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Ibtissem Lassoued - Partner, Head of Advisory - Financial Crime / Family Business
The effort against both the increasing threat of terrorism and the development and proliferation of weapons of mass destruction, has consistently involved the implementation and imposition of economic sanctions against offending nations. Following action by the United Nations Security Council, the European Union Commission and the United States Government against Iran in particular, Al Tamimi & Company has been receiving more and more queries in relation to the impact of the various economic sanctions upon commercial relations with Iran.
Recurrent questions include, but are not limited to, the following:
It is crucial that a lawyer be aware of any transactions when his/her client or a client’s business partner is located in a sanctioned country, has business dealings with a sanctioned country, gained its funds from a sanctioned country or is owned or controlled by a sanctioned entity or individual. The reason why it is so crucial for such a determination to take place is that the number of economic sanctions continue to increase as do the potential consequences upon the client, whether at the business or at the personal level. One only has to witness the recent significant financial penalties upon major global banks as reported in official press releases (e.g. Standard Chartered Bank) and the potential penalties upon other financial institutions that have transgressed the economic sanctions against trade dealings with Iran.
In order to properly understand the significance of the global economic sanctions, one must understand their primary objectives and implications.
Given the complexity of this topic, this article is not an exhaustive analysis of all the existing economic sanctions and mainly addresses the Iran sanctions, in light of the UAE and Iran trade ties and geographical proximity. For more information on this article, please contact Ibtissem Lassoued, Senior Associate – Special Projects Department: email@example.com.
1. Global Economic Sanctions: Global Effective Measures for Global Concern
An economic sanction can be defined as “any action taken by one country or a group of countries acting collectively in order to harm the economy of another country or group of countries, with the objective being to engender economic or political change.” Often used as an instrument of foreign policy, it can be applied for various reasons including, but not limited to, the punishment of the other country, or as an incentive for change, political, policy or otherwise, in the target country. There are two general types of sanctions that are exercised: unilateral sanctions (imposed by a single country against another) or bilateral sanctions (sanctions imposed by a group of countries acting either individually or collectively against another). Economic Sanctions can affect all industries and there are several ways in which a sanction is exercised through laws and regulations of imposing states including mainly the following:
a) Countries / International Entities Exercising Economic Sanctions
|Country / International Organization Exercising Economic Sanctions||In Practice||Examples of Middle East Countries Subject to Economic Sanctions|
|United Nations (UN) Security Council Sanction Committee||The UN imposes mandatory sanctions on countries through the Security Council Sanctions Committees (the “SC”) under Articles 39 and 41 of Chapter VII of the UN Charter.
The SC adopted: (i) Resolution 1730 (2006) by which the SC requested the Secretary-General to establish within the Secretariat, a focal point to receive de-listing requests and (ii) Resolution 1904 (2009) by which it established the Office of the Ombudsperson.
|European Union (EU)||The EU imposes sanctions and restrictive measures pursuant to the objectives of the EU Common Foreign and Security Policy (CFSP) as set out in Article 11 of the Treaty establishing the European Union.
The Guidelines on Implementation and Evaluation of Restrictive Measures (Sanctions) in the Framework of the EU Common Foreign and Security Policy provides guidance and standard wording that could be used in legal instruments.
|Country, individually||In the US:
Sanctions are set forth in the Iranian Transactions Regulations (31 CFR Part 560)1 and enforced through the Office of Foreign Assets Control (OFAC) which derives its authority from a variety of US federal laws regarding embargoes and economic sanctions and operates under the auspices of the US Department of the Treasury.
OFAC administers and regularly updates the Specially Designated Nationals (SDN) List which is a publication listing individuals and organizations with whom US citizens and permanent residents are prohibited from doing business. OFAC regulations often provide general licenses authorizing the performance of certain categories of transactions and also issues specific licenses on a case-by-case basis under certain limited situations and conditions2.
|Currently, OFAC administers sanctions programs against the following countries in the MENA Region (Middle East and North Africa) see notes below:
Countries such as Switzerland, Canada5, Australia, the UK and Japan have recently tightened sanctions against Iran.
b) Comprehensive Sanctions Imposed Against Iran to Curtail Nuclear Armament Development
I. Scope of the Sanctions:
The sanctions cover mainly (a) the blocking of persons involved in terrorism, proliferation of mass destruction weapon and (b) Iran’s energy sector and financial transactions with Iran.
• US Key Sanctions6
The CISADA authorized sanctions on foreign financial institutions that engage in financial transactions with:
Note: The financial provisions of CISADA are implemented through the Iranian Financial Sanctions Regulations (IFSR) issued by the US Treasury Department in August 2010.
Recently in 2012:
• UN Key Sanctions
• EU Key Sanctions
Sanctionable Activities and Restrictions:
• US Sanctions
As described in the IFSR, the sanctionable activities of a foreign financial institution are:
• EU Sanctions
EU Council Regulation No 961/2010 implements additional restrictive measures against Iran, and repeals Regulation No 423/2007. It follows the UN Security Council Resolution 1929.
The restrictions are mainly as follows:
II. Consequences of breach
The extra-jurisdictional approach by the US involves the unilateral imposition of an obligation on foreign entities to comply with its laws. Penalties vary from “caution” letters to transaction-based civil penalties, to criminal prosecution that could result in millions of dollars worth of fines or up to 20 years imprisonment (sentences vary based on the program). The penalty will be less important if there was a voluntary self-disclosure (e.g. a bank disclosing that through negligent or reckless conduct, it had breached the sanctions), than an egregious and willful breach of sanctions.
