Compliance With Financial Sanctions and Trade Embargoes: A Simple Matter of Minding Your Ps and Asking the Right Qs?

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1 April 2012 / Issue 4 A legal upate from Dechert s Trae an EU Government Affairs Group Compliance With Financial Sanctions an Trae Embargoes: A Simple Matter of Mining Your Ps an Asking the Right Qs? For corporate an financial services clients on both sies of the Atlantic, trae compliance represents a major compliance challenge. The complex, multi-jurisictional network of regulatory obligations has given many a General Counsel, Compliance Officer or Chief Financial Officer a heaache. While unoubtely presenting a complex set of regulatory issues, the management of regulatory risks associate with issues such as economic sanctions, asset-freezing measures an trae restrictions can be broken own into four key components the four Ps. Places Where the Transaction Takes Place Question: Does the transaction involve a estination subject to a country specific sanctions programme? This is often the easiest of the core sensitive elements to spot. All organisations, whether multi-nationals, or small start-ups shoul have implemente well-establishe systems an proceures for flagging transactions which irectly involve a sanctione estination such as, Belarus, Egypt, Ivory Coast or Zimbabwe. However, restrictive measures an trae embargos often cover both irect an inirect supply to the sanctione estination. Therefore, even a transaction which appears to be totally containe within the European Union or the Unite States may involve regulatory risks if there is any knowlege or suspicion that the transaction might lea to inirect supply to a thir party in a sanctione estination. Answer: International sanctions measures target transactions which may lea to either a irect or inirect transfer of funs or resources to a sanctione estination. Where there is any knowlege or suspicion that a transaction may inirectly involve a sensitive estination enhance ue-iligence shoul be consiere. Wier mitigating actions inclue securing warranties or rafting appropriate contractual provisions to limit the transaction to nonsanctione estinations or to restrict re-supply to thir parties locate in a sanctione country. Has ue-iligence in relation to the acquisition of a target company consiere the target s primary markets an potential re-supply to a sanctione estination? Whilst the beneficiary an applicant to a letter of creit are locate an incorporate in non-sanctione estinations, oes the unerlying transaction involve a sanctione estination?

2 Does a claim for breach or non-performance of obligations uner a contract or guarantee stem from an inability to perform ue to the involvement of a sanctione estination? Does a hire-purchase agreement provie financing for assets to be acquire by a company whose CEO is a sanctione iniviual? Parties to the Transaction Question: Does the transaction involve a party liste uner an international sanctions regime? For most non-sensitive transactions, this will simply involve incorporating the screening of counterparties against the relevant European Union an Unite States consoliate lists of sanctions targets (often referre to as SDN, or Specially Designate Nationals Lists). This generally forms part of the wier customer take on, or general AML/KYC checks. For more sensitive transactions, for example those which may involve a estination subject to restrictive measures (e.g. Iran, Syria, Suan, Libya, or Cuba) enhance ue-iligence may be require to establish the ownership structure of a particular counter-party, or members of its boar or wier corporate officers who are responsible for controlling or irecting the counter-party. In aition, it may be necessary to screen known thir parties such as, agents, shipping companies an financial institutions against SDN lists. Answer: International sanctions measures target a broa range of boies, entities an iniviuals locate aroun the worl, incluing many targets that are locate in Europe an the Unite States. The measures often target wier entities that owne or controlle by the liste sanctione party. Therefore, a wier investigation may be require to ascertain the corporate structure, or equity participation of the counter-party to establish whether a sanctione party will benefit from the transaction. Are customer eposits that you currently hol, an which may form a key component of your liquiity ratios, potentially subject to asset-freezing provisions? Are the assets which you hol uner a Custoian agreement subscribe to by a sanctione financial institution or wier liste party? Proucts Involve in the Transaction Question: Does the transaction involve goos, software, or technology which is restricte for export uner either export control or sanctions provisions? Military proucts (i.e. any prouct specially esigne or moifie for military use) an so-calle Dual-use proucts (i.e. high-tech proucts which have both a civilian an military application) are tightly controlle for export on both sies of the Atlantic. Such proucts are generally liste an classifie either at a national, regional, or multilateral level. Country specific sanctions regimes often control certain wier proucts, equipment an technology either of use in key sectors of the target country s economy, or which may be use for internal repression or torture. Key sectors inclue the telecommunications sector, the financial services sector, the oil an gas sector, the petrochemical sector, an the crue oil an petroleum sector. Wier controls apply to facilitating the supply of controlle proucts, for example through the provision of financing or financial services or the provision of insurance an reinsurance. Answer: International sanctions an export control provisions control a wie range of military an ualuse proucts. In aition, wier controls exist on ancillary services which may facilitate the transfer of controlle proucts such as financial services, insurance, or logistical support. Therefore, companies involve in cross-borer supply or in proviing support for export relate activity shoul ensure that they are aware of the relevant prouct classifications an any applicable restrictions in the specific proucts supplie uner the transaction. Is a loan agreement or financing structure being use to unerwrite the procurement controlle proucts? Does an investment strategy nee to consier whether an investment target s growth markets are limite ue to controls on the export of its prouct to certain estinations? April 2012 / Issue 4 2

