A n t i - B r i b e r y a n d I n t e r n a t i o n a l Tr a d e Update on Trade Sanctions Amber Road Complying with Export Controls 5 th. November 2015 Baker & McKenzie LLP is a member firm of Baker & McKenzie International, a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organisations, reference to a "partner" means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an "office" means an office of any such law firm.
Why Do We Care About Trade Compliance? Prison sentences for individuals e.g. up to 10 years in UK, and 20 years in US Extradition (e.g. Tappin) Significant fines for companies (e.g. $8.9 bn fine on BNP Paribas for Iran payments ) Denial of export privileges (e.g. licences withdrawn or not renewed) Forfeiture of goods Debarment from government contracting Listing in the US as a restricted party (e.g. for association with terrorist or WMD proliferator) Reputational harm and CSR concerns (e.g NSN in Iran) Management time\legal expenses Enforcement is on the rise!
Sanctions
EU and US Sanctions Targets Cyprus* SFRY Lebanon Belarus Ukraine Crimea & Sevastopol Syria Armenia and Azerbaijan Iraq Kuwait Egypt Russia Tunisia Iran Libya Afghanistan USA (EU/Cuba Blocking Measures) Saudi Arabia China Cuba North Korea Haiti* UAE Burma Venezuela Vietnam* Guinea and Guinea-Bissau Sri Lanka* EU and US Fiji* EU only Yemen US only (*arms embargo only) US Anti-Boycott only Liberia Ivory Coast Central African Republic DR Congo Zimbabwe Somalia Sudan and South Sudan Eritrea 4
Sanctions Toolbox Comprehensive Individuals / Entities Goods / Technology Services Investment Asset freeze / Blocked property Arms / Dual-use Finance Sectors Making available / Dealing Sanctioned country origin Insurance Funds transfer Other Brokering Anti-circumvention / Facilitation / Causing violations 5
EU Sanctions Legal Basis EU looks to follow so-called smart sanctions policy Mostly follow UN multilateral regime Some unilateral regimes that go beyond UN measures in whole (e.g., Syria, Zimbabwe) or in part (e.g., Iran) EU sanctions regulations directly applicable in all 28 EU Member States Licensing, penalties and enforcement left to each Member State Sanctions apply independently of (albeit often overlap with) export controls
Designated Persons Programmes and TI Rankings Country UN EU US TI 2014 CPI Ranking (total 175 countries) Afghanistan 172 Belarus =119 Myanmar/Burma =156 DR Congo =154 Central African Republic =150 Cuba 63 Egypt =94 Eritrea =166 Republic of Guinea =145 Guinea-Bissau =161 Iran =136 Iraq 170 Ivory Coast =115 Lebanon =136 Liberia =94 Libya =166 North Korea =174 Russia =136 Somalia =174 South Sudan 171 Sudan 173 Syria =159 Tunisia 79 Ukraine (incl. Crimea and Sevastopol) =142 Venezuela =161 Yemen =161 Zimbabwe =156 Balkans and ICT of Yugoslavia N/A Al-Qaida and Terrorists N/A 7
EU Embargoes, Product and Sector-Specific Controls Country Arms Embargo Additional restrictions Armenia X (OSCE) Azerbaijan X (OSCE) Belarus X Internal repression Burma/Myanmar X Internal repression Central African X Republic China X (Partial) Crimea & Sevastopol ~ Import ban and related services; investment ban; goods and technology for use in transport, telecommunications, energy and the prospection, exploration and production of oil, gas and mineral resources in Crimea and Sevastopol and related services; services related to tourism activities DR Congo X Eritrea X Iran X Nuclear; dual-use; internal repression; oil/gas equipment; petrochemical equipment; graphite and metals; naval and shipbuilding equipment and services; ERP software; bank notes/coinage; insurance Iraq X Cultural property Ivory Coast X Internal repression Lebanon X Liberia X Libya X Internal repression; restrictions regarding crude oil illicitly exported from Libya and vessels involved North Korea X Nuclear; dual-use; luxury goods Russia X Dual-use for military use/end-user; goods and technologies for the oil industry (for use in oil exploration and production in waters deeper than 150 metres, oil exploration and production in the offshore area north of the Arctic Circle, or projects that have the potential to produce oil from resources located in share formations by way of hydraulic fracturing) in Russia, its Exclusive Economic Zone and Continental Shelf) and related services; access to capital markets Somalia X Power to inspect vessels in certain circumstances South Sudan X Sudan X Syria ~ Oil/gas items; jet fuel and additives; telecommunications/information security items; electricity sector; insurance services; internal repression; luxury goods; gold, diamonds and precious metals Zimbabwe X Internal repression 8
Jurisdiction
Who Must Comply with EU Sanctions? EU sanctions measures typically apply to: Any entity incorporated in an EU Member State and its EU and non-eu branches Any entity incorporated outside the EU, but only in respect of any business conducted in the EU Any directors, officers, employees, agents, etc. located in the EU (irrespective of nationality) Any directors, officers, employees, agents, etc. that are nationals of an EU Member State (even if located outside the EU)
Who Must Comply with U.S. Sanctions? U.S. Sanctions Apply to U.S. Persons Entities organized under U.S. laws and their non-u.s. branches Employees (regardless of nationality) of above entities Individuals and entities in the United State U.S. citizens and permanent resident aliens ( Green Card holders) wherever located or employed Non-U.S. Persons may be subject to U.S. jurisdiction if they cause prohibited transactions to occur in whole or in part in the United States or anywhere by U.S. Persons Separately incorporated foreign subsidiaries of U.S. companies are NOT U.S. Persons
Consider EU/US nationals working in Russia for a Russian Corp? Transaction denominated in USD?
Designated Parties
DP / SDN Controls EU and U.S. list-based sanctions programmes: EU Designated Parties ( DPs ) and U.S. Specially Designated Nationals ( SDNs ) EU sanctions on DPs: Prohibition on making available funds or economic resources, directly or indirectly, to or for the benefit of DPs Freeze on funds and economic resources belonging to, owned, held or controlled by DPs Administered and enforced by each EU Member State U.S. sanctions on SDNs: Prohibition on U.S.-Person dealings with SDNs, directly or indirectly, and any entity 50% or more owned by one or more SDNs, or facilitation of such dealings Requirement to block SDN property and interests in property Administered and enforced by Office of Foreign Assets Control ( OFAC ) Prohibition under EU and U.S. sanctions in relation to acts of circumvention/facilitation Non-U.S. Persons may also have liability for causing a U.S. Person to violate sanctions (e.g., U.S. dollar payments, ordering goods from United States for supply to SDNs)
Dealings with Affiliates of DPs / SDNs DP Shareholder Non-DP Shareholder Customer 60% 40% Company EU: Assess whether counterparty is majority owned or controlled by one or more DPs; test is complex and subject to EU Member State interpretation U.S.: Assess whether counterparty is 50% or more owned by SDNs Screening of counterparty s name only would not address risk of dealing with non-designated entity that is owned/controlled by DP/SDN Other forms of indirect dealings may be caught (e.g., distributor relationship)
Making sense of screening US, EU and Member State laws do not contain specific obligations on how to screen However, EU law does contain defence of did not know nor had reasonable cause to suspect that you were dealing with DP Best practice is a risk-based approach screen at least directors, shareholders and managers of direct counterparty, and check for management agreement check all available resources, but do ask counterparty if this raises any red flags, need to discharge those red flags if no red flags, no obligation to push to next level, but apply risk analysis (e.g. most important JV or business deal? Leave no stone unturned) record and keep screening DD to prove that you did it
Practical application DP? 100% Russian Co A Russian Co B 50% 50% Finnish Co Cypriot Nominee Co Cypriot Nominee Co Cypriot Nominee Co Russian non-dps 25% 25% 25% 25% Russian Counterparty C C L I E N T S U P P L I E R
Practical application Client asks Russian counterparty who owns it told 4 Cypriot Nominee companies and various non-dp Russians no other red flags ( and can t see above the line) no reasonable cause to suspect dealing with a DP? Client does own DD, but doesn t ask Russian counterparty who owns it, and stops with 4 Cypriot Nominee companies Is that proper DD? Client told DP in fact still owns Russian counterparty and thinks above and below the line are part of the same group
How to optimize sanctions position Ensure foreign operating companies are locally incorporated What about incorporation of all relevant parties in the EU or US? Consider having variable decision making routes (to avoid EU or US persons being a block) Have an effective risk-based screening system, based around client intake Consider keeping back office structures out of the US (and if possible the EU) Consider finance structures, have non-us banks and non-usd capabilities in reserve Make sure all contracts anticipate sanctions. Force majeure wording usually not enough. Have detailed provision that anticipates sanctions, and works through position during their pendency
A n n u a l A n t i - B r i b e r y a n d I n t e r n a t i o n a l Tr a d e C o n f e r e n c e Part III: Russia and Iran Baker & McKenzie LLP is a member firm of Baker & McKenzie International, a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organisations, reference to a "partner" means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an "office" means an office of any such law firm.
