Trump and US sanctions – managing the risk

US trade and economic sanctions are tools to address national security, foreign policy and economic threats. For the past several decades, the vast majority of sanctions have been imposed by the President alone, not by Congress.

Under US law, simply by declaring to Congress that he believes a particular threat constitutes a national emergency, the President becomes vested with authority to impose sanctions to combat that threat. The President can also impose sanctions under active national emergencies declared by his predecessors, of which there are currently around 20. Sanctions imposed by the President can have immediate effect, be issued without notice or any regard whatsoever to existing contractual relationships, target persons, companies, transactions or entire countries anywhere outside the US and they can be virtually unlimited in scope, from restricting trade of certain types of goods to imposing a full-scale embargo.

This is a significant power for one person to have and, regardless of one’s political viewpoint, it is highly disconcerting for those involved in global business or insurance if that power is in the hands of a man with no government track record from which one can predict how it will be used. Enter, of course, Donald J. Trump.

Coping with sanctions uncertainty

So, how can an international insurer or other business protect itself against the possibility of waking up tomorrow, or a month or year from now, confronted by the fact that a counterparty or the business it conducts is now targeted by sanctions? Some strategies are offered below.

First, a disciplined approach to sanctions compliance is key, and organisational discipline requires policies and procedures. Sanctions compliance policies and procedures help not only to minimise the risk of violation, but also to mitigate potential penalties if a violation occurs. They should be risk-based, meaning tailored to address the specific types of risks posed by the activities in which the business engages. And they should be broadly communicated throughout the enterprise, supported by a visible and genuine commitment from management, and provide for training of all personnel whose activities may expose the company to sanctions risk.

Second, every international business needs to make use of sanctions screening software. Screening software checks the names of persons and entities against sanctions lists, such as the US list of specially designated nationals (SDNs). All counterparties and payees should be screened on a transaction-by-transaction basis. Only through such screening can a company take comfort that a party it is about to contract with or send a payment to has not been added to a sanctions list. Note: two tranches of additions to the SDN list have been made in the Trump administration’s first month.

Insurers will often insist on inclusion of a sanctions clause in insurance policies, which can provide protection to the insurer. While such clauses vary considerably, an example is the following wording, which is broadly used in the London insurance market:

“No insurer shall be deemed to provide cover and no insurer shall be liable to pay any claim or provide any benefit under this policy to the extent that the provision of such cover, payment of such claim or provision of such benefit would expose that insurer to any sanction, prohibition or restriction under United Nations resolutions or the trade or economic sanctions, laws or regulations of the European Union, UK or US.”

Under this wording, even if wholly unexpected sanctions are imposed midway through a policy term, the insurer is deemed not to have not provided cover and is relieved of all liability under the policy, if to do otherwise would expose it to sanctions. It is, of course, key that risk managers understand the extent to which their policies include such provisions and their potential reach.

It is not just insurers who can make use of contractual sanctions provisions. In managing sanctions risk, the contours of such provisions should be appropriate for the business concerned. Typically, they require representations and warrantees that a party is not the target of any sanctions, and that it is not owned or controlled by anyone targeted by sanctions. They also typically contain covenants requiring maintenance of sanctions compliance and thus, if the sanctions landscape changes during the course of the contract, a party has a duty to adjust its activities as needed to maintain sanctions compliance.

Sanctions uncertainty has always been a source of discomfort for international businesses and now even more so under the unpredictable Trump administration. It behoves such businesses to consider and adopt appropriate strategies to manage the risk.