Export control and sanctions compliance
Zoe Chan So Yuen FCIS FCS, discusses the impact of export controls and sanctions laws on international contracts.
International sanctions law has emerged as an important compliance topic for corporations or individuals engaged in international trade and supply chain management, the procurement of goods and services, or even corporate finance related directly and indirectly to sanctioned activities. Multinational corporations, local corporations and company officers may violate rules of international sanctions through their shipment of goods via sanctioned territories, thus triggering a breach of underlying international contracts, financing agreements, insurance and reinsurance contracts with concerned stakeholders. Since an ignorance of law is not a good defence, compliance professionals are recommended to be familiar with the international sanctions/export control requirements. This article examines the impacts of international sanctions law on international contracts and the importance of sanctions compliance programmes for Chartered Secretaries.
Countries and individuals can be subject to international sanctions due to political and economic reasons. They can be regulated either unilaterally or multilaterally. The United Nations Security Council, the European Union (EU) and individual countries, can impose different types of sanctions against countries, individual nationals and corporations, usually imposing bans or restrictions on making assets or services available, directly or indirectly, to the sanctions targets. The sanctioned measures can be broadly defined as so wide in scope that they can affect all supply chains and management decisions with countries, corporations or individuals subject to sanctions.
These risks are very real. During a listing vetting in 2013, Hong Kong’s Securities and Futures Commission found that PRC incorporated subsidiaries of a local applicant had engineering and construction contracts connected to a sanctioned country. As a result, legal opinions needed to be secured for compliance with the rules before formal vetting of the listing.
The regulatory framework in Hong Kong and globally
The Hong Kong government has given effect to United Nations (UN) resolutions and treaties relating to sanctioned activities. The UN (Anti-Terrorism Measures) Ordinance (Cap 575), and UN Sanctions Ordinance (Cap 537), target anti-money laundering (AML) and counter-financing of terrorism, human rights abuses and the proliferation of weapons of mass destruction by terrorists and sanctioned countries.
The Hong Kong Commerce and Economic Development Bureau maintains the most up-to-date list of sanctioned countries and individuals ready for inspection online. Such regulators as the Hong Kong Monetary Authority monitor sanctions compliance for all authorised financial institutions (FIs) to maintain a database of sanctioned targets, and particulars of terrorist suspects and designated parties for clients and transactional screening purposes. Any non-compliance by companies, FIs or individuals may subject them to a fine of not exceeding HK$0.5 million and/or imprisonment of responsible officers. So there are lessons to be learnt with criminal consequences and economic liabilities.
On a global level, the US Office of Foreign Assets Control (OFAC) of the Treasury Department rigorously administers and enforces economic and trade sanctions based on the US foreign policy and national security goals. The US government has implemented various financial restrictions on persons and entities as part of its domestic counter-terrorism regime, as well as those persons prohibited by the UN and/or EU. For example, some PRC telecommunication giants were found to be targets for investigations by OFAC for alleged import of telecommunication networks and technology transfers to sanctioned countries. Afghanistan, Cote d’Ivoire, DR Congo, Iran, Iraq, DPR Korea, Lebanon, Liberia, Sierra Leone, Somalia, Sudan and Burma, as well as their political leaders and affected individuals, are also common targets subject to sanctions.
Meanwhile, the UK Office of Financial Sanctions Implementation (OFSI) was established in early 2016 to focus on increasing criminal penalties for financial sanctions breaches. Like OFAC, OFSI is expected to adopt a tougher enforcement of financial sanctions in the UK.
Notably, OFAC applies to the US persons and US businesses around the globe. OFAC has also designated individuals and other entities as ‘specially designated nationals’ (SDNs) of target countries, subjecting them to the same sanctions as the relevant country itself. The economic consequences for non-compliance can be severe as FIs can be ordered not to provide any economic or financial support to individuals and corporations that appear on the SDN list, or to sanctioned countries. A Hong Kong registered company that is a subsidiary of a US company, or is owned by a US citizen, will be treated as a US person. Contracts made by those Hong Kong companies will be subject to the same restrictions as are imposed against the related US companies.
The EU, Australia and New Zealand basically implement similar regulatory approaches to sanctions law compliance. Priority is also put on human rights violation issues by those parties on the SDN list.
Given the wide range of sanctioned persons and entities, and the frequency with which sanctions targets are constantly updated, it is not sufficient to simply check the nationalities/registration of the corporations or country of residence of your clients and your corporate trading partners as a one-off due diligence check. Interestingly, many strategies (for example, setting up companies in tax havens and overseas companies) can be used to circumvent the rules by individuals and corporations so that their origins and identities cannot be easily identified by regulators.
