GUIDANCE NOTE UNITED STATES AND EUROPEAN UNION SANCTIONS

Transcription

1 GUIDANCE NOTE UNITED STATES AND EUROPEAN UNION SANCTIONS 1. INTRODUCTION This guidance note provides a brief and non-comprehensive overview of the legal basis of US and EU sanctions regimes and flags transactional concerns and potential protections that Members may wish to consider including in loan documentation, where relevant in the context of a particular transaction. Details of the scope of US and EU sanctions in force as at the date of this note can be found on the websites of the relevant authorities. 1 It should be noted that sanctions issues are complex and relevant laws and regulations change frequently. In all cases, the precise impact of sanctions on any individual transaction will always be fact-specific and, therefore, should sanctions be of particular concern, specialist advice should be sought. This guidance note (and the information contained within it) is not legal advice, and must not be relied upon, whether as legal advice or otherwise. 2. SANCTIONS OVERVIEW 2.1 US Sanctions and OFAC (c) The Office of Foreign Assets Control of the US Department of the Treasury ("OFAC") implements and administers US economic sanctions in the service of US foreign policy and national security objectives, including those based on or derived from United Nations Security Council ("UNSC") Resolutions. The relevant statutes upon which OFAC derives its authority include the Trading with the Enemy Act (which applies to US economic sanctions against Cuba) and the International Emergency Economic Powers Act. There are also other US statutes authorising US extraterritorial sanctions against Iran, and to a much lesser extent, Syria, including the Iran Sanctions Act, the Comprehensive Iran Sanctions Accountability and Divestment Act of 2010, the Iran Threat Reduction and Syria Human Rights Act of 2012, the Iran Freedom and Counter-Proliferation Act and others. The scope and severity of each sanctions programme varies according to foreign policy, national security and domestic political considerations. Sanctions may apply to particular countries or territories (including its citizens, residents and commercial enterprises) or less broadly to specific individuals and entities. Persons and entities specifically targeted are listed on OFAC's Specially Designated Nationals and Blocked Persons list ("SDN List"). 1 For US measures, see: Foreign-Assets-Control.aspx. For EU measures, see:

2 However, OFAC sanctions also apply to entities owned, directly or indirectly, 50% or more by a person or entity on the SDN List (collectively "SDNs"). (d) (e) Generally, US sanctions apply globally to "US Persons", being US citizens and permanent US residents or green card holders, persons within the US, entities organised under US law (including foreign branches) and, in the case of sanctions against Cuba and Iran, non-us subsidiaries of US firms. OFAC also enforces sanctions requirements against non-us persons in relation to their transactions involving US Persons or the US financial system (which means all deals in US Dollars that transmit through the US). Further, OFAC regulations prohibit US Persons from facilitating transactions by non-us persons if such a transaction would be illegal for US Persons to undertake directly. Finally, US sanctions prohibit transactions by US Persons or through US territory or the US financial system intended to evade US sanctions laws and regulations. Other relevant US laws may broaden the reach of US sanctions and this is something to be aware of, but the detail of all such provisions is wide-ranging and goes beyond the scope of this guidance note. 2.2 European Union (c) The EU applies sanctions and restrictive measures to third countries, entities and individuals as part of its Common Foreign and Security Policy. It does so either: (i) in order to implement UNSC Resolutions; or (ii) independently of the United Nations, in order to implement a Council Decision which defines the EU's approach to a particular matter (such as the imposition of restrictions against a country or group). Sanctions are implemented by the EU through Council or Commission regulations which are directly applicable in all Member States. Responsibility for the administration and enforcement of such regulations rests with the competent authorities in each Member State, where relevant domestic legislation may be enacted (for example, to provide for breaches of sanctions to be criminal offences). In the UK, EU financial sanctions are administered by HM Treasury. 2 Generally, EU sanctions give rise to compliance obligations for "EU Persons", being any person within the EU; any person who is a national of a Member State; any legal person, entity or body which is constituted in a Member State or which conducts any business within the EU; and any person on board an aircraft or vessel under the jurisdiction of a Member State. Entities incorporated outside the EU are not required to comply with EU sanctions except in respect of business done in whole or in part within the EU. EU sanctions tend to comprise targeted sanctions in relation to designated individuals, groups or entities (each, a "Designated Person"); and other specific prohibitions or controls which are directed at particular industries, sectors and/or activities. Of particular relevance to financial institutions, EU 2 See:

