocking Regulation directly into national law (e.g., France).
The risk of enforcement action being taking for breach of the Blocking Regulation (or local law equivalent) will vary between Member States. However, enforcement risk is generally perceived to be low. This may be, in part, as a result of the legal uncertainties surrounding the terms of the Blocking Regulation. It may also be that enforcement agencies acknowledge that for some companies, principally EU-incorporated subsidiaries of US companies, they will be caught between ‘a rock and hard place’ when deciding whether to comply with the relevant US sanctions or the terms of the Blocking Regulation. Taking into account varying enforcement risks between the European Union and the United States, many companies are likely to opt to comply with US sanctions, if relevant, given the much higher level of enforcement risk for sanctions breaches in the United States.
It is perhaps more likely that EU operators who decide to end business with Iranian or Cuban counterparties may be subject to civil claims by those parties for losses caused as a result of their decisions to terminate existing contractual arrangements.
For example, Bank Melli Iran commenced proceedings against Telekom Deutschland GmbH in Germany following issuance of notice to terminate existing contractual arrangements by the telecommunications company against a German branch of the bank. The termination notice was issued subsequent to the designation by the Office of Foreign Assets Control (OFAC) of Bank Melli Iran on the List of Specially Designated Nationals (SDNs) and Blocked Persons (the SDN List) in 2018. The bank claims that notice to terminate the contracts was issued in breach of Article 5 of the Blocking Regulation as it was issued in purported compliance with US secondary sanctions on Iran. On 2 March 2020, the German court made a request to the EU Court of Justice for a preliminary ruling on interpretation of Article 5. It includes seeking a ruling on whether Article 5 only applies if an EU operator is issued directly or indirectly with an official or court order of the United States, or whether it is sufficient for its application that the action of the EU operator is predicated on compliance with secondary sanctions. A ruling is yet to be made.
Separately, Article 6 of the Blocking Regulation provides that any EU operator shall be entitled to recover any damages and legal costs caused to that person by the application of the laws specified in the Annex. This provision is broad and leaves open the possibility that a claim could, for example, be made against the US government for losses caused.
Despite the restrictions imposed by blocking measures enacted by the European Union and others, OFAC has not indicated an interest in easing enforcement for US companies or their foreign subsidiaries that operate in sanctioned jurisdictions. In fact, OFAC’s Framework for Compliance Commitments, issued in May 2019, does not reference the Blocking Regulation, and US authorities take the view that companies whose transactions have a nexus to the United States must abide by US sanctions, regardless of the local restrictions that companies or individuals might have.
Drafting contractual provisions
Drafting robust sanctions compliance provisions is crucial to the effective performance of contracts particularly in financing and trade arrangements. The strength of these provisions will vary depending on the sanctions risk (both present and future) to a particular arrangement or transaction. Difficulties will arise when multiple jurisdictions and conflicting sanctions regimes are involved.
Even more challenging is the need to proof contracts from the risk that they might include terms that imply an obligation to comply with sanctions legislation imposed by third countries. For example, the English courts have held that a non-default clause in an agreement governed by English law including the words ‘mandatory provision of law’ was wide enough to include both primary and secondary US sanctions in circumstances where neither party to the agreement was a US person, nor did the transaction have a US connection. This enabled a party to suspend payments under the agreement.
In addition, it is vital that parties do not breach the terms of the Blocking Regulation by agreeing to comply with relevant US measures (as set out in the Annex to the Blocking Regulation). Typically, agreements will require parties to confirm that they have not, and will not, breach relevant sanctions. If a US person is involved in such an agreement, relevant sanctions will be defined to include US sanctions and limits will be placed on dealing with persons designated by OFAC under those sanctions. Article 5 of the Blocking Regulation could be interpreted widely to mean that compliance with such terms amounts to ‘complying’ under Article 5.
To work around the implications of the Blocking Regulation, contractual parties often carve out the terms of that Regulation from an obligation to comply with US sanctions. In those circumstances, a compliance with sanctions clause would not be applicable to the extent that is inconsistent with the Blocking Regulation.
German nationals (legal and natural) are prohibited from issuing or participating in a boycott declaration. Terms that define the breach of a sanctions clause as an event of default under the contract might also fall foul of the anti-boycott legislation since the party in breach would suffer adverse consequences. German contractual parties therefore typically seek to include a carve out from compliance with sanctions that are inconsistent with the terms of the anti-boycott legislation and that either opt in or opt out of particular terms.
An alternative approach is for contractual parties to limit terms relating to compliance with sanctions to the facts of a specific transaction. For example, it may not be necessary for parties to agree to continuing compliance with US sanctions on Iran if they carry out no business in Iran or with Iranian parties. When permitting a counterparty to adopt such an approach, it is recommended that due diligence is undertaken, for example, to obtain a clear understanding of the counterparty’s business, likely use of funds (in a financing arrangement) and to determine the legal possibility and risk of that party breaching US sanctions.