Russia in Focus
Geographic Reach Not just a US and EU issue Includes: EU, US, Japan, Canada, New Zealand, Australia, Iceland, Moldova, Georgia, Norway, Switzerland, Liechtenstein, Albania, Montenegro and Ukraine. 22
Triggers and Escalation Early Feb 2014: Ukraine Revolution Late Feb 2014: Military intervention in Crimea March 2014: Crimean referendum; Putin signs a bill to annex Crimea April 2014: Beginning of protests in eastern Ukraine July 2014: MH17 shot down Feb 2014: Limited US travel bans and EU MS agree on limited suspension of licences to Ukraine Early March 2014: Limited DP Controls/SDNs; US BIS/DDTC stop issuing licences to Russia Late March 2014: Additional EU DPs and SDNs April/May 2014: Significant new EU DPs and SDNs July 2014: EU and US introduce sectoral sanctions and product controls Escalation from a designated person regime to significant sectoral measures over a very short time period 23
EU Restrictions Russia/ Ukraine Designated Party controls: 166 individuals and 37 entities Financial controls: Dealings in certain financial instruments issued by, and provision of new debt/credit of >30 days maturity to, certain listed financial, oil and military parties (and related entities) Energy sector: Prior licensing requirement for certain oil and gas items (Annex II); cannot be granted for deepwater, Arctic, shale oil projects Also captures related services: technical assistance, brokering, financial assistance/financing Prohibition on provision of drilling, well testing, logging and completion services, and supply of specialised floating vessels, regarding deepwater, Arctic, shale oil projects Export-related controls: Any dual-use items to military end-user/end-use or to certain listed entities Arms embargo Related services Circumvention 24
EU Restrictions Crimea and Sevastopol Restrictions on investment in property/entities in Crimea or Sevastopol Restrictions on certain services in infrastructure in the following sectors: energy; prospection, exploration and production of oil/gas/mineral resources; transport; telecoms Prohibition on export/sale/transfer/supply to entity/for use in Crimea/Sevastopol of certain listed items related to these sectors (another Annex II, very broad) and related services No prohibition if no reasonable grounds to determine for use in Crimea Due diligence paramount Consider contractual wording (beware position within Russia) Prohibition on import into the EU of goods originating in Crimea/Sevastopol (and related services) Ban on services relating to tourism activities Circumvention 25
Further EU and US Russia Sanctions Developments US impose significant new export controls in relation to Russia EU significantly increases Crimea sanctions and issues amendments to clarify Regulation 833/2014 on Russia sanctions US imposes comprehensive sanctions against Crimea and US Congress passes Ukraine Freedom Support Act US impose significant new export controls in relation to Russia US BIS adds Yuzhno Kirinskoye Field to Entity List Aug 2014 Sep 2014 Dec 2014 Jun 2015 Jul 2015 Aug 2015 Sep 2015 EU and US significantly increase Russian sectoral sanctions and export controls EU extends Russia sanctions under Regulation 833/2014 to 21 January 2015 and EU US BIS Announces Addition of Parties to Entity List EU extends asset freezes under Regulation 269/2014 to 15 March 2016 26
EU and US A Coordinated Approach Restricted party controls US SDNs: blocked EU DPs: broad restrictions Sectoral Sanctions Export/product Controls Crimea Not blocked; more targeted restrictions Finance: dealings in new debt/new equity Energy, Defence Russian Entity List parties; Russian Oil Industry End-uses / key equipment (EU Annex II) Military end-user/end-use and heightened dual-use controls; High technology items US: complete embargo EU: extensive restrictions 27
EU and US some key differences Restricted party controls Sectoral Sanctions Export/product Controls Controls regarding Crimea US listings have a larger impact Ownership/control test (EU) vs. entity 50% or more owned by one or more SDNs (US) Similar targets/restrictions but notable exceptions (Gazprom, Lukoil, Novatek, only targeted specifically by US) US controls cover specific fields EU controls related services EU introduced limited grand-fathering provisions US export controls apply extraterritorially Licensing requirements are stricter in the EU EU has not introduced comprehensive sanctions albeit restrictions are significant US introduced a comprehensive embargo 28
Russia/Ukraine Sanctions Challenges 1 But we don t have a country field for Crimea! Is my customer Crimean? Ukrainian? Russian? Clean counterparty with a bad bank Opaque ownership structures Holding companies Resistance to providing ownership information Knowledge standards unable to determine / no reasonable cause to suspect / no grounds to determine How reliable are end-use certificates? How much is enough? De-risking or risk mitigation? Negotiating appropriate contractual protection 29
Russia/Ukraine Sanctions Challenges 2 Lack of clarity in EU legislation: Technical terminology, broad restrictions with limited definitions and guidance NB: Rosneft challenges Differences in scope e.g. trade financing Downstream distributors /resellers payment terms on resale Late payments Differences in approach between EU Member States Questions as to EU licensing jurisdiction Managing risk with sanctions outlook unclear 30
Upcoming Sanctions-Related Milestones Minsk II implementation deadline (currently) EU-Ukraine DCFTA to enter into force EU DP controls regarding misappropriated Ukrainian state funds to expire* EU sanctions targeting Crimea and Sevastopol to expire* 31 December 2015 1 January 2016 31 January 2016 6 March 2016 15 March 2016 23 June 2016 EU sanctions under Reg 833/2014 to expire* EU DP controls regarding Ukraine territorial integrity to expire* * unanimity needed to extend; has been extended each time to-date * US sanctions - continue unless and until revoked 31
Possible Scenarios Going Forward Escalation increased sanctions De-escalation sanctions rollback Divergence between EU and US Continuation of status quo 32
Iran De-escalation
A n n u a l A n t i - B r i b e r y a n d I n t e r n a t i o n a l Tr a d e C o n f e r e n c e Iran and the JCPOA Ross Denton Partner London Alison Stafford Powell Of Counsel Palo Alto Sven Bates Senior Associate London Baker & McKenzie LLP is a member firm of Baker & McKenzie International, a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organisations, reference to a "partner" means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an "office" means an office of any such law firm.
JCPOA Background 14 July 2015: EU/E3+3 (China, France, Germany, Russia, the UK, the US, and the EU) and Iran announce agreement on a Joint Comprehensive Plan of Action ( JCPOA ) Two years of negotiations on: Which sanctions to be removed Sanctions roll back timeframe Iranian commitments Inspections, monitoring and verification Repeal of measures at UN level 35
JCPOA Overview of Sanctions Relief Comprehensive lifting of all nuclear-related UNSC sanctions and multilateral and EU/US national sanctions Sanctions relief only commences once IAEA verifies Iran has implemented its commitments under the JCPOA (2016) Various stages of sanctions relief over course of next 8 years If Iran violates the JCPOA, there is a 65-day process under which UN, EU and US sanctions could snap back Pre-existing JPOA Temporary Sanctions Relief still applicable 36
JCPOA Timeline for Sanctions Relief July 2015 14 July 2015 19 July 2015 20 July 2015 September 2015 17 September 2015 29 September 2015 October 2015 9 October 2015 UNSC endorse JCPOA 20 July 2015 EU/ E3+3 JCPOA announced 14 July 2015 EU endorses JCPOA 20 July 2015 EU passes first legal acts to implement JCPOA 31 July 2015 EU to adopt regulation to terminate relevant Iran sanctions Date unknown EU State Department sends JCPOA to Congress 19 July 2015 12-day deadline for President Obama to veto resolution (in the event Congress disapproves JCPOA) US Day 1 of 60-day congressional review period 20 July 2015 Day 60 of 60-day congressional review period 17 September 2015 29 September 2015 10-day deadline for Congress to override President Obama's veto President to issue 9 October 2015 sanctions waivers Date unknown 18 October 2015 2016 October 2023 October 2025 Adoption day October 18 2015 (90 days after UNSC passes resolution to endorse JCPOA) Implementation Day 2016 Transition Day October 2023 (8 years after Adoption Day or earlier subject to IAEA determination) Termination Day - October 2025 (10 years after Adoption Day)
UN Sanctions Relief Overview 1. Lifting of all UNSC resolutions relating to Iran s nuclear programme 2. UN sanctions relief will principally relate to: Removal of all UN nuclear-related sanctions E.g., prohibition on supply of nuclear-related materials and technology; prohibition of related financial services Delisting of certain parties related to Iran s nuclear programme 3. UNSC resolution maintains restrictions in relation to: Sale of arms to or from Iran (5 years) Development of ballistic missile technologies (8 years) 38
