FT Special Reports EU-US sanctions January 2020
Businesses have to contend with the resumption of US sanctions and EU rules that can make it illegal to comply with American measures © Daniel Pudles

When President Donald Trump walked away from the Iran nuclear deal in 2018 and imposed sanctions against the country, the intricate landscape of global trade embargoes became even more complex for multinational companies.

Not only did international businesses have to contend with the resumption of US sanctions, they also had to navigate EU rules that can make it illegal to comply with the American measures, leaving them caught in the geopolitical crossfire.

Yet the legal labyrinth in which multinationals find themselves is likely to grow more challenging still as other governments follow the US’s enthusiastic use of sanctions.

The biggest challenge for companies is simply understanding what is required of them to comply with the rules, given how the policies and the enforcement of them varies widely, according to Bryan Early, a politics professor at Albany university. The US in particular has become an “extreme outlier in terms of how much it is willing to invest in the implementation and enforcement of its sanctions — and its willingness to name and shame the companies it identifies as violating sanctions”, he says.

The US Treasury’s Office of Foreign Assets Control (Ofac) administers and enforces economic and trade sanctions. But its statements and regulations leave “plenty of grey areas” which means multinationals need to be “very conservative and stay as far away from those grey lines as possible”, says Clif Burns, senior counsel at Crowell & Moring in Washington.

Without good guidance, most businesses tend to steer clear of countries targeted by trade sanctions, he says. Yet in practice, even a conservative approach can be difficult. US companies are forbidden to do business with organisations which in aggregate are more than 50 per cent owned by individuals or entities on Ofac’s list of blocked parties. “This means you may have to go up and down the chain of ownership to ensure you’re not doing business with a sanctioned entity,” says Mr Burns.

Ofac is willing to impose large penalties against foreign sanctions violators, as well as inflicting reputational damage, says Prof Early. Ofac also encourages companies to voluntarily disclose violations in exchange for lower penalties.

While the US’s expansive sanctions rules might be vague, they are also relatively coherent, says Anna Bradshaw, a partner at Peters & Peters Solicitors in London. This stands in contrast with the EU, where member states all have their own approach to enforcement. “Some member states criminalise breaches, yet others only impose civil or administrative penalties. These differences can have significant consequences,” she says.

“In the UK, if you believe someone has breached EU financial sanctions, you must report it; it’s a criminal offence for certain institutions, businesses and professions to fail to do so. But that’s not the case in other jurisdictions,” she adds.

In navigating all this, multinationals must consider not only where they and their subsidiaries are domiciled and doing business, says Lourdes Catrain, partner at Hogan Lovells. They must also examine the currency of any payments, the country of origin of products, and the identity of the people involved.

US primary sanctions prohibit US companies (including their non-US branches) as well as citizens, green-card holders and non-US entities owned or controlled by US persons, from doing business with Iran and Cuba. But the applicability of US secondary sanctions against Iran and Cuba is more complex, says Ms Catrain, as these apply to any company in the world that wants to do any business in the US.

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“Secondary sanctions effectively forbid EU companies from doing certain business with Iran or Cuba — even if the goods or technology are not subject to US law.”

Particularly problematic for European companies are EU laws known as blocking regulations, which prohibit EU companies from following US secondary sanctions. The regulation was updated in response to the US’s withdrawal from the Iran deal.

“It’s a breach of EU blocking regulations to follow the US secondary sanctions,” says Ms Catrain. “The result has been that EU businesses are effectively caught between the requirements of the blocking regulation and the US’s secondary sanctions.”

In recent cases involving US sanctions violations by European companies, Ms Bradshaw says compliance with the EU blocking regulation even seems to have been treated as an aggravating factor, justifying greater punishment. “Evidence of steps taken to follow the EU regime could be invoked as proof of how a company is violating the US regulations,” she says.

There is a little-used way out — companies can apply for a waiver from the EU if they feel they would suffer irreparable harm. But the EU has set a high bar for what constitutes irreparable harm, and Ms Catrain believes only 22 such authorisations were granted last year. The EU does not make the waivers public.

Most sanctions, in addition to targeting specific sectors, include asset freezes on certain people and entities. Yet Ms Catrain says the EU and US lists of sanctioned persons and entities differ, making compliance particularly complicated for global supply chains.

“Businesses need to check their customers, suppliers and all counterparties against the EU and US sanctions lists — as well as lists of any other applicable jurisdictions,” says Ms Catrain. “To minimise exposure to sanctions risks, they should also screen the final user of the product or service — even if not a direct customer — to avoid unpleasant surprises.”

Businesses must strive to be “100 per cent” on top of all applicable sanctions or they might as well not bother, she adds. Even so, they may still find that banks will not process transactions from certain countries. “Financial institutions — who more often than not will have strong links to the US and rely on their continued ability to do business there — may see too much risk in allowing such transactions to pass through their systems.”

And despite all that work, the most diligent businesses may still find themselves tripped up by vague rules and opposing sanctions regimes. “They must accept the reality that they’re never going to be able to ensure full compliance,” says Ms Bradshaw.

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