US anti-boycott laws
The current iteration of the US’s anti-boycott laws were first enacted in the middle to late 1970s with the Ribicoff Amendment to the Tax Reform Act of 1976 (TRA) and the EAA. Both statutes were enacted in response to the Arab League’s boycott of Israel, although neither explicitly referenced Israel or the Arab League’s boycott. The US Department of Commerce’s Bureau of Industry and Security (BIS) administers and enforces the EAA’s anti-boycott provisions through the Export Administration Regulations (EAR), while the US Department of the Treasury is responsible for administering and enforcing the TRA’s anti-boycott provisions, which are contained in Section 999 of the Internal Revenue Code.
The EAR’s anti-boycott restrictions apply to the activities of US persons that do business in the interstate or foreign commerce of the United States. The EAR defines ‘US person’ as ‘any person who is a United States resident or national, including individuals, domestic concerns, and “controlled in fact” foreign subsidiaries, affiliates, or other permanent foreign establishments of domestic concerns’.
Similarly, the anti-boycott provisions of the TRA, which are contained in Section 999 of the Internal Revenue Code, apply to any US person, defined as a citizen or resident of the United States, a domestic partnership, a domestic corporation, any estate (other than a foreign estate), and any trust subject to US supervision or control.
The EAR prohibits a wide range of conduct relating to unauthorised boycotts. Specifically, US persons may not:
refuse, knowingly agree to refuse, require any other person to refuse, or knowingly agree to require any other person to refuse, to do business with or in a boycotted country, with any business concern organized under the laws of a boycotted country, with any national or resident of a boycotted country, or with any other person, when such refusal is pursuant to an agreement with the boycotting country, or a requirement of the boycotting country, or a request from or on behalf of the boycotting country.
In addition, US persons are prohibited from furnishing, or knowingly agree to furnish, ‘information concerning his or any other person’s past, present or proposed business relationships’ with or in a boycotted country, with any business concern organised under the laws of a boycotted country, with any national or resident of a boycotted country, or with any other person who is known or believed to be restricted from having any business relationships with or in a boycotting country.
With regard to the TRA, Section 999(b) of the Internal Revenue Code prohibits agreements to participate or cooperate in international boycotts, which includes instances in which a person agrees to refrain from doing business with a country that is the object of a boycott, refrain from doing business with a US person engaged in trade in a country that is the object of a boycott, or refrain from doing business with any company whose ownership or management is made up of individuals of a particular nationality, race or religion, among other potential grounds.
Under the EAR, all US persons are required to report to BIS once a quarter whenever they receive a ‘request to take any action which has the effect of furthering or supporting a restrictive trade practice or boycott fostered or imposed by a foreign country against a country friendly to the United States or against any United States person’. Such a request can either be verbal or in writing, and can include a request to furnish information or enter into or implement an agreement. It may also include a solicitation, directive, legend or instruction that asks for information or that requests a US person to take or refrain from taking a particular action.
Under the TRA, US persons must annually report the receipt of any requests to participate in or cooperate with a boycott, regardless of whether they plan to assent to any request. Section 999’s reach is broad, such that if the taxpayer ‘knows or has reason to know that participation in or cooperation with an international boycott is required as a condition of doing business’ within a boycotting country or with a boycotting entity, the taxpayer must report, regardless of whether it has direct contact with that country or entity.
Penalties and enforcement
Penalties for violations of US anti-boycott laws can be severe. Administrative penalties under the EAR can include a denial of export privileges and the imposition of monetary fines up to US$50,000 per violation. Criminal penalties can include monetary fines of up to US$1 million and up to 20 years’ imprisonment for wilful violations. BIS, in enforcing the EAR, encourages voluntary self-disclosure, which can qualify as a mitigating factor if done properly.
Violating the TRA may result in adverse tax consequences, including the loss of foreign tax credits and the exclusion of extraterritorial income from gross income. Liability attaches under the TRA if a US person fails to report prohibited boycott activity to the Internal Revenue Service. Specifically, any person who wilfully fails to report faces fines of up to US$25,000 and imprisonment for up to one year.
