Published in Asian-mena Counsel: Sanctions & Investigations Special Report 2019
Ever-changing and broadening sanctions give rise to formidable challenges for legal teams, but Asian arbitration centres might stand to benefit, writes Nick Ferguson.
Governments around the world are increasingly using economic sanctions and embargoes as a foreign policy tool. Staying abreast of this proliferation of programmes can be a headache for legal teams.
For example, the Office of Foreign Assets Control (Ofac), an agency of the US Treasury Department, lists 31 separate sanctions programmes, more than half of which have been updated during the past year. They include broad narrative sanctions programmes related to foreign interference in US elections, the trading of diamonds and transnational criminal organisations, as well as country-specific programmes targeted at Cuba, Iran and Venezuela, among many others.
In addition, Ofac’s specially designated nationals and blocked persons list includes roughly 6,300 names connected with sanctions targets.
And this is just the US Treasury. Other agencies of the US government have separate programmes, as does the EU, UN and numerous other governments around the world, and the regulatory approach may differ from one jurisdiction to another.
US sanctions in particular are wide and extra-territorial in scope, and failure to comply can have serious consequences, including severe penalties, legal actions, reputational damage, forfeiture of goods or profits, and difficulty in obtaining financing or other services.
Paul Fredrick
And as the Ofac example demonstrates, sanctions can be targeted in a number of different ways — against particular persons, groups or organisations, or vessels and aircraft, or against a specific sector of a country’s business, or against an entire country or state.
“The sanctions environment continues to tighten globally as a result of ever-changing local political situations and relationships among countries,” says Paul Fredrick, general counsel for East Asia and Japan at Schneider Electric. “Schneider Electric has commercial operations in over 100 countries, thus our legal department must remain educated and vigilant about evolving sanctions laws and their possible impact on our business.”
The most significant recent developments that in-house counsel need to be aware of so far in 2019 include the evolving range of sanctions that are applied to entities, persons and activities in Iran and Russia, the extension of EU sanctions to target those responsible for cyber-attacks and the development of UK autonomous sanctions in anticipation of Brexit.
Screening
Clearly, this environment is challenging for legal teams within large and complex businesses. Counsel can’t be involved in vetting every single transaction the business engages in.
“The ever-changing and broadening sanctions give rise to formidable challenges on sanctions screening,” says Joyce Chan, a partner at Clyde & Co in Hong Kong. “Organisations may consider adopting a risk-based approach whereby they identify, assess and understand the sanctions risks to which they are exposed and design a sanctions screening process which is aligned to the organisation’s risk appetite.”
Chan says that factors to take into account in conducting the risk assessment include the territorial presence of the organisation, customer base, products and services offered by the organisation, any cross-border transactions, volume of transactions, suppliers and distribution channels, location of property or asset, and payment.
“Organisations should determine which sanctions lists are relevant for screening,” says Chan. “For organisations which conduct cross-border transactions or carry on business in sectors which are subject to high sanctions risks such as financial institutions and the oil, gas, energy and defence sectors, they should conduct rigorous list management and screening. Financial institutions may go beyond what the law requires and maintain internal lists of individuals and entities which may present a financial crime risk to them identified through their internal procedures or intelligence. On the other hand, domestic transactions are less prone to sanctions risk and real-time sanctions screening may be unnecessary if a ‘know your customer’ process has been undertaken when on-boarding the relevant customer. Having said that, where a red flag appears or there is any activity suspected of violating the sanctions regulations, organisations should conduct further due diligence to ensure sanctions compliance.”
At Schneider Electric, the company operates a global export control centre that works closely with the legal team and local customs and trade compliance teams to stay updated on all US, European and other international sanction laws and regulations applicable to the countries in which Schneider Electric does business.
“My legal team and I also monitor and review current trade alerts on various topics, including licensing policies and procedures related to exports of controlled items for the 15 countries in the Asia-Pacific region for which we are responsible,” says Fredrick . “Schneider Electric places great value on ensuring that all of the products and services we provide to customers are in full compliance with all sanctions laws and other applicable regulations. Contractual provisions require both parties to comply with applicable laws; thus anything less than that can have liability and indemnity ramifications. Careful recordkeeping is also important in case of a customs audit that can arise without advance notice.”