3 Do the unerlying goos covere by a stanby letter of creit nee to be assesse before a counter-guarantee is issue or a payment effecte? Purpose of the Transaction Question: Does the transaction involve the transfer of proucts or the provision of ancillary services for a sensitive purpose or en-use? Sanctions provisions restrict the irect an inirect supply of any prouct to certain estination if there is a risk that the prouct may be use in conjunction with a prohibite en use. Wie-ranging catchall controls restrict the supply of any items which may be estine for use in sectors such as WMD programme, a nuclear evelopment programme, any military capacity, the oil an gas sector, or the petrochemical sector. These catch-all controls exten to ancillary services such as financing, financial services, logistical support an the provision of (re)insurance. The controls are often referre to as trafficking an brokering controls an, given their wie-ranging application in relation to both irect an inirect supply of any prouct, they are often over-looke. Answer: International sanctions an export control provisions restrict the transfer of any prouct which may be estine for a prohibite en-use, such as WMD, nuclear an military en use. In aition, wier controls exist on ancillary services which may facilitate the transfer of proucts estine for a restricte en-use such as financial services, insurance, or logistical support. Therefore, companies involve in cross-borer supply or in proviing support for export relate activity shoul ensure that they are aware of the potential purpose of the export an the potential en use of any proucts supplie. Is a potential M&A target engage in the prouction, manufacture or supply of proucts which generally attract en-use concerns, e.g. ceramics, laboratory equipment, chemicals, electronic components, filtration equipment, etc? Is the applicant or beneficiary of a letter of creit or wier trae financing instrument engage in activities which may fall into the category of a restricte en-use? How Can Dechert Help You? Dechert s Trae an EU Government Affairs Practice regularly works with corporate an financial institutions on the application of international sanctions measures. We provie an experience partner able to offer soun commercially focuse avice in relation to specific transactions, or wier compliance programming, incluing: Knowlege of the evelopment, implementation, interpretation an legal an practical implications of economic sanctions an trae embargoes applie by the Unite Nations European Union, Unite States an Iniviual EU Member States. Designing compliance programmes tailore to iniviual nees, to minimise compliance risks, as well as reviewing existing company proceures, conucting internal auits an establishing improve compliance plans. Avising on jurisictional issues associate with the aministration of economic sanctions, incluing potential extraterritorial aspects of export, re-export, investment an transactional controls. Preparing an negotiating sanctions compliance provisions in contracts, purchase orers, istributor agreements, subcontracts, an supply arrangements an relate representations an warranties in connection with mergers, acquisitions an joint ventures. Assisting with licence applications an obtaining authorisations in relation to regulatory exemptions an the interpretation of limitations in sanctions provisions. Investigating potential violations, responing to enforcement inquiries an representing clients before European an U.S. regulatory an enforcement agencies in connection with voluntary isclosures, enforcement an criminal an civil (aministrative) investigations. Avising persons an entities which have been targete uner EU an US lists of esignate entities with regars to their legal rights an obligations an wier public relations consierations. Conucting trae embargo an economic sanctions ue iligence in connection with April 2012 / Issue 4 3

