Feature

posted 30 Nov 2001 in Volume 5 Issue 3

Are you dealing with terrorists?

The US government has acted in response to the terrorist threat by trying to dry up the sources of terrorist funds. Its actions and how they might affect the trade financier are discussed by Jane Freeberg Sarma, a senior associate in the litigation department of Watson, Farley & Williams’ New York office.

In the new war on terrorism, the economic front is crucial. The United States is attempting to dry up sources of terrorist funding through economic sanctions, and to expose the trail of assets leading to terrorists. By freezing the assets of terrorists, and prohibiting US persons from dealing with suspected terrorists and terrorist organisations, the US hopes to staunch the flow of funds into the coffers of the terrorists. Terrorists with little funding, it is hoped, may be less dangerous than well-funded terrorists. More than US$24 million has already been frozen in the US, and £63 million in the UK.

Cutting the links

In an executive order issued on September 24, 2001, President Bush froze all assets in the US or in the possession of US persons belonging to 27 suspected terrorists and terrorist organisations, and prohibited US persons from entering into transactions with such persons. The sanctions imposed by the US are not directed solely at the terrorists themselves. Some businesses with links to terrorists have been targeted by economic sanctions already, and more are expected to be named in the coming months. The list of blocked terrorists was expanded on October 5, 2001, when the US state department issued its biennial report on foreign terrorist organisations, naming 28 terrorist organisations, some of which appeared on the September 24 list. On October 12, 2001, the department of treasury issued an expanded list of terrorists and terrorist organisations, adding 39 more names to the list, including three businesses. Other nations are also following suit, including the UK, France, Germany and Bahrain.

The US is also targeting countries that support terrorism. In early January 2001, the United States froze all assets of the Taliban and any persons owned or controlled by the Taliban. US origin goods, services and technology may not be exported to Taliban-controlled areas of Afghanistan. Humanitarian aid to Afghanistan, however, is permitted. States supporting international terrorism, which are currently defined as Cuba, Iran, Iraq, Libya, North Korea, Sudan and Syria, are also subject to US sanctions.

These sanctions prohibit transactions which a US person has reasonable cause to believe pose a risk of furthering terrorist activities in the US. In addition, all property that belongs to Cuba, Iraq, or Libya that is in the possession or control of a US person has been frozen.

US persons are prohibited from entering into transactions with persons from Cuba, Iran or Libya, or with certain Yugoslavian persons associated with former President Milosevic, without first obtaining authorisation from the US government. Transactions with Iraq by US persons are prohibited unless authorised by both the United Nations and the United States.

The sanctions apply only to US persons. The US department of treasury, which administers the sanctions programmes, interprets the term “US person” very broadly. Companies that are organised outside the US, who may not usually consider themselves to be US persons, may in fact be “US persons” under the sanctions. “US person” is defined in the September 24 executive order as, “any United States citizen, permanent resident alien, entity organised under the laws of the United States (including foreign branches), or any person in the United States”.

The executive order does not define what constitutes being “in the United States”. A physical presence in the United States, such as an office, would clearly constitute being “in the United States”. Even a one-person representative office in the US would be sufficient for the entire company to be “in the United States”. However, a physical presence is not always required to be deemed “in the United States”. Other connections to the US also may be sufficient. Factors that may indicate that a person

is “in the United States” include: (i) the volume of business done and extent of contacts with the US; (ii) trading of company stock on a US stock exchange; (iii) ownership or control of the company by US persons; (iv) the presence of US persons in key positions in the company as officers, directors, agents or employees; (v) assets of the company in the US, including bank accounts; (vi) frequency of visits to the US by company personnel; and (vii) any other connection that the company may have with the US. A single factor, taken by itself, may not indicate that a foreign company is a “US person” within the meaning of the sanctions, but the weight of the factors taken as a whole may do so.

Are you affected?

Foreign companies that are not US persons under the sanctions may still be affected by the sanctions. Wire transfer payments in dollars that are made anywhere in the world are all processed through US banks. The sanctions require US banks to block, or freeze, any payment to a sanctioned person. Most banks use ‘filters’ that automatically check all payment instructions for indications that payments are related to a sanctioned person. If the wire transfer instructions suggest that a sanctioned person is involved in any way in the transaction, it is likely that the payment will be blocked when it passes through a US bank for processing. Blocked payments cannot be returned to the sender, or forwarded to the recipient, without the authorisation of the US government.

Foreign companies may also find their business affected by the sanctions if US persons are their officers, directors or employees. As US persons, those individuals may not be involved in any transaction with a sanctioned person without personally violating the US sanctions. The company, however, is not automatically deemed to be a US person solely because it employs US persons.

US persons who learn they are doing business with sanctioned persons must obtain a licence from the US department of treasury, office of foreign assets control. Until this approval is obtained, a US person is prohibited from taking any action with respect to a sanctioned person, including proceeding with a contract, making payment or setting off a claim.

If a US person does business with a sanctioned person without first obtaining government approval, the US department of treasury can impose stiff penalties for violation of the sanctions. However, the US person must “know or have reason to know” that he is dealing with a sanctioned person for a penalty to be imposed. The “reason to know” standard requires that US persons remain alert to rumours in the market about sanctioned persons and know their customers. Wilful ignorance about whether a person is on the sanctions list is not a defence to a sanctions violation. Penalties that may be imposed by the department of treasury include both fines on a company violating the sanctions, and fines and/or imprisonment on the individuals involved in the transaction, regardless of whether they were acting for themselves or on behalf of their company.

Keep a look out!

Companies engaged in international trade should closely monitor the list of sanctioned persons. The US department of treasury has formed a new organisation, the Foreign Terrorist Asset Tracking Center, to locate assets of suspected terrorists and to uncover funding sources for terrorists. It is likely that the list of sanctioned businesses that are suspected of funnelling assets to terrorists will expand.

The events of September 11 continue to shape our lives and the way we do business. For the trade industry, careful compliance with applicable sanctions is an absolute necessity. Companies should look first to their own contacts with the United States to determine if they are subject to the US sanctions. If a company is a US person and therefore subject to the sanctions, it should examine its trading activities closely to ensure it is not, and will not be, in violation of the sanctions. In this war on terrorism, a company claiming that it was unaware it was doing business with a suspected terrorist front will receive little sympathy, either from the press or from the department of treasury.