Sanctions risk complicated by US exposure and lack of guidance

Despite this advice from legal, regulatory and risk management experts at our recent Risk Frontiers event, companies will encounter many grey areas when it comes to sanctions and must weigh up the risk reward of doing business with blacklisted countries or individuals. Global companies need to understand both EU and US sanctions because even if a company is not incorporated in the US they are unlikely to be completely exempt from its sanction regime, explained Guy Soussan, Partner at legal firm Steptoe & Johnson. Primary US sanctions apply to US businesses and persons, as well as foreign non-US subsidiaries of US organisations trading with China and Iran. However, secondary US sanctions explicitly apply to non US persons or companies, explained Mr Soussan at our European Renewals Forecast & Sanctions Risk Frontiers seminar in Belgium last month.hideSecondary sanctions seek to restrict non-US persons from engaging in certain types of business with certain sanctioned countries—currently Iran and Russia, and to a lesser extent Syria, continued the lawyer at the event held in association with the Belgian risk management association Belrim and its Dutch counterpart Narim. Non-US companies and persons have received ‘significant penalties for allegedly violating US sanctions for conduct primarily undertaken outside the US’, Mr Soussan warned delegates. For example, French bank BNP Paribas received a $8.97bn penalty and fine for breach of Sudan, Cuba and Iran US sanctions. At our event sponsored by AIG and Aon, Mr Soussan said that the US sanction regime is more comprehensive when it comes to blocking trade with countries and individuals. Generally all business is restricted under US sanctions, he said. Whereas the EU regime is more ‘targeted’ with trade restrictions put in place against certain sectors, he added. The US also tends to dish out higher penalties for breach of sanctions compared to the EU, he continued. Enforcement in the EU is left to member states and is not as ‘vigorous’ as the US, he said. Fellow speaker Carl Leeman, Executive Chairman of Ifrima, Ferma board member and Chief Risk Officer at Katoen Natie, said risk managers at European companies should be aware of the potential to fall under US sanctions. “Sometimes it is possible that in a commercial contract you agree to fall under the US sanctions although you are a European company and normally you wouldn’t. This is something that risk managers should be aware of,” he said. The experts agreed that the US does provide more guidance than the EU on whether a company’s activities are likely to contravene sanctions. But they said risk managers cannot expect the authorities on either side of the Atlantic to hold their hand and give them the green light on specific deals or contracts. “I have been told that the US authorities are much more straight forward in informing you on a case if you can do a deal,” said Mr Leeman. Mr Soussan said there is much more guidance in the US and, as opposed to the EU, it offers a form of voluntary disclosure whereby companies can enter discussions with the authorities. But don’t expect a yes or no answer to sanction queries in either jurisdiction, he said. “In both the US and EU an agency or regulator is not going to sit down with you, take time and say to you from what you have explained to them it is okay to do something or not. This will not happen. They will give you some principles and an indication but they will never sign off on something,” he said. “They will give you principles and might enter into discussion, but you will be left on your own to decide whether a particular transaction is compliant or not.” Gerry Regan, Policy Officer at the Sanctions Division of the European External Action Service, agreed with this assessment. Ultimately companies must carry out due diligence and then decide whether to act or not, having weighed up the balance between risk and reward, he said. “It is not a happy message to give to people but in the end on a specific case business is expected to take professional advice and make professional decisions…So unfortunately you just have to take professional advice and decide on the level of risk that people are prepared to carry against the level of reward on offer. That is the classic position on sanctions and probably in a lot of areas of regulation,” he told delegates. Risk managers at the event agreed that carrying out due diligence is the only answer for companies concerned about sanctions. But they said this is often complicated by commercial pressures to make rapid business decisions. When it comes to sanctions there are many grey areas, in the end risk managers often have to gather as much information as possible and then make a difficult call, they said. “Risk managers need to improve their process on sanctions internally. We don’t do enough inside organisations on risk mitigation on this subject. But it is difficult because we receive pressure from commercial interests, sometimes executive committees, who say we have an opportunity. So it is very difficult to convince people to go step-by-step and come back before making any final assessment,” said Gaëtan Lefèvre, President of Belrim. Adri van der Waart, Corporate Insurance Manager at Arcadis and Secretary-Treasurer of Narim, said that the sanctions landscape changes so frequently that it is difficult to follow all the issues. “But we as risk managers must try to be in control,” he said. According to Mr Leeman: “Coming to clear due diligence is not easy at all. You contact different law firms and get different advice but still there remains those grey areas.” “It’s difficult because the information you get is sometimes contradictory. So it is complex but you have to do it. First of all you have to know what is going on in your company. It is not easy for everybody to know what their companies are doing,” he continued. Adding: “Due diligence is key but again is easier said than done because you have commercial pressures. If you tell your commercial guys to wait two weeks while you carry out due diligence and come back with an answer that may be an issue.” According to Mr Soussan there are two main risk management options for complying with sanctions. The first is a de-risking approach by which companies self-impose limitations on potential business. This approach is very common, he said. But although it requires more simple compliance assessment it often goes beyond what is required by law and can result in loss of legitimate business and upset customers, he warned. The second option is ‘nuanced compliance’ whereby companies engage with countries as permitted by sanctions. This requires a complete and nuanced understanding of the law, more complicated compliance mechanisms and the use of well-trained experts to assess compliance decisions, but can deliver business and market opportunities, said Mr Soussan. Mr Regan said on a ‘number of occasions’ he has seen over-compliance with sanctions, particularly relating to Syria. “Anything with Syria in the title large entities won’t touch it even though five to ten minutes of due diligence would work out it was possible,” he said. He added that more generally when sanctions are first introduced companies tend to immediately halt any business in the country but return once they have sought experts’ advice and reassurance. Sanctions clauses are another option for companies looking to mitigate sanction risk. But Mr Soussan said they should not replace due diligence and have ‘inherent limitations’. “They may not be accepted by counter parties and may not cover all of them. They take different forms with varying degrees of legal certainty and their enforcement is affected by the choice of law or jurisdiction of the contract concerned,” said the lawyer.

Sanctions risk complicated by US exposure and lack of guidance

Want to read this article?

Read Next

AXA P&C increases premiums by 7% as rates rise at AXA XL

Hong Kong and Shanghai to cooperate on captives and ILS

Swiss broker Kessler names head of special risks

Supply chain cyber risk concentrated in 15 top vendors with ‘below average’ cybersecurity

Four in five non-EU companies to align with CSRD

AXA P&C increases premiums by 7% as rates rise at AXA XL

Hong Kong and Shanghai to cooperate on captives and ILS

Swiss broker Kessler names head of special risks

Supply chain cyber risk concentrated in 15 top vendors with ‘below average’ cybersecurity

Four in five non-EU companies to align with CSRD

Want to read this article?

Read Next

AXA P&C increases premiums by 7% as rates rise at AXA XL

Hong Kong and Shanghai to cooperate on captives and ILS

Swiss broker Kessler names head of special risks

Supply chain cyber risk concentrated in 15 top vendors with ‘below average’ cybersecurity

Four in five non-EU companies to align with CSRD

Related Articles