3 sanctions generally prohibit EU Persons from making any funds or economic resources available, directly or indirectly, to or for the benefit of a Designated Person (except under the authority of a licence granted by the competent authorities in a Member State). 3 In addition, there is an accompanying requirement on EU Persons to freeze funds or economic resources which belong to (or which are owned, held or controlled by) a Designated Person. 4 The EU maintains a consolidated list of Designated Persons. 5 (d) EU sanctions may impact on the ability of EU Persons to engage in transactions with (non-designated) entities that are owned and/or controlled by a Designated Person. The principles for establishing ownership and/or control by a Designated Person and the consequences which may flow from this regarding the application of EU sanctions are complex, and beyond the scope of this guidance note. 2.3 Sanctions imposed by individual EU Member States Sanctions programs enacted by the EU through Council or Commission regulations are directly applicable in all Member States. For completeness, please note that individual Member States may also enact measures over and above the sanctions programs enacted by the EU. Those measures may, for example, target individuals, groups or entities which are deemed to pose a domestic threat; or seek to place additional restrictions on conducting business with individuals and entities in particular jurisdictions outside the EU. 3. ISSUES ARISING FROM US AND EU SANCTIONS FOR LOAN TRANSACTIONS Lenders will wish to ensure that the transactions they enter into are compliant with applicable sanctions regimes for a number of reasons, including: (i) (ii) Lenders could be subject to civil and/or criminal penalties for failure to comply with applicable laws and regulations, whether such failure is direct or arises as a result of the use by the Borrower of the proceeds of a loan; if sanctions affect a loan transaction, then there are potential credit issues in ensuring Lenders are repaid (see paragraph (c) below); and "Funds" is defined broadly in EU sanctions regulations, and means financial assets and benefits of every kind. "Economic resources" are assets of every kind (whether tangible or intangible, movable or immovable) that are not funds but may be used to obtain funds, goods or services in any way (for example, by selling, hiring or mortgaging them). The requirement to freeze funds is also defined broadly, and means preventing any " move, transfer, alteration, use of, access to, or dealing with funds in any way that would result in any change in their volume, amount, location, ownership, possession, character, destination or any other change that would enable the funds to be used, including portfolio management". The list is available at:

4 (iii) there are risks of damage to reputation in the event that a Lender is involved in a transaction which gives rise to a breach of sanctions or where a Lender is thereby associated with a sanctions target even if the transaction is legal for the parties. (c) However, Borrowers may be resistant to the inclusion of sanctions protections in loan transactions on the basis that they may be drafted very widely to pick up the large body of law and regulation that applies in this area and in some cases will require an institutional policy that extends beyond legal requirements. Moreover, as sanctions regimes are complex and subject to frequent change, it is difficult to confirm compliance with those laws and regulations on an ongoing basis. In addition, a Borrower may be beyond the jurisdictional reach of OFAC and/or EU sanctions itself and may legitimately wish to contract with sanctions targets. If sanctions affect a loan transaction, the sanctions may impact on the following provisions of a standard LMA Facility Agreement: (i) Payments by the Borrower The ability of a Borrower to repay interest or principal on a loan may be restricted by sanctions. For example, assets of a Borrower designated under sanctions may be frozen and/or third parties may be required to freeze/block payments by the Borrower (unless a licence has been obtained, depending on the specific circumstances and the sanctions regime involved). Sanctions may also affect the ability of an Agent to distribute to Lenders funds that are received from a designated Borrower. (ii) Lenders' rights Standard illegality/unlawfulness provisions in loan documentation may be insufficient to allow Lenders to accelerate and/or decline future utilisation requests in the event that the Borrower (or a relevant affiliate) is designated under a relevant sanctions regime, or sectorrelated restrictions are introduced. For example, depending on the sanctions regime in question, it may still be lawful to make payments into a frozen bank account for the Borrower; or to make payments to the Borrower under a licence from the relevant authorities, or pursuant to an exemption. In addition, sanctions may affect the ability of Lenders to enforce a guarantee or security following a default by a Borrower who is designated under sanctions

5 4. SANCTIONS RISK MITIGATION 4.1 Due diligence Sanctions risk may be assessed through detailed due diligence on, for example, the Borrower, its group, businesses and the jurisdictions in which it operates. The issues to be addressed will likely be transaction-specific and addressed by KYC and customer/transaction diligence processes. Such due diligence could be confirmed by the Borrower's management. 4.2 Documentary protections Although Members will have internal teams to analyse sanctions risk in relation to clients and transactions before giving clearance to proceed, many institutions now wish to seek additional documentary protections in this regard, particularly for Borrowers where sanctions risks have been identified. The advantage of such protections is that they give Lenders contractual options and remedies if sanctions become an issue in the future. However, they will not, as a general rule, override sanctions in the event that a transaction (and/or the parties to that transaction) become subject to the effects of sanctions. The inclusion of documentary protections addressing sanctions issues may serve to tease out areas of risk to augment the due diligence process. This is a difficult issue upon which to provide generalised guidance because of the complexity and breadth of the issues and, particularly in the EU, because of the potential conflict of laws issues detailed in section 5. The wording of documentary protections to address sanctions risk will always be fact-specific and will depend upon a number of variables (including, amongst other things, the parties, the extent of the parties' compliance obligations under sanctions regimes and the details of the transaction under contemplation). Accordingly, the LMA does not intend to draft recommended form provisions for its template documentation. Many Lenders will have their own specific requirements as to the wording of any such provisions. However, we would highlight the following points for consideration in relation to documentary protections: A representation can be used to provide Lenders with assurance that the Borrower (or any member of its group) who may receive the proceeds of the loan is not a target of sanctions, nor is it located in a jurisdiction which is targeted by an applicable sanctions regime. An undertaking can be used to provide Lenders with comfort that the proceeds of the loan will not be used to finance any business of any sanctions target, or in any way which would violate (or cause the Lenders to violate) any applicable sanctions regime. The precise wording of any such representation and/or undertaking will depend on the transaction, the parties involved and the sanctions regime(s) that the parties wish to address (e.g. OFAC, EU, United Nations and/or other domestic regimes). The wording of covenants, representations, warranties and undertakings addressing - 5 -

6 sanctions (and the compliance obligations that they seek to impose on a Borrower) should always be subject to careful consideration. Certain standard provisions of LMA loan documentation require the Borrower to obtain consent (from all or a majority of the Lenders) before the Borrower is able to introduce a third party into a transaction. For example, consent from the Lenders may be required if the Borrower wishes to add a subsidiary as an additional borrower, or where the Borrower requests that a letter of credit is issued in favour of a beneficiary who is not identified by name in the loan documentation. The requirement on the Borrower to obtain consent in these circumstances is an important way for the Lenders to mitigate sanctions risk, as it provides the Lenders with an opportunity to refuse consent where they identify a sanctions risk associated with the third party. Borrowers will frequently request that a requirement for the Lenders to grant consent should be deleted. In light of the benefits in mitigating sanctions risk, Lenders should carefully consider whether to agree to such deletions. 4.3 Currency of repayment Facility agreements may include provision for the Agent to specify that payment by a Borrower can be made in an alternative currency in circumstances where a repayment would otherwise be blocked/frozen as the result of the Borrower's designation subsequent to the execution of the facility agreement. For example, if a non-us person Borrower was contractually obliged to make a repayment to a non-us person Lender in dollars, such repayment would almost definitely involve the use of a US correspondent bank; if there are OFAC sanctions against the Borrower, the US correspondent bank will be required to block the payment and sequester the funds. In this situation, to the extent that repayment in another currency would not fall foul of any sanctions restrictions, switching a payment into that currency may allow the repayment to be made. Care should be taken in such cases to ensure that switching could not be construed as evasion or circumvention of applicable sanctions. 5. CONFLICTS OF LAWS ISSUES RELATING TO SANCTIONS The US and the EU have separate sanctions regimes which often impose similar (but not identical) restrictions. Care must be taken to ensure that any conflicts between the two are considered. In addition, domestic sanctions regimes may add a further layer of complexity. Advice will need to be sought on a transaction-specific basis, which will include advice on the laws of each relevant jurisdiction. This note briefly addresses the EU Blocking Regulation and specific issues which arise under German anti-boycott legislation and the UK Equality Act. EU Blocking Regulation The EU has enacted blocking legislation against certain specified extraterritorial measures under US sanctions that target transactions involving, predominantly, Cuba. 6 The EU Blocking Regulation prohibits compliance with specified US measures by (amongst others) any legal person incorporated within the EU, any natural person who is resident in the EU or a national of a 6 Council Regulation (EC) No. 2271/96 of 22 November

7 Member State. The application of the EU's blocking legislation in particular cases should be considered and may potentially give rise to conflicting legal obligations on an entity and/or its employees (for example, where a company incorporated in the EU is the subsidiary of a US company and is required to comply with OFAC sanctions as well as the EU Blocking Regulation). German anti-boycott restrictions Under German domestic legislation, any declaration for the purposes of foreign trade dealings that obliges a resident party domiciled in Germany to take part in a boycott against a foreign state is prohibited. This may make it illegal for German entities (potentially including German branches of non- German entities) to comply with foreign sanctions requirements (including applicable OFAC sanctions) and therefore such entities may not be able to agree to representations and undertakings that relate to OFAC compliance in loan documentation. (c) UK Equality Act If undertakings are requested which will limit the ability of a UK-based entity to deal with a person on the grounds of their citizenship or nationality, this may raise an issue under the Equality Act 2010 (the "Equality Act") in certain circumstances. In broad terms, for a UK-based entity to refuse to deal with a person on the grounds of their citizenship or nationality is likely to breach the Equality Act, leading to the risk of a claim by a discriminated person in a UK County Court, or a complaint to the Equality and Human Rights Commission. (d) Potential alternatives if conflicts of laws issues arise To the extent that any of the issues set out in the paragraphs above arise, there may be difficulties for certain Lenders to accept the inclusion of representations and undertakings on sanctions in the loan documentation, as to do so may potentially place them in breach of laws that are applicable to them. These issues will need to be considered on a transaction-specific basis, but the following alternatives could be considered: (i) (ii) (iii) (iv) Lenders could rely solely on the due diligence and management confirmations referred to in paragraph 4.1 above. The scope of any sanctions provisions could be carefully crafted to limit the restrictions to those sanctions/rules which do not conflict. Sanctions provisions could be set out in a side letter for the benefit of the Lenders which require it, but consideration needs to be given to the intended implications, if any, of breach of such a side letter under the Facility Agreement. The applicability of a sanctions representation and undertaking in the Facility Agreement could be limited to those Lenders who are able to - 7 -

8 take the benefit of them but, again, careful thought must always be given as to how this is to work in practice