Sanctions Briefing May 2012 Contents Introduction 01 Key sanctions regimes 02 Financierʹs sanctions issues 02 Practical considerations 03 Conclusion 04 Contacts 05 The web of international sanctions is becoming more complex and onerous to navigate for parties involved in cross border transactions. A recent example is the United States executive order (the EO ) signed on 1 May 20121 which targets foreign individuals and entities that violate or facilitate the violation of US sanctions against Iran and Syria. The EO specifically prohibits the provision of funds, goods or services by, to, or for the benefit of any individual or entity (both a person ) violating or facilitating the violation of US sanctions against Iran and Syria. The EO gives the US Department of Treasury (the Treasury ) the authority to publicly identify foreign persons that violate or facilitate the violation of US sanctions against these countries. Upon Treasury s (public) identification of a foreign sanctions evader, US persons will be essentially prohibited from dealing with that evader, effectively cutting it off from the US marketplace. International financial institutions and trading groups with operations in multiple jurisdictions will likely be subject to a number of sanctions regimes. A particular branch or subsidiary may be bound by a sanctions regime or regimes which are not binding on other branches or subsidiaries. In addition, different sanctions regimes often apply different tests as to state of knowledge or awareness, for example actual knowledge of a sanction breach may be required to establish a financier s culpability under one regime, whilst constructive knowledge (i.e. should have known) may be sufficient under another regime. 1 Executive Order 13608, Federal Register, Vol. 77, No. 86, Thursday, May 3rd 2012, Presidential documents 2 The term ʺfinanciers is sometimes used for convenience to cover both lenders and lessors (including operating lessors). The term borrower is sometimes used for convenience to cover both borrowers and lessees. References to lending are often used for convenience to cover loans and leases. The application of a particular sanctions regime to loans and leases might be different. This briefing is intended to give a broad overview for financiers 2 and companies regarding the impact of sanctions regimes. This is an area of increasing complexity, with a multitude of sanctions regimes targeted at nations and persons, with new and amended sanctions being enacted monthly or even more frequently. As may be expected, the application of various sanctions regimes and their impact on persons and particular transactions requires specific analysis and advice, consequently this update is meant to provide only a snapshot of the issues facing market participants. wfw.com
02 SANCTIONS BRIEFING Key sanctions regimes Financiers participating in sanctions avoidance or the financing of sanctions breaching activities risk criminal and civil liability. As noted earlier, there are many sanctions regimes that may be relevant in the context of a particular transaction, however, practically speaking the regimes of the following international actors should be considered as a minimum when evaluating any cross border transaction: the United Nations sanctions imposed by the UN are by treaty (meant to be) implemented by all member states through each stateʹs domestic legislation; the United States of America beyond those entities that are incorporated in the US or US individuals operating within non US persons, a number of US sanctions have been drafted with extra territorial application and international banks that have US correspondent accounts will have to operate within a US dollar payments system that the US ultimately controls; and the European Union generally speaking, the EU sanctions apply within the territory of the EU, including its airspace; on board any aircraft or vessel under the jurisdiction of an EU member state; to any person inside or outside the territory of the EU who is a national of an EU member state; and to any legal person, entity or body that is incorporated or constituted under the laws of an EU state. A further level of complexity is created by laws which prohibit compliance with foreign sanctions. An early and well known example is the US regulation prohibiting the refusal to do business with a boycotted country (aimed, albeit not expressly, at the Arab League boycott of Israel). As a counter to such legislation, the European Commissionʹs Council Regulation (EC) no. 2271/96 prevents EU nationals from complying with certain US sanctions having extra territorial effect. Financierʹs sanctions issues Recent history has shown us that financiers could breach sanctions principally in one of two ways: either through their own actions or through funding a borrowerʹs activities that themselves breach sanctions. Bankʹs actions. A number of banks were prosecuted for a practice called ʺwirestrippingʺ whereby a bank intentionally removes or conceals from wire transfers information linking sanctioned countries to facilitate the transfer of funds through the US interbank payment systems. In 2009, a large Swiss bank and a UK bank settled with Treasuryʹs Office of Foreign Asset Control and the US Justice Department in relation to their participation in such wire stripping, by paying fines of US$536m and US$350m respectively. In 2010 a (different) large UK bank paid US$298m in penalties to settle similar charges. Borrowerʹs actions. One example is banks financing assets that are contracted to operate on behalf of a now sanctioned countryʹs national oil company. Difficult issues can arise, especially if the financing and the assets were put in place prior to the host country becoming subject to sanctions. Recommended advice at this time is for such financiers to begin to either unwind the financing or require the borrower to seek to cancel (or at least not extend) the offending contract. Of course, all other relevant issues will need to be considered, including any arguments the borrowers may have to resist prepayment of the facility and what options the financiers have if the borrowers are unable to refinance.