Each member country will enact its own statutes to give effect to EU criminal stipulations. Violations of EU legislation shall be punished either by fine or imprisonment. If the Member State is at fault, they will be required to pay the EU Commission a fine. For example, in the UK, the current maximum penalties for breaching the embargo on financing or importing crude oil or petroleum originating from Iran are imprisonment (for up to three months for summary offences and two years upon indictment) and/or a monetary fine (up to £5,000 on summary conviction and unlimited in the event of indictment).
To enforce sanctions, the UN requests that countries implement Resolution measures and establish authorized persons to ensure adherence to these sanctions within their respective territories. Since the UN is effectively a forum wherein other countries convene, it is assumed that a vote by members of the Security Council – or in wider sittings of the UN – could be used to impose sanctions on Member States who have violated the Iranian embargos.
2. Recent developments and the practical implications of Global Economic Sanctions
Disconnection of all Iranian banks from the international network Society for Worldwide Interbank Financial Telecommunication (SWIFT)8
On 17 March 2012, SWIFT – the worldwide financial messaging network to facilitate the interbank transfer of funds – disconnected all Iranian banks from its international network that had been identified as institutions in breach of current EU sanctions. This has been described as having the analogous effect of prohibiting access to waterways. This occurred following an agreement between all 27 Member States of the EU Council, and the Council’s subsequent ruling.
It is worth noting that SWIFT has never before expelled an institution in its 39 year history. There is a clear and present possibility that countries found to be non-compliant with EU, US and UN measures against Iran, could be compelled to ‘fall in line’ and become more cooperative with the sanctions via payment network sanctions.
There is a reasonable likelihood that Iran will successfully establish and implement its own SWIFT-type transfer systems so as not to get locked out of the international monetary system in the future. Cutting the network to Iran could force alternate networks to appear, similar to the “Barter Network”, as there is no other alternative currency to use. It is actually worth noting that on 26 May 2012, the Governor of the Central Bank of Iran Mr. Mahmoud Bahmani announced 9 that it had created such a system. This proves that there may be indeed state-initiated avenues through which the various sanctions imposed on Iran can be made less effective if there are subscribers to these types of methods.
The Financial Action Task Force (FATF)
In June 2012, the FATF, which is an inter-governmental body to promote policies to combat money laundering and terrorist financing, reaffirmed10 its call on members and urged “all jurisdictions to advise their financial institutions to give special attention to business relationships and transactions with Iran, including Iranian companies and financial institutions” and “to protect against correspondent relationships being used to bypass or evade counter-measures and risk mitigation practices and to take into account ML/FT risks when considering requests by Iranian financial institutions to open branches and subsidiaries in their jurisdiction”. Simultaneously, the FATF urged Iran to immediately address its AML/CFT deficiencies, in particular by criminalizing terrorist financing and implementing suspicious transaction reporting (STR) requirements, failing which the FATF will ask its members to strengthen counter-measures in October 2012.
Major Global Banks under investigation
Major Global Banks are currently being investigated by US regulators over allegations of illicit dollar transactions / money laundering with Iran, exposing non-US banks to sanctions by the US after the “u-turn exemption” was rendered illegal by the US Treasury in November 2008. in particular, said investigations are based on the use of the “wire stripping” technique by which global banks managed to ensure the anonymity of Iranian US Dollar clearing activities by stripping information from the SWIFT system and hence (i) removing references to Iranian entities and (ii) consequently not triggering investigations before clearing the US Dollar transactions via the bank’s branches located in the US (since sanctioned countries, individuals or entities’ names would not appear and hence could not be identified).
Examples of major global banks under official or internal investigation, as highlighted in various press releases and newspapers articles:
US Foreign subsidiaries: Iran Sanctions Accountability and Human Rights Act of 2012
Since May 2012, there are no more loopholes in relation to the liability of US Parent Companies for Violations of Sanctions by Foreign Subsidiaries: in Section 218 of the Iran Sanctions Accountability and Human Rights Act of 2012, US Parent companies are held liable for dealings with Iran by their foreign subsidiaries, which means there will be no more exemptions for the latter even when non US persons would have facilitated the subsidiaries activities with Iran. Section 218 states the following: “Not later than 60 days after the date of the enactment of this Act, the President shall prohibit an entity owned or controlled by a United States person and established or maintained outside the United States from knowingly engaging in any transaction directly or indirectly with the Government of Iran or any person subject to the jurisdiction of the Government of Iran that would be prohibited by an order or regulation issued pursuant to the International Emergency Economic Powers act (50 U.S.C. 1701 et seq.) if the transaction were engaged in by a United States person or in the United States.”
In circumstances where US companies have subsidiaries located abroad and dealing with Iran, the US Parent companies would need to separate from those subsidiaries to avoid any liability.
3. The Ultimate Defense: Preventive Action
In light of the above, it appears that international companies need to be compliant with several jurisdictions at the same time and the ultimate defense in protecting yourself from the possibility of infringing any of the highlighted sanctions is preventive action. Abstaining from dealing with blacklisted entities, ensuring that self-regulation is diligent and thorough, and actively ensuring the validity of client or transaction in line with applicable trade sanction laws will best enable a lawyer’s client to comply with these far-reaching economic sanctions. Keeping abreast of legislative changes from the UN, EU and US that affect Iran and other sanctioned countries will allow for more time to effect the changes necessary to align your client’s operations with the law.
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