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An update on key changes to trade sanctions and compliance
Forensic Foresight: July 2016
There has been significant media attention on the changes to sanctions against Iran, Russia and Cuba. We have distilled these changes to present you with the key implementation differences across the United States, Europe and Australia. The recent volatility in sanctions regimes targeting Iran, Cuba and Russia presents both an opportunity to exporters but also substantial risk, due to the complexity and variability of these sanctions regimes.
Sanctions: a lesson in complexity
The recent breakthrough agreement between the permanent members of the United Nations (UN) Security Council and Iran1 on nuclear disarmament has signaled a winding back (at least in part) of the United States (US) Iranian sanctions. Similarly, the removal of Cuba from the list of ‘State Sponsors of Terrorism’ may also signal a shift in US foreign policy that may eventually lead to a substantial relaxation of the long term Cuban trade embargo. These factors are noteworthy developments, however, the US Iranian and Cuban sanctions, for now, remain largely intact and exporters should continue to exercise a high level of vigilance when dealing with either country due to the extraterritorial reach of US sanctions and the Iranian sanctions imposed by Australia.
Whilst the sanctions targeting Cuba and Iran may at some point be relaxed, the sanctions targeting Russia have been strengthened. Russian sanctions are somewhat novel. The sanctions have been crafted to sit between the limited sanctions (which primarily target Specially Designated Nationals (SDNs)) and the broad-based sanctions regimes that the US has adopted against countries such as North Korea. This balancing act has been achieved through the introduction of ‘sectoral sanctions’ which are designed, amongst other objectives, to limit the availability of medium and long term finance to key Russian industries. Due to the complexity of the Russian sanctions and restrictions on dealing with a number of significant Russian enterprises, many exporters have adopted enhanced due diligence measures, including the identification of their counterparty’s ownership structure, to confirm that their trade with Russia is compliant.
As the sanctions that target Iran, Cuba and Russia show, there can be significant variation between sanctions regimes. Unfortunately, there are also significant differences in the sanctions issued by key countries. The table below summarises the key components of the sanctions imposed by the US, the EU and Australia against Russia, Iran and Cuba.
Which sanctions regimes apply to you?
Exporters need to consider the extraterritorial impact of sanctions law. Sanctions law may apply by virtue of:
- Your head office location (e.g. if in Australia, Australia’s sanctions laws apply to your overseas operations)
- The countries the goods are shipped to, from or via
- The origin of the goods (e.g. if certain products incorporate controlled US origin goods, US export law may apply subject to certain de minimis thresholds)
- