Difficult times ahead – the sanctions compliance world is getting more complex for Swiss companies

As a Swiss small, medium or multinational company, the struggle for compliance managers to assess the impact of recent global political turmoil, including market protectionism dressed as sanctions and retaliatory measures, is very real. MME presents a brief recap, followed by important considerations for assessing risks.

1. The First Act

a) US and JCPOA

Effective May 8, 2018, the US President withdrew from the Joint Comprehensive Plan of Action (“JCPOA”). The US Government will therefore re-instate the sanctions on Iran that were lifted or waived following the implementation of the JCPOA. Sanctions will be re-instated on August 7, 2018, and November 5, 2018, following the end of 90-day and 180-day “wind-down” periods. With President Tumps’ decision, a multinational contractual agreement has been unilaterally cancelled by the US. Companies around the world that began re-building relations in Iran have to wind down any contractual agreements and operations – or alternatively face the risk of being sanctioned by US enforcement agencies or being banned from US markets, as well as from the international financial system dominated by the USD.

b) US and CAATSA

Besides this, the US and EU are fighting another sanction battle. The US has stepped up their opposition to Nord Stream2, a gas pipeline project between Russia and Germany, and is threatening to impose sanctions on the companies involved by means of the US CAATSA federal law. CAATSA allows US enforcement agencies to impose sanctions on entities and persons that are undermining US sanctions regime against Russia, even if the activities of those individuals or entities have no US nexus at all.

c) US and China

President Trump also shocked his own agencies when announcing via twitter that he had instructed the Commerce Department to rewind the ZTE ban, which resulted from significant violations of US re-export regulations and sanctions. This is an unprecedented presidential involvement into a sanctions case and shows that the US is increasingly using sanctions as an instrument of strategic negotiations, politics and trade. “President Xi of China, and I, are working together to give massive Chinese phone company ZTE a way to get back into business, fast. Too many jobs in China lost. Commerce Department has been instructed to get it done!”

2. The second Act; Counter-Reactions

a) EU and JCPOA

Unlike the US, the EU is willing to stick to the contractual agreement with Iran. Even more, the EU is ready to impose a blocking statute that will require EU companies to ignore US sanctions against Iran, while offering companies a theoretical access to compensation for potential financial impact derived from US sanctions. European Commission President Jean-Claude Juncker said on Thursday: “As the European Commission, we have the duty to protect European companies. We now need to act and this is why we are launching the process to activate the ‘blocking statute’ from 1996. We will do that tomorrow morning at 1030.” He also added: “We also decided to allow the European Investment Bank to facilitate European companies’ investment in Iran. The Commission itself will maintain its cooperation with Iran.”

The Council regulation EC 2271/96 he is referring to was enacted in 1996, protecting EU companies against the effects of the extra-territorial application of legislation adopted by a third country. The EU's blocking statute bans any EU company from complying with US sanctions and does not recognize any court rulings that enforces American penalties. It was developed when the United States tried to penalize foreign companies that traded with Cuba in the 1990s, but has never been formally implemented. On May 18, the Commission said in a statement that it had "launched the formal process to activate the Blocking Statute by updating the list of US sanctions on Iran falling within its scope". The EU measure would come into force within two months, unless the European Parliament and EU governments formally reject it. It could also be activated sooner if there was strong political support.

b) Russia Countering Western Sanctions

Russia is now entering the sanctions theatre as an active player. The Russian parliament's lower chamber has passed a draft law in a second reading that, if enacted, imposes criminal liability for compliance with US and other foreign sanctions against Russian parties. The proposed changes (section one of article 283.2 of the Criminal Code) would qualify any action or inaction to comply with foreign sanctions, such as restrictions on, or refusal to engage in customary business with Russian nationals, companies or governmental entities and affiliates, as a criminal act. Violations of this provisions could result in criminal liability for individuals of up to four years’ imprisonment or a fine. The application of this provision is not limited to Russian persons or entities, but applies also to foreign companies and individuals. Section 2 of the proposed amendment criminalizes intentional facilitation of foreign sanctions by e.g. providing information to foreign authorities that may result in sanctions of Russian persons or entities or affiliates. Violations may result in up to three years imprisonment or a fine.

It remains to be seen how Switzerland will place itself in this political compliance turmoil. It’s very likely that Switzerland will stick to the JCPOA agreement, however Swiss companies are facing significant issues with foreign extraterritorial regimes such as the US, EU and Russia and may have to choose the regime they want to comply with based on a thorough analysis of risk and impact and an active management decision.

d) Other Countries

We will see in the next weeks, how other important players in the global trade landscape, such as China, Japan, or India, will react to the new US and Russian sanctions policy.

3. The third Act; Navigating Through Uncertain Sanctions

The activation of the EU blocking statute against Iranian sanctions and the Russian counter sanctions are strong political signals, however the practical impacts remain to be seen. Many companies and financial institutions will face the challenge of choosing between compliance with one jurisdiction or another. Compliance will become a juggling act of balancing risk and fines between different regimes.

In order to assess the risk impact on your organization, consider the following elements;

a) Understand the Jurisdictional Landscape

• Ensure you’ve considered exposure to all applicable extraterritorial sanctions and export control regulations (U.S., EU, China, potentially Russia). In particular, the EU blocking statue as well as the Russian counter sanctions both have extraterritorial application. Remember that even a minimal US nexus (i.e. US technology above the de minimis level) will subject transaction and entities to US jurisdiction.

• In the case of US sanctions against Russia under CAATSA, no US nexus is required for the US to impose penalties on companies. Being involved in projects like NordStream2 may be sufficient grounds for being sanctioned and cut off from the US market.

b) Develop a Risk Matrix

• Having an overview of your risk landscape in the form of a risk matrix, will help senior management understand the impact of the decisions to be taken.

• Quantify the magnitude of the impact and the likelihood of the risks for involved entities and individuals

Assess existing business relationships for risk and liability exposure

c) Active Regime Management

• Develop a strategy and rules around the different regimes;

• Ensure close monitoring on daily changes;

• Follow Trump on Twitter