Acceptable forms of contractual language
In drafting agreements for transactions (including letters of credit) in which a boycott-related issue arises, there are several important factors to consider in complying with applicable US law and protecting a company after an agreement is finalised. First, companies should consider whether the parties have a nexus to the United States and, if so, whether they are subject to the US’s anti-boycott laws. Second, if the parties are subject to the US’s anti-boycott laws, then careful attention to the agreement’s contractual language is necessary, including any references to Israel or other unsanctioned boycotts. For example, a reference to Israel in a charterparty agreement for a vessel transporting petroleum in the Middle East could be a red flag that necessitates further enquiry to ensure there is no violation of the anti-boycott laws. Third, attention should be given to requests to furnish information, including, for example, information regarding prior port calls or business activity in Israel or other boycotted jurisdictions. Finally, those subject to US anti-boycott laws should consider the exceptions contained in the EAR and other laws, including those that permit certain activities necessary to comply with local law in foreign jurisdictions.
Advising clients subject to US and EU regimes
Relevance of due diligence and risk assessment
In any commercial setting, performing due diligence for a contemplated transaction and screening the relevant counterparties is an essential component of an effective compliance programme. Due diligence should examine the background of the parties, including a particular focus on those who are nationals of or otherwise resident in sanctioned jurisdictions (for example, Iran). In addition, consideration should be given to the flow of funds, including ensuring that funds do not transit sanctioned jurisdictions, companies or financial institutions. Transactions that involve high-risk jurisdictions should exercise caution in transiting the US financial system, including the use of the US dollar (which may clear through US accounts) as OFAC has targeted non-US companies for ‘causing’ US correspondent banks to violate sanctions by processing otherwise sanctioned payments.
Additionally, in providing credit facilities and other lending transactions, the lender should ensure that the borrower, and any subsidiaries or affiliates that might access the loan proceeds, have controls in place to prevent those proceeds from being used in, or for, activities that violate EU or US sanctions. If a borrower uses loan proceeds to transact with a party subject to sanctions or in a manner that violates sanctions, then the lender could face sanctions liability.
Notably, the concepts of facilitation and predominance are particularly relevant in the context of credit facilities and other large commercial transactions. Under the US’s Burma sanctions, which the Obama administration withdrew in October 2016 (but recently have been reimposed in a targeted manner), US persons were prohibited from investing in a third-country company when that company’s profits were predominantly derived from Burma. In a sense, this rule prevented US persons from doing indirectly what they were prevented from doing directly, and is closely aligned with the concept of facilitation, which prohibits US persons from approving, financing, facilitating or guaranteeing any transaction by a foreign person ‘where the transaction by that foreign person would be prohibited . . . if performed by a [US person] or within the United States’. The concepts of facilitation and predominance differ in the sense that predominance penalises companies that profit from business in sanctioned jurisdictions, whereas facilitation is meant to prevent US companies from enlisting foreign entities or individuals to engage in conduct that they themselves could not otherwise perform. In short, while predominance is a concept to consider when transacting with companies that have a large presence in sanctioned jurisdictions, the risk of facilitation also poses a significant risk, especially with regard to US companies that have foreign affiliates or subsidiaries, or counterparties involved in cross-border transactions in high-risk jurisdictions.
Use of general and specific licences
Under US sanctions administered by OFAC, there are general and specific licences, each of which authorises activities that are otherwise prohibited by US law. General licences authorise a particular type of transaction for a class of persons without the need to apply for a specific licence from OFAC. A specific licence is a written document issued by OFAC to a particular person or entity, following an application process, that authorises a particular transaction or set of transactions. Both general and specific licences are typically limited to a specific period and range of activities and persons. Broadly speaking, activities that are ‘ordinarily incident and necessary’ to a licensed transaction are also often authorised, such as funds transfers and certain shipping transactions.
In relying on a general or a specific licence, companies and individuals should ensure they are performing the precise range of activities authorised by the licence, and doing so within the timeframe specified by the licence (typically two years for a specific licence and often shorter for a general licence). In addition, parties should be mindful of wind-down periods or OFAC’s expectation that the business activity will be wound down prior to expiry of the licence.
Finally, when a US company or its foreign affiliate transacts with a counterparty that relies on a specific licence, the US company or foreign affiliate should request a copy of the licence before engaging in the business relationship. Upon receipt of the licence, it is important to confirm that the licence is valid, the business activity contemplated is covered by the licence and that the timeframe of the anticipated business transactions will not extend beyond the expiration date set forth in the licence. OFAC will often renew a specific licence but there is no guarantee, and OFAC is under no obligation to do so.
Moreover, although OFAC will generally not grant specific licences for activities that have no US nexus, non-US companies are still permitted to seek formal written guidance from OFAC through the licensing process and informal guidance from OFAC via its hotline. In addition, EU operators cannot request a licence from OFAC to be exempt from the application of extraterritorial sanctions listed in the Blocking Regulation. To seek a licence is very likely to demonstrate ‘compliance’ with the US sanctions under Article 5. However, the Commission acknowledges that it does not consider conversations with OFAC to understand the effects of the sanctions to amount to compliance.
