Managing the convergence of changing sanctions and the human rights and anti-corruption movements
March 2018 | SPECIAL REPORT: MANAGING RISK
Financier Worldwide Magazine
March 2018 Issue
The challenge of keeping pace with the increased compliance burden posed by US and other sanctions regimes has heightened over the past year. New sanctions programmes have emerged; others have waxed or waned. Furthermore, sanctions tools that traditionally have been associated with foreign policy objectives increasingly have become instruments of the human rights and anti-corruption movements.
For global businesses, it may be a good time to take stock of the latest developments and consider how best to ensure compliance with all of the new sanctions, including whether measures originally designed to ensure supply chain integrity might also be deployed towards sanctions compliance.
In the US, the top-billed sanctions development of the past year was enactment of the Countering America’s Adversaries Through Sanctions Act (CAATSA). This legislation, signed into law in August 2017, imposed sanctions and required reports related to Iran, Russia and North Korea. On several fronts, the legislation ‘codified’ and strengthened existing sanctions, thereby depriving the Executive Branch of the flexibility to modify, lift or waive certain sanctions, particularly as related to Russia.
However, despite delayed implementation of the tighter restrictions on providing financing to the Russian financial, energy and defence sectors, these changes not only set the US further apart from its allies in implementing Russia sanctions, but posed significant challenges for businesses which now face shorter than normal invoicing periods and the consequent need to re-evaluate invoicing policies and contract terms applicable to business conducted in Russia.
The legislation also introduced new sanctions and other requirements related to Russia, and the perceived ‘slow walking’ of the implementation of these measures has set the Trump administration and Congress on a collision course. The result has been a marked increase in the level of regulatory uncertainty.
One aspect of CAATSA that has drawn much attention and created uncertainty is the requirement for so-called ‘secondary’ sanctions related to transactions with the Russian defence and intelligence sectors. Specifically, CAATSA instructed the US Department of State (DOS) to publish a list of Russian persons and entities with which “significant transactions” will attract sanctions effective as of 29 January 2018. However, CAATSA did not clearly define what constitutes a significant transaction, and DOS guidance, while somewhat helpful in identifying the factors to be considered, does not draw a bright line. CAATSA also required the US Department of the Treasury to produce a list of Russian senior foreign political figures and ‘oligarchs’.
The list, published on 29 January 2018, was accompanied by repeated assurances from the Trump administration that this is not a sanctions list and that CAATSA merely required reporting of the list but not imposition of sanctions against the listed persons. However, the prospect of further Congressional action has left the business community with significant doubts on this point.
The spectre of uncertainty has also affected those attempting to do business with Iran. Two years on from implementation of the Joint Comprehensive Plan of Action (JCPOA), president Trump issued a “last chance” waiver of secondary sanctions under the JCPOA and challenged Congress to devise a “fix” for what he views as the deficiencies of the JCPOA. Meanwhile, the limited relaxation of primary sanctions that resulted from the JCPOA – i.e., general licences permitting certain activities by foreign subsidiaries of US companies and certain trade in the commercial passenger aircraft sector – would also appear to be in jeopardy if the US withdraws from the JCPOA.
Adding to the uncertainty for US persons is the fact that licence applications pursuant to the JCPOA licensing policy appear to be languishing under the Trump administration, as well as the complex and less than clear-cut compliance burdens faced by US companies and their subsidiaries if a decision is taken to allow the subsidiaries to do business in Iran.
CAATSA and subsequent implementation of United Nations Security Council Resolutions have also resulted in additional sanctions against North Korea, both on the primary sanctions front (i.e., sanctions that restrict the conduct of US persons) and in the secondary realm (i.e., sanctions that promise consequences for specified activities of non-US persons). Along with non-proliferation objectives, human rights protections took centre stage. Title III of CAATSA prohibited entry into the US of goods produced with North Korean labour and provided for the imposition of secondary sanctions against non-US persons who knowingly employ North Korean labourers.
In addition, protection of human rights motivated new designations under existing executive orders of individuals and entities in Iran who have been responsible for human rights abuses and censorship in Iran. The Office of Foreign Assets Control (OFAC) also issued designations under a new executive order designed to implement the Global Magnitsky Act, the purpose of which was “to impose tangible and significant consequences on those who commit serious human rights abuses or engage in corruption, as well as to protect the financial system of the United States from abuse by [such persons]”.