These issues are particularly relevant in Hong Kong, given Hong Kong’s position as a leading international trading centre and import/export hub for global business. A Hong Kong registered company that exports US-origin goods or services to a country subject to the US sanctions, for example, may violate those US sanctions even if it has no other US connection. Caution is needed to avoid any transactions, or even indirect trading or financing, with sanctioned countries, companies and parties. For example, the UN has identified certain companies which breached sanctions against Iraq under the Oil-for-Food Programme and imposed heavy fines. Numerous oil and gas producers, infrastructure and engineering companies were subsequently prosecuted and convicted for sanctions breaches. In March 2016, economic sanctions were implemented to prevent anyone helping the Iranian Revolutionary Guard to develop ballistic missiles. Two British companies were found to have business relations with the Iranian Aviation Company of Mahan. Worse still, huge penalties were put in place on any company that dealt with the sanctioned entities like the Iranian government, together with a ban on investment in the oil sector, the sale of goods and services (for example, food and telecommunication supplies) to Iran. Similar sanctions were imposed by the US on Iraq, the regime of Saddam Hussein and political leaders, with heavy fines and penalties. Those financial and economic losses should not be underestimated.
Non-compliance with sanctions law can result in huge losses for construction companies, clients, insurers and banks, including reputational damage, regulatory sanctions, litigation and fines. Many insurance and reinsurance contracts relating to the transport of goods may be breached and terminated with no remedy where the transport crosses high-risk countries. Moreover, insurers and insured may be prosecuted for facilitating and financing prohibited transactions with sanctioned countries. Reliance upon overseas compliance procedures is not likely to be considered sufficient due diligence to insulate the brokers and investors from liability of whatsoever nature.
Sadly, a recent UK survey revealed that more than 45% of international companies had not developed effective international sanctions compliance programmes or due diligence checks. Many companies had not continuously vetted their clients or business partners against sanctions lists and SDNs.
Sanctions compliance programmes
Many of the risks outlined above can be mitigated with an effective sanctions compliance programme. The frontline staff or corporate officer from sales and marketing should be in charge of a global sanction compliance programme. Like other risk management compliance programmes, such a programme should include:
- detailed customer and transactional due diligence and screening against applicable sanctions target lists and SDNs, including the UN, UK, Australia’s consolidated sanctions list and OFAC’s SDN list
- assessment of whether equipment, services, finance facilities and products are on export/import control lists, such as the UK’s Strategic Export Control List. If so, all necessary prior approval, export permits/licences need to be obtained in the connected jurisdictions
- detailed legal advice on local exports, international sanctions contractual controls, including export sanctions exclusions and warranties in product/servicers liability risks, finance and insurance
- educating and training of frontline staff in implementing sanctions compliance policies and procedures, and
- regular monitoring/audit of transactions to ensure sanctions compliance.
Sanctions risk audits
It is important to have a vigorous assessment of your or your clients’ sanctions risk profile. Companies need to assess their AML, anti-bribery risk and sanctions risk profiles, they should also vet their likely risk exposure from their clients or related stakeholders.
Take Iran as an example. Although Iran used to be treated as an ‘ultra high risk country’, the lifting of some of the sanctions programme has been witnessed since January 2016. Most international banks, MNCs and professional investors are still reluctant to adjust to this new reality, however, and insurances currently purchased for the shipment of goods still generally exclude cover when shipments are to or via Iran.
With the increasing trend towards globalisation, construction companies and professionals should be alert to screen their sanction risks in international trade and operations. They should escalate and report potentially suspicious transactions to regulators in accordance with applicable local and international sanctions laws.
Meanwhile, they should engage in sanctions audits, compliance assessments and risk mitigation. Detailed professional advice with regular contract review should be sought updating sanctions compliance requirements, financial and insurance coverage under the relevant overseas export trade laws.
Zoe Chan So Yuen
Solicitor, FCIS FCS, LLM, MCIArb, HKRFP
SIDEBAR: INTERNATIONAL SANCTIONS FACTFILE
The most common types of international sanctions are listed below.
Diplomatic sanctions – can include a reduction or removal of diplomatic ties, travel and visa restrictions or visa bans. For example, there used to be a ban on Iranian politicians and military leaders travelling to the US and the EU. Similar sanctions are implemented against the leaders of the Assad regime in Syria and Ali Abdallah Saleh and his sons in Yemen.
Economic sanctions – can include a ban on trade, possibly limited to certain sectors such as armaments, or technology transfers. Typically, additional permits are required for the import or export of sensitive goods, software and technology, which could be used in arms programmes. Sanctions can prohibit financial credits, assistance and may prohibit the carriage of goods. There may be restrictions on providing finance, loans and letters of credit for targetted individuals or companies by FIs. The Hong Kong government can also freeze the assets and cash of sanctioned targets and companies.
Military sanctions – can include military intervention and arms embargoes (a ban on weapons, military vehicles, etc). Embargoes can also cover goods that generate money for a country’s leaders, like trading weapons oil or timber.
Sport sanctions – can include preventing the targetted country’s sports teams from competing in international competitions and sports events. For instance, some athletes from Russia were banned from the recent Olympics Games in Brazil.