Representations and warranties
In negotiating cross-border transactions, it is often prudent to consider sanctions-related written representations and warranties as a way to mitigate against future risks. For example, in lending transactions, the lender should consider requiring that the borrower affirmatively represent and warrant that it will not use the loan proceeds for purposes that violate applicable sanctions (e.g., a ‘use of proceeds’ clause). This representation and warranty can often apply to the borrower’s subsidiaries, affiliates, employees, officers and directors, and any others that might have access to the loan proceeds.
Additionally, parties in cross-border transactions can protect their interests by including contractual provisions that govern what will occur if a sanctions violation is suspected or detected. For example, a lender should consider including information request and notification clauses in the applicable loan agreements, whereby if the borrower learns of a potential sanctions violation, it will be required to report that to the lender and the lender will be permitted to request additional information, as necessary to ensure the loan has not been used for sanctioned purposes or that the loan principle is at risk of being frozen.
Finally, to the extent that a party to a transaction has a sanctions-related problem, there should be some mechanisms built into the transaction to permit an orderly exit. For example, in the context of a revolving credit facility, the lenders should have the option to exit the facility following notice that the borrower violated sanctions or itself is subject to sanctions. These types of incidents frequently qualify as events of default.
Foreign subsidiaries of US persons
Foreign subsidiaries of US companies are generally subject to OFAC jurisdiction under certain sanctions programmes (e.g., Cuba and Iran), and, as discussed below, there is risk to foreign subsidiaries under additional theories of liability.
First, US citizen employees, officers and directors can face individual liability for failing to comply with US economic sanctions, even if they are employed by a non-US company and are located outside the United States. For example, US citizens are required to block an SDN’s property and interests in property that they possess or control, regardless of where they are located. Thus, if a US citizen is an officer or director of a foreign company, and possesses or controls property of an SDN, then that US citizen must block that property. In those circumstances, an officer, director or employee who is a US citizen might consider recusal out of an abundance of caution.
Second, foreign subsidiaries of US companies face risks doing business even in sanctioned jurisdictions other than Iran and Cuba. For example, foreign subsidiaries could face US regulatory exposure for doing business in a sanctioned jurisdiction (other than Iran or Cuba) if the transaction transits the US financial system or otherwise has a nexus to the United States. If the US parent company is a public company, then this could also trigger a public reporting requirement if an enforcement investigation is initiated, an apparent violation is voluntarily self-reported to OFAC or an SDN designation occurs. Additionally, if operations are coordinated between the US entity and the foreign entity, or there are dual-hatted employees, then that could also raise the risk of sanctions exposure, including under facilitation, conspiracy to evade sanctions or ‘causing’ theories of liability. Notably, OFAC has advised of the risk that companies subject to US jurisdiction face in referring business opportunities, approving or signing off on transactions conducted by, or otherwise facilitating dealings between their company’s non-US locations and sanctioned jurisdictions, regions or persons.
Third, the US government has aggressively targeted non-US persons for designation who have ‘materially assisted’ or otherwise provided financial support to SDNs. For example, although there is no formal secondary sanctions regime for Venezuela, OFAC has targeted non-US persons for transacting and otherwise supporting the government of Venezuela and other sanctioned entities that the US has a foreign policy interest in isolating from the world economy.
Finally, credit agreements and other material contracts can subject foreign subsidiaries of US companies to more stringent regulatory requirements than the strict letter of the law. As part of a risk-based approach, US companies and their foreign subsidiaries should review their material contracts to ensure they are in compliance with their contractual obligations, and not simply rely on a strict letter of the law approach as it relates to US sanctions.
Brexit and the EU Blocking Regulation
As with other EU sanctions, the Blocking Regulation was directly applicable in UK law. However, for criminal penalties to be imposed for breach, it was transposed into UK law, and was retained following the UK’s withdrawal from the European Union on 31 January 2020. The transposing legislation was amended with effect from 1 January 2021. The amendments principally ensure the continued effectiveness of the blocking legislation by, for example, removing references to ‘the EU’ and ‘Commission’. The UK government has issued guidance on the operation of the blocking provisions in the UK.
Going forward, the United Kingdom will be free to make additional changes to the Blocking Regulation but is unlikely to do so in the short term. In the Explanatory Memorandum that accompanied the draft amending legislation, the UK government stated:
We will continue to work with our European partners on matters of significance to the UK, even as we leave the EU. We intend to uphold the policy intent of the Blocking Regulation in our statute book once we have left the EU, so that we can mitigate the impact of extraterritorial sanctions on our trading interests. The UK will assume responsibility for listing extraterritorial sanctions legislation with which UK businesses must not comply.