SANCTIONS BRIEFING 03 No market standard position Non US lenders. Until recently, financiers outside the US have not generally included a sanctions clause addressing US sanctions in their documents. 3 The approach that financiers take to the increase in sanctions is still developing and, except for lending by US persons, there does not yet appear to be a market standard position. Given the fact that each financier may have its own unique set of sanction regimes that it is subject to, there is unlikely to be a one size fits all approach. Some might look beyond the laws which are binding on them and seek to impose on themselves (and thus on their borrowers) compliance with wider laws. For example, an international financial institution might take the policy decision to comply, and require compliance by its borrower with, US sanctions restrictions in a particular transaction even where such compliance is not strictly required. One would expect the reasons behind such an approach to include consideration of reputational issues, concerns about potential repercussions while operating in the US dollar markets and payment system and perhaps concerns about having the ability to sell down to US financial institutions. US lenders. Perhaps unsurprisingly, US financiers have traditionally included a sanctions clause in their documents where they have been lending or leasing to US borrowers, i.e. borrowers themselves subject to US sanctions. However, US financiers have sometimes encountered difficulty in having their US oriented sanctions clauses accepted by borrowers outside the jurisdiction of the US. Practical considerations As the level of concern regarding the possibility of being prosecuted for breaching sanctions increases, a number of our clients are actively reviewing transactions that are closely linked to such activity and are considering how best to address the associated issues. Which sanctions are relevant? The first step will be to identify which sanctions regimes(s) apply. In most cases, in order to determine if a sanctions regime applies the following questions will need to be answered: In entering into a contemplated transaction, will the financier be facilitating a sanctioned person or activity? Are the persons with which the financier is entering into a given transaction restricted by a sanctions regime? Are the persons with which the financier is entering into such a transaction controlled or owned by a person that is prohibited by a relevant sanctions regime? Are the persons with which the financier is entering into transactions complying (and will they continue to comply) with sanctions that are applicable to it and its business? Although the above considerations may appear fairly straightforward, it is important to note that a person that is not sanctioned at the outset of a transaction might become so by changes made to a relevant sanctions regime or to the entity s control or ownership structure. 3 However as might be expected, the US branches of non US banks (i.e. falling within the definition of US persons for the US sanctions provisions) often include sanctions clauses and the practice is spreading to their non US affiliates. Watson, Farley & Williams May 2012
04 SANCTIONS BRIEFING No way out? The next question to consider is whether there is an appropriate exit mechanism for a financier if the relevant borrower becomes sanctioned or the lending facilitates a sanctioned activity. If financiers have participated in a transaction where the borrower s activities are in apparent breach of sanctions and the decision is taken to seek to unwind that financing early, they will have to do so on the basis of the terms of their agreement with the borrower. If the relevant sanctions have not been addressed in that agreement, the following provisions (which are almost invariably included in finance documentation) should have a bearing on the breach of sanctions: an obligation on the borrower to comply with applicable laws and regulations; and an event of default or mandatory prepayment / termination event if the making or maintenance of the financing by the financier becomes illegal through a change of law. The above provisions will give the financier some leverage in extricating itself from the financing. Of course, the borrower may object to the financier s interpretation of such sanctions, and that objection may become a matter of litigation. What next? Going forward it is likely that, despite the potential application of the general language referred to above, financiers will expect to see language in their documentation which expressly addresses specific sanctions regimes. Where a financier and its borrower are subject to the same sanctions regime it should be relatively easy to agree sanctions language. More difficulties can arise where the financier and borrower are subject to different sanctions regimes or where the borrower is not subject to any sanctions regime at all. For the financier, the cautious approach is to require the borrower to comply with the sanctions regime binding on the financier in addition to that binding on the borrower. However, this might be difficult for the borrower to accept as wide sanctions wording can be very difficult to comply with (e.g. requiring a borrower to ensure a third party does not breach sanctions either). If the borrower refuses to comply with the sanctions regime applicable to the financier, the financier must then consider carefully (based on the terms of the sanctions regime by which the financier is bound) if the borrower s refusal puts the financier at risk of sanctions breach (in this context, the relevant sanction s use of expressions such as actually, directly or indirectly and knowingly require careful attention). Conclusion Sanctions related concerns vary according to the nature of each person s business activities and structure. As a starting point each person should establish which sanctions regime(s) it may be subject to and in what circumstances, with reference to geographical location, the types of entities and the nationalities of the persons involved. Once the applicable sanctions regime(s) have been determined, a detailed investigation of the contemplated (or existing) transaction can be carried out to ensure that a breach will not occur or continue as a result of the transaction.
05 SANCTIONS BRIEFING Contacts If you have any questions regarding sanctions, please get in touch with a member of our team or your regular contact at Watson, Farley & Williams. Josh Clarke jclarke@wfw.com +65 6551 9126 Mei Lin Goh mlgoh@wfw.com +65 6551 9125 Jesse Clark Lawyer jclark@wfw.com +65 6551 9187 Michael Kenny London mkenny@wfw.com +44 20 7814 8042 Jane Freeberg Sarma Lawyer New York jfreeberg@wfw.com +1 212 922 2218 6 Battery Road #28 00 049909 Tel: +65 6532 5335 Fax: +65 6532 5454 London 15 Applold Street London EC2A 2HB Tel: +44 20 8714 8000 Fax: +44 20 7814 8141 New York 1133 Avenue of the Americas New York, NY 10036 Tel: +1 212 922 2200 Fax: +1 212 922 1512 All references to Watson, Farley & Williams and the firm in this brochure mean Watson, Farley & Williams LLP and/or its affiliated undertakings. Any reference to a partner means a member of Watson, Farley & Williams LLP, or a member of or partner in an affiliated undertaking of either of them, or an employee or consultant with equivalent standing and qualification. This brochure is produced by Watson, Farley & Williams. It provides a summary of the legal issues, but is not intended to give specific legal advice. The situation described may not apply to your circumstances. If you require advice or have questions or comments on its subject, please speak to your usual contact at Watson, Farley & Williams. This publication constitutes attorney advertising. Watson, Farley & Williams 2012 100 000 1320 SIN KW KW 29/05/2012 wfw.com