By Amir Fadavi
December 11, 2021
With the proliferation of sanctions, many companies are increasing their efforts to examine all the restrictions. In some cases, the complexity results in companies leaving a jurisdiction or following all sanctions applicable to them globally across their operations even though it is not required. Such zealous compliance fails to account for increased counter-sanctions measures and presents further problems.
Discussed is the scope of some of the sanctions imposed by the United Nations, the European Union and the principal sanctioning countries followed by a short guide on how to decide which sanctions must be observed and why you must identify those that apply to your own activities.
The sanctions measures decided by the United Nations Security Council (UNSC) are multilateral. Even though the decision is taken by the UNSC and not by the General Assembly, where all the countries have a voice, the UNSC resolutions need to be respected by all the member states.
All member states must take the necessary steps to implement them in their respective jurisdictions. However, in practice, if a member state has no mechanism for such implementation, in its domestic laws, then those sanctions will not be applicable in that country.
Having said that, a number of states do not implement the UN sanctions because they have not passed domestic legislation that provides a legal basis for the sanctions in their jurisdiction. Examples include Afghanistan, Bangladesh, Cameroon, Zimbabwe and Yemen, which have yet legislatively to affirm UN sanctions.
US sanctions are generally applicable to a US person. US persons are defined as:
- US citizens, wherever they are;
- US permanent residents, wherever they are;
- entitles incorporated in the US;
- entities organized under the laws of the US or of any state, territory, possession, or district of the US; and
- any person (individual, entity) inside the US or its territories.
An entity can be deemed present in the US even if not physically present in the US. For example, OFAC deemed B Whale Corporation, an entity based in Taipei, Taiwan, present in the US because it was there for bankruptcy proceedings.
In some cases, US sanctions apply to subsidiaries of US companies incorporated outside the US. In particular, these foreign subsidiaries of all US entities are under the reach of the US sanctions for Iran and Cuba programs. For the North Korean program, only foreign subsidiaries of US financial institutions are also subject to certain restrictions.
Furthermore, in the case of secondary sanctions, a non-US person can be sanctioned in the absence of any US nexus. Therefore, non-US persons need to be aware of the risks of dealing with certain US sanctions targets to whom the secondary sanctions are attached.
Most of the EU Council’s sanctions regulations have an almost identical section about their applicability. The section usually reads that the regulation in question shall apply:
- within the territory of the Union, including its airspace;
- onboard any aircraft or any vessel under the jurisdiction of a member state;
- to any person inside or outside the territory of the Union who is a national of a member state;
- to any legal person, entity or body, inside or outside the territory of the Union, which is incorporated or constituted under the law of a member state; and
- to any legal person, entity or body in respect of any business done in whole or in part within the Union.
Notably, the latter category is not present in one of the regulations imposing certain sanctions against Somalia (Council Regulation (EC) No 147/2003) while it is present in another set of regulations that imposed additional restrictive measures against Somalia (Council Regulation (EU) No 356/2010).
A negative reading or what the regulator did not say in the clause stating that EU sanctions regulations apply to “any legal person, entity or body, inside or outside the territory of the Union, which is incorporated or constituted under the law of a member state” suggests that those sanctions do not apply to the non-EU subsidiaries of the EU companies. For example, the EU sanctions regulations do not apply to a company incorporated in Brazil and is a subsidiary of an entity incorporated in Germany.
UK financial sanctions apply to all persons within the territory and territorial sea of the UK and to all UK persons, wherever they are in the world. This means that:
- All individuals and legal entities who are within or undertake activities within the UK’s territory must comply with UK financial sanctions that are in force.
- All UK nationals and legal entities established under UK law, including their branches, must also comply with UK financial sanctions that are in force, irrespective of where their activities take place.
Similar to the EU sanctions, a negative reading or what is not said in the UK sanctions scope indicates that UK sanctions do not apply to non-UK subsidiaries of UK companies. For example, UK sanctions do not apply to a US subsidiary of a UK parent entity.
Canadian sanctions apply to any person in Canada or Canadian outside Canada. “Canadian” means a person who is a citizen within the meaning of Canada’s Citizenship Act or a body corporate incorporated or continued by or under the laws of Canada or a province.
Australian sanctions laws apply to activities in Australia and those undertaken overseas by Australian citizens and Australian-registered bodies corporate or onboard Australian ships or Australian aircraft.
On looking at the applicability of sanctions in the US, EU, UK, Canada and Australia, a common theme is apparent. Sanctions imposed by a country apply to its citizens and entities incorporated or organized under its laws.
Entities include branches and representative offices, as they are not considered separate – they are extensions of the entity they have branched out from or represent. And sanctions apply to anyone (individual, entity) present in that country.
Sanctions imposed by a country do not apply to foreign subsidiaries unless specified by a regulator.
How to Assess What is Applicable
First of all, deciding which sanctions to follow depends on the risk appetite of an entity. If an entity is not ready to absorb any risk, it is unlikely to deal with any sanctioned party regardless of the authority which imposed sanctions.
However, a more reasonable approach is to understand the requirements and then decide. Your company will not want to lose potential business opportunities not targeted by applicable sanctions.
Account for the following when analyzing which sanctions apply to your company.
- Begin your inquiry with a heading stating where your company is incorporated. From here, everything pertains to this jurisdiction.
- Who is taking decisions on behalf of your legal entity, and what is that person’s nationality?
- Where are the decisions are being made?
- Consider where an entity is conducting business now or in the future. Make a thorough analysis. Not every interaction with a jurisdiction establishes presence.
- Is the business being conducted via a branch or a subsidiary?
- Check out your business partners. You may cause a business partner to violate sanctions that apply to them. For example, if an EU bank sends payments to a US bank for clearing that are permissible per EU regulations but not permissible per US regulations, the US authorities may bring an enforcement action against the EU bank even though it was not initially subject to the US jurisdictions.
Why does it matter?
Knowing which set of sanctions regulations is applicable is important for three main reasons. First, no one needs to stop pursuing legitimate business opportunities in jurisdictions where sanctions legislation has no impact on the person in question. For example, a company in Spain can legitimately pursue a business opportunity in Cuba as long as there is no US nexus.
Second, countries’ sanctions lists differ. Know which one is applicable and screen against it.
If wrong lists are selected, false hits will be generated and can lead to wrongful freezing of assets, blocking assets that should not have been frozen. This can increase the risk of litigation for a person who wrongfully blocks the assets of another person with no legal basis in a jurisdiction where the assets are located.
By contrast, if an applicable list is not used for screening, it is possible to violate relevant obligations under sanctions laws.
Third, if an entity does not follow best practices, it may violate sanctions and lead to an enforcement action risk. On the other hand, in jurisdictions with counter-sanctions measures, if an entity follows something it is not supposed to, it may again face enforcement action or litigation risk. In the EU and China, which have counter-sanctions measures, the scope of sanctions should be assessed in light of such counter-measures.
Amir Fadavi is the Global Sanctions Lead at Airwallex, a fintech company, where he focuses on enhancing its global sanctions compliance program. Amir is a member of the ACSS Editorial Task Force.