Technology solutions are also being deployed to scan data and payments to reduce the amount of time and resources required to undertake sanctions checks.
“These platforms allow for detailed analysis of millions of transactions simultaneously and reduce the need for human involvement,” says Avryl Lattin, a corporate regulatory partner at Clyde & Co in Sydney. “This type of technology is extremely beneficial when dealing with repetitive transactions, and allows for greater human focus on the real grey areas. Another area where technology is being used is network analytics. This technology allows sophisticated analysis to be undertaken of complex corporate structures to identify relationships with entities or persons to whom sanctions apply.”
Technology solutions are also being deployed to scan data and payments to reduce the amount of time and resources required to undertake sanctions checks.
“These platforms allow for detailed analysis of millions of transactions simultaneously and reduce the need for human involvement,” says Avryl Lattin, a corporate regulatory partner at Clyde & Co in Sydney. “This type of technology is extremely beneficial when dealing with repetitive transactions, and allows for greater human focus on the real grey areas. Another area where technology is being used is network analytics. This technology allows sophisticated analysis to be undertaken of complex corporate structures to identify relationships with entities or persons to whom sanctions apply.”
L to R: Joyce Chan, Avryl Lattin, Simon McConnell
Arbitration
The increasingly complicated sanctions environment has effects that go beyond trade and can also affect international arbitration in various ways.
“Parties from a sanctioned state may find it difficult to pay for advance on costs due to restrictions on access to the banking system and asset freezes imposed by sanctions,” says Simon McConnell, managing partner of Clyde & Co in Hong Kong. “Further, arbitrators and legal counsel who have connections with sanctioned states or entities may not be able to act on the dispute, thus resulting in the reduction of the pool of available arbitrators and counsel.”
Other restrictions imposed by sanctions such as travel bans can also cause practical difficulties in securing the attendance of parties or key witnesses at hearings.
“Additionally, sanctions may affect the substantive merits of a dispute. It can be a ground of frustration, which discharges parties from performance of their contractual obligations. However, it is noted that recent case law has shown that the courts will not lightly treat sanctions as a ground of frustration where a licence that would enable parties to continue performance of the contract could be sought from the relevant authority.
“The enforceability of arbitral awards may also be affected by sanctions. An award which disregards sanctions may be unenforceable in the sanctioning country on the ground of public policy. Conversely, a sanctioned state may refuse to enforce an award which gives effect to sanctions against the state.”
For example, the UK’s defence ministry lost an arbitration with Iran at the Paris-based International Chamber of Commerce (ICC) in 2001 over a 1976 arms deal that was cancelled due to the overthrow of the shah in 1979. After years of further challenges, the UK eventually claimed to be unable to pay the £400 million (US$500m) settlement because of EU sanctions against Iran. A British court ruled in July that the ministry was also not liable to pay interest on the settlement as long as sanctions have applied.
Asia
As global geopolitical tensions ratchet up, countries that stand outside the US-EU axis and are not subject to sanctions themselves may have some advantages as arbitral jurisdictions — and this applies to Hong Kong and Singapore in particular.
“Given the potentially wide-ranging effects that sanctions have on arbitrations, parties from sanctioned countries have more incentive to use Asian arbitration institutions in place of US or European institutions such as the ICC, SCC [Stockholm Chamber of Commerce] and LCIA [London Court of International Arbitration],” says McConnell.
Indeed, it was announced in April that the Hong Kong International Arbitration Centre (HKIAC) would be appointed as the first foreign arbitral institution permitted to administer disputes in Russia. One of the factors leading to the appointment was that HKIAC “operates primarily from a jurisdiction that has not imposed sanctions against Russia”. As a result of the appointment, HKIAC will be able to provide dispute resolution services to a broad range of Russia-related disputes.
“This is a case in point demonstrating how Asian arbitral institutions can gain an edge over their counterparts in US or Europe by being outside of the US/EU sanctions orbit,” says McConnell.
