The rules have changed

Feature | 5 May 2017
Fence_US_Sanctions

Michael O'Kane provides an update on the state of play
for sanctions against Russia and Iran, the increasing reach
of US regulatory bodies, and how the EU is likely to
approach sanctions in a future without the UK

 

Predictability in foreign affairs has become a key part of the compliance planning for companies dealing directly or indirectly with countries subject to sanctions, and the present volatility makes such planning much more speculative. This article seeks to offer some guidance as to the future, as we all gaze into the crystal ball of US and EU sanctions enforcement over the coming years.

2016 was a pivotal year for sanctions enforcement, denoted by a number of significant developments, including the:

  • Implementation of the Joint Comprehensive Plan of Action (JCPOA), diluting sanctions against Iran;

  • Relaxation of sanctions against Myanmar;

  • Removal of many US sanctions against Cuba;

  • Continuation and enhancement of US and EU sanctions against Russia;

  • Introduction of US sanctions against Russia for cyber violations;

  • Issuance by the US Office of Foreign Assets Control (OFAC) of non-binding sanctions guidance; and

  • Creation of the UK's Office of Financial Sanctions Implementation.

We also consider the consequences for sanctions following the UK referendum result in favour of Brexit.

US sanctions policy now

The first weeks of President Donald Trump's administration were marked by a frenetic pace of new legislative measures, broadly aligning with key statements made by him during his election campaign. Such statements included criticism of both the JCPOA and relaxation of Cuba sanctions, plus certain supportive remarks about Russian President, Vladimir Putin.

Informed commentators predicted that Trump would begin altering US sanctions policy, potentially putting him at odds with much of the international community, the US Congress, and his own party. This foreign policy uncertainty was exacerbated when the senior management team of the US State Department tendered their resignation in a move described as "the single biggest simultaneous departure that anyone
can remember."

Russia reversals

The Obama administration extended US sanctions on Russia until March 2018, as a continuation of the sanctions first imposed following Russian involvement in the military conflict in Eastern Ukraine and the annexation of Crimea. US foreign policy during this period was that sanctions would be removed or diluted only after full implementation of the Minsk Agreements.

Despite the seemingly pro-Putin statements of Trump during his campaign, both US Secretary of State, Rex Tillerson, and Defence Secretary James Mattis, have called for Russia to comply with its obligations under the Minsk Agreements, including returning the Crimea to Ukrainian control.

Since his inauguration, Trump has made statements that Crimea was 'taken'; a position which has been confirmed by White House press secretary, Sean Spicer. Russia's response to this position has been to claim that the Crimea was Russian territory.

Critics have expressed doubts that these White House statements represent a genuine change in stance, referring to their timing coinciding with the negative press surrounding the Trump administration's close links to Russia. In particular, former national security adviser Michael Flynn, who resigned in February 2017, and attorney general Jeff Sessions, who in March 2017 recused himself from any investigation into Russian interference in the US election, due to contact with the Russian Ambassador to the US. As a reaction, in February 2017, a bipartisan group of senators introduced the Russian Sanctions Review Act, requiring President Trump to notify Congress before lifting any sanctions linked to either the invasion of Ukraine or interference with the US elections.

Against this apparent concern about sanctions relaxation, Trump has appointed Fiona Hill, (a well-know Russophobe) as his White House senior director for Russia and Europe and member of the National Security Council. Hill, a senior fellow at the Brookings Institute and a former intelligence officer who has been highly critical of President Putin and called for sanctions against Russia to remain in force, now holds a key position on the development of US-Russian sanctions policy.

Iran concerns

The JCPOA was agreed on 14 July 2015 and implemented on 16 January 2016, at which point a number of EU and US nuclear-related sanctions were lifted, including the removal of US secondary sanctions, as well as the deletion of 400 individuals and entities from the
sanctions list.

President Trump has repeatedly criticised the JCPOA, stating that it was his "[n]umber one priority… to dismantle the disastrous deal with Iran". However, he has conceded that it would be difficult to revoke due to being supported by a UN Resolution which was agreed by the EU, Russia, the US, the UK, France and Germany, and having global backing (with the exception of Israel and certain Gulf states). The alternative for the White House is to tighten the non-nuclear sanctions against Iran that fall outside the JCPOA arrangement. Such action was taken following an Iranian ballistic missile test on 29 January 2017, with OFAC adding 13 individuals and 12 entities connected with ballistic missiles to the sanctioned party list on 3 February 2017.

Despite the relaxations in sanctions and the eagerness of European and Asian companies to explore Iranian business prospects, the uptake in opportunities has been slow. In part because of the reluctance of European banks to finance deals involving Iran, particularly following the imposition of fines and forfeiture orders totalling US$8.83bn against BNP Paribas and US$258m against Deutsche Bank for sanctions violations.

There is also concern in the business community about the complexities of the sanctions regime and required exemptions, despite assurances of immunity for deals done between relaxation and snapback. Hesitation among EU and Asian banks about the ongoing prohibition on the use of the US financial system for transactions involving Iran is also proving a barrier to conducting deals with Iranian companies, despite the JCPOA. Following increasing pressure on the US for clarification, at the end of 2016, the then US secretary of state John Kerry said, "There are now opportunities for foreign banks to do business with Iran".