The Global Magnitsky Act requirements are separate from the CAATSA requirements for mandatory sanctions focused on Russian corruption and human rights abuses, upon which the Trump administration has not yet acted. Furthermore, new sanctions against Venezuela also were motivated by the fight against government corruption and repression.
Even in areas in which sanctions have been lifted or relaxed, uncertainty and compliance challenges prevail. In the past year, the Trump administration followed through on the process begun by the previous administration of ‘lifting’ the sanctions against Sudan, but lingering statutory requirements continue to pose challenges for some businesses. Although reformation of the Cuba embargo largely remained in place following the Trump administration’s announcement of its Cuba policy, some new restrictions were imposed on permitted transactions.
With all of the complexities of the current sanctions regime and the surrounding uncertainty, the days when compliance personnel could rely on name screening and a list of countries subject to comprehensive OFAC embargoes have been relegated to distant memory. Not only have OFAC’s ‘country’ embargoes become multi-faceted (including everything along a spectrum from limited blocking or sectoral sanctions to comprehensive embargoes), but regional embargoes have joined OFAC’s toolkit (the case of Crimea, for example), and companies with a global footprint must also comply with the varying sanctions programmes of all countries in which they do business. Like the US, many other countries have implemented sanctions focused on human rights abuses and corruption, but many key differences between US and other sanctions regimes remain, and some have been exacerbated by CAATSA and other developments over the past year.
How, then, to ensure compliance in this rapidly changing environment?
There is no one-size-fits-all when it comes to sanctions compliance, in part because the level of sophistication that regulators expect in a compliance programme depends on the company. Large sophisticated companies, doing business overseas and in regulated areas, are expected to have more robust compliance programmes than small domestic operations that may only do a handful of international transactions per year. While lack of clear compliance directions from OFAC and other regulators can be frustrating, it also allows companies the flexibility to tailor their compliance programmes to their specific risks and risk tolerances.
Though many companies incorporate it into their sanctions compliance programmes, ‘name-screening’ is not required per se. However, the proliferation of sanctions aimed at corruption and human rights abuses has magnified the need for screening of all parties to contemplated transactions, irrespective of the country ostensibly involved. For companies that do choose to name-screen, OFAC offers a free name screening tool and there are also private software solutions that can provide companies with greater screening capabilities. Such software has long been used in the anti-corruption compliance field as a key component of broader due diligence techniques. Many companies may find that the due diligence programmes they have adopted to eliminate corruption or human trafficking from their supply chains can be deployed to avoid dealing with persons who are, or are at risk of becoming, subject to sanctions for corruption and human rights abuses.
In some cases, again borrowing from anti-corruption programmes that may be more developed in this respect, companies may wish to mitigate sanctions risks in the contracting phase. For example, a contract could have flow-down provisions to ensure that individuals and entities subject to US sanctions do not participate in any part of the transaction. Given the uncertainty surrounding possible implementation of new sanctions, companies may also wish to incorporate clauses that allow withdrawal from the contract if the other party becomes subject to US secondary or primary sanctions. Of course, the devil will be in the details, and careful drafting will be required to ensure that such clauses cover all possible outcomes and any necessary licensing requirements.
Whatever compliance measures a company adopts, they must be implemented via clear policies and procedures. Not only do clear policies and procedures reduce a company’s risk of committing a sanctions violation, they can also be counted as a mitigating factor by OFAC should a sanctions violation ever be discovered. Though the specifics of every compliance programme differ, all should include provisions for regular training and audits.
That said, as sanctions programmes become more widespread and complex, companies should be mindful that the ability of most employees to absorb additional details given already significant demands on their time may be limited. Training may have to be divided into manageable sessions, both from a time and information overload perspective. In addition, although it may require a somewhat greater investment of time to incorporate sanctions compliance procedures into tangible job-specific work instructions, the pay-off will be better compliance and fewer inadvertent violations – the reporting of which should also be the subject of clear policies and procedures that take into consideration the possibility that the US may not be the only jurisdiction with an interest in the disclosure.
Barbara D. Linney is a partner and Patrick M. Stewart is an associate at Miller & Chevalier. Ms Linney can be contacted on +1 (202) 626 5806 or by email: firstname.lastname@example.org. Mr Stewart can be contacted on +1 (202) 626 1582 or by email: email@example.com.
© Financier Worldwide
Barbara D. Linney and Patrick M. Stewart
Miller & Chevalier