4 exports an reexports, istributor/supply agreements, mergers, acquisitions an joint ventures. Counselling clients with respect to their exposure for sanctions violations committe by thir parties an potential courses of action to protect their business interests. Dechert s Trae an EU Government Affairs Practice Dechert avises on all aspects of trae law an policy, incluing sanctions, export control, WTO matters, anti-umping, customs law an trae agreements. We bring together international trae lawyers an practitioners with political avisors to offer a unique blen of legal an strategic trae avice. We have wie ranging experience in avising European, US an other companies an financial institutions on transactions involving countries, entities an iniviuals subject to sanctions regimes. We raw on the first han experience of exregulators to provie legal avice an minimise corporate an personal exposure to enforcement proceeings. Practice group contacts For more information, please contact the attorney liste, or any Dechert attorney with whom you regularly work. Visit us at Miriam Gonzalez Lonon miriam.gonzalez@echert.com Sign up to receive our other DechertOnPoints. April 2012 / Issue 4 4

5 D Dechert internationally is a combination of limite liability partnerships an other entities registere in ifferent jurisictions. Dechert has more than 800 qualifie lawyers an 700 staff members in its offices in Belgium, China, France, Germany, Hong Kong, Irelan, Kazakhstan, Luxembourg, Russia, the Unite Arab Emirates, the UK, an the US. Dechert LLP is a limite liability partnership registere in Englan & Wales (Registere No. OC306029) an is regulate by the Solicitors Regulation Authority. The registere aress is 160 Queen Victoria Street, Lonon EC4V 4QQ, UK. A list of names of the members of Dechert LLP (who are referre to as partners ) is available for inspection at the above aress. The partners are solicitors or registere foreign lawyers. The use of the term partners shoul not be construe as inicating that the members of Dechert LLP are carrying on business in partnership for the purpose of the Partnership Act Dechert (Paris) LLP is a limite liability partnership registere in Englan an Wales (Registere No. OC332363), governe by the Solicitors Regulation Authority, an registere with the French Bar pursuant to Directive 98/5/CE. A list of the names of the members of Dechert (Paris) LLP (who are solicitors or registere foreign lawyers) is available for inspection at our Paris office at 32 rue e Monceau, Paris, France, an at our registere office at 160 Queen Victoria Street, Lonon, EC4V 4QQ, UK. Dechert in Hong Kong is a Hong Kong partnership regulate by the Law Society of Hong Kong. Dechert Kazakhstan Limite, a private limite company registere in Englan & Wales (Registere No ), is a wholly owne subsiiary of Dechert LLP, a Pennsylvania limite liability partnership, an is authorise an regulate by the Solicitors Regulation Authority of Englan an Wales. Legal services in Kazakhstan are provie by the Almaty branch of Dechert Kazakhstan Limite. A list of the names of the irectors of Dechert Kazakhstan Limite is available for inspection at its registere office: 160 Queen Victoria Street, Lonon EC4V 4QQ, Englan. This ocument is a basic summary of legal issues. It shoul not be relie upon as an authoritative statement of the law. You shoul obtain etaile legal avice before taking action. This publication, provie by Dechert LLP as a general informational service, may be consiere attorney avertising in some jurisictions. Prior results o not guarantee a similar outcome. Dechert in Irelan is an Irish partnership regulate by the Law Society of Irelan Dechert LLP. Reprouction of items from this ocument is permitte provie you clearly acknowlege Dechert LLP as the source. Almaty Austin Beijing Boston Brussels Charlotte Dubai Dublin Frankfurt Hartfor Hong Kong Lonon Los Angeles Luxembourg Moscow Munich New York Orange County Paris Philaelphia Princeton San Francisco Silicon Valley Washington, D.C. April 2012 / Issue 4 5