This ignores a key policy that has created huge uncertainty for business, namely the snapback provisions. These allow for sanctions against Iran to be re-imposed at the request of one UN Security Council member, within days, if there was perceived to be a failure by Iran to comply with the terms of the JCPOA. In response, in December 2016, OFAC issued additional guidance on these snapback provisions and the UK's Office of Financial Sanctions Implementation issued further guidance on the operation of sanctions from a UK perspective.

The US and cyber sanctions

On 29 December 2016, President Obama imposed targeted sanctions on Russia for "significant malicious cyber-enabled activities," being actions undertaken and authorised by Russian agencies during the US elections. This is not the first time that sanctions have been imposed for a cyber-attack, as on 1 January 2015 the US imposed sanctions on North Korea in response to cyber-attacks in November and December 2014, including one on Sony Pictures.

The Russian cyber sanctions target nine entities and individuals, namely two Russian intelligence services (the GRU and the FSB), four individual officers of the GRU and three companies that provided material technical support to the GRU. In addition, two US-based Russian compounds used for Russian intelligence-related purposes were closed and the US expelled 35 Russian intelligence operatives. Given the recent announcement by the director of the FBI that an investigation is being conducted into whether the Trump administration colluded with Russia in relation
to this activity, it remains to be seen if any
fresh sanctions of this nature against Russia
will be imposed.

Jurisdiction of the OFAC

Over the years, the US OFAC has claimed jurisdiction for sanctions violations over foreign activity by virtue of the fact that transactions were conducted in US dollars. In 2014, OFAC reached settlement of a criminal investigation into BNP Paribas for violations of US sanctions between 2004 and 2012, resulting in fines and forfeiture totalling US$9bn. Laurent Fabius, France's foreign minister, condemned the fine as disproportionate and "not reasonable", suggesting that EU companies should conduct business in euros and not in US dollars.

Any retreat from this aggressive claim of extra-territorial jurisdiction under Trump seems unlikely after OFAC issued a finding of sanctions violation to B Whale Corporation, a Taiwanese shipping company, for a ship-to-ship transfer of crude oil in international waters, to a vessel owned by an Iranian company on OFAC's sanctioned party list. OFAC found that, despite no US footprint, the inclusion of B Whale Corporation's ship in a US bankruptcy petition was sufficient to meet the definition of US person, which includes "any person in the US".

The future of EU sanctions

EU sanctions have been the spinal cord of EU foreign policy over the last few years. Sanctions against Russia, Iran, Syria and numerous other regimes have been imposed with uniform agreement across the 28 member states. It is arguable that the future effectiveness of EU sanctions now hangs in the balance as a result of Brexit, national elections in 2017 and conflicting foreign policy interests.

With the triggering of UK withdrawal from the EU on 29 March 2017, the focus of the UK foreign policy machine over the next two years will be ensuring as smooth an exit as possible. The energies of the main EU states will be similarly devoted to this topic, leaving less time and attention to be spent on sanctions. The UK has been a motivating nation on many of the key sanctions developments in recent years, including against Russia, Iran, Syria and the various former leaders of the Arab spring countries. The absence of this influence will undoubtedly impact on the quality and consistency of sanctions policy.

It also appears that it will be harder for the EU to hold the line against Russia. With the UK retreating, Russia has been making overtures to the Central and Eastern European countries dependant on Russian oil and gas, funding populist political parties in the upcoming Italian and French elections, and introducing domestic laws to restrict banks in Russia that won't do business with sanctioned companies.

Russian interference in Syria has also complicated the picture as recently observed when, on 28 February 2017, a draft UN Security Council Resolution proposed by the US, UK and France prohibiting the sale of helicopters to Syria, and sanctioning 21 officials and entities was vetoed by China and Russia, with Putin commenting that it was "totally inappropriate".

The EU is likely to continue firm policies on those jurisdictions where sanctions enforcement is uncontroversial. To that end, sanctions on North Korea were recently increased by the EU pursuant to a UN resolution, jointly drafted by China and the US, in response to nuclear and ballistic missile tests and other violations of international law.

The EU also lifted sanctions against the Côte d'Ivoire following progress made towards the restoration of democratic process, culminating in the successful conclusion of presidential elections on 18 December 2016. It also renewed sanctions against Zimbabwe until 20 February 2018; maintained sanctions on Egypt; and renewed sanctions against Belarus.

Looking ahead

As 2016 was a year characterised by major developments, 2017 is likely to be characterised by uncertainty. As the Trump administration beds in and the EU comes to terms with Brexit and Russian influence, only the brave would make too many predictions.

What does appear clear is that, absent Iranian non-compliance, the JCPOA deal is likely to remain in place, US and EU sanctions on Russian will not be diluted in the next six months and sanctions will remain a cornerstone of foreign policy in the West.

Michael O'Kane is a senior partner at law firm Peters & Peters (with thanks to Alice Kemp, legal assistant at the firm)

References: 

1. David Wade, former State Department Chief of Staff: http://wapo.st/2nAyRHb

2. See FT article: http://on.ft.com/2o7TtaA

3. US Department of the Treasury: http://bit.ly/2k9K933

4. See White House archives: http://bit.ly/2kuHFtU

5. See BBC article: http://bbc.in/1jO8b96

6. US Federal Register: http://bit.ly/2o85XPr

7. Security Council Resolution 2270: http://bit.ly/2o83bcX

8. EUR-Lex - Access to EU Law: http://bit.ly/2ohrJ0E; http://bit.ly/2nAmISy

9. EUR-Lex - Access to EU Law: http://bit.ly/2nMcxL3; http://bit.ly/2oblVJ3

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