EU Sanctions Relief Key Points 1. Adoption Day 18 October 90 Days after UNSC endorsement of JCPOA 2. Main EU sanctions relief will not take effect until Implementation Day in 2016 3. This applies for oil/gas, petrochemical, shipping and financial services sectors 4. Some sanctions to remain in force until Transition Day in 2023 in arms, nuclear and metals sectors 5. Existing JPOA sanctions relief remains applicable 6. Whole deal subject to satisfactory IAEA inspections being completed 39
EU Sanctions Relief Jurisdiction Who is subject to EU sanctions? Who will benefit from the EU Iran sanctions relief? EU Entities (and foreign branches) EU Nationals EU Territory Business conducted in EU 40
EU Iran Sanctions Background Rules on Iran Controls on designated persons Separate (extensive) controls generally applicable to dealings with Iranian persons, entities or bodies, defined broadly to include: Iranian state and public bodies Any person in, or resident in, Iran Iranian registered entities Non-Iranian companies that are owned or controlled directly or indirectly by Iranian parties Controls also cover exports/imports to, from or for use in Iran (regardless of whether the counterparty is Iranian) 41
EU Iran Sanctions Background Iran Controls (1) Extensive product controls: Dual-use items Military items Key oil and gas and petrochemicals items Internal repression items Proliferation-sensitive items Naval equipment and technology (and wider shipping controls) Graphite and raw or semi-processed metals such as aluminium and steel ERP software specifically designed for use in certain sectors Bank notes/coinage, precious metals, gold and diamonds applicable to dealings with Government/CBI controlled persons Controls on related services (technical, financial, brokering) Import bans into the EU (oil, gas, petrochemicals-related) 42
EU Iran Sanctions Background Iran Controls (2) Iran financial controls Ban on transfers and relationships between EU and Iranian banks Funds transfer controls (from 10,000) Investment controls Restrictions on provision of insurance and reinsurance Restrictions on sale/purchase of public bonds Designated party controls Extensive lists of designated parties Wide range of individuals, entities, and bodies targeted Almost all Iranian banks are designated (including the Central Bank of Iran) 43
EU Sanctions Relief JPOA JPOA temporary sanctions relief extended through to 14 January 2016 Relief from sanctions on: Import, transport, and insurance of petrochemicals from Iran Raising of thresholds under funds transfer controls Trade in precious metals 44
EU Sanctions Relief Product Controls and Financial Services From Implementation Day, JCPOA contemplates sanctions relief for: Finance, banking, and insurance measures including funds transfer controls Oil, gas, and petrochemical sectors Shipping, shipbuilding, and transport sectors Banknotes and coinage Software Human rights-related sanctions are expected to remain in place Arms restrictions / missile proliferation sanctions remain in place until Transition Day Same for raw and processed metals restrictions 45
EU Sanctions Relief Delisting of DPs From Implementation Day (2016): Attachment 1 to Annex II of JCPOA sets out delisting of: Persons, entities, and bodies designated due to their involvement in the Iranian oil and gas, financial, and shipping sectors Delisting includes Iranian banks and financial institutions, and the Central Bank of Iran From Transition Day (2023): Other parties designated due to nuclear activities or human rights violations will not be delisted until Transition Day 46
Compliance Tips
How can you comply? Due diligence / screening on counterparties Clearly documented standardized process for screening against sanctions lists At least screen against information in your possession and in public domain Risk-based assessment of counterparties, shareholders and other third parties to screen Determine which future exports/reexports may require licenses
How can you comply? Contractual protections Obtain certifications/representations/warranties from counterparties Require screening by distributors and agents Review option to terminate or suspend contracts Stay up-to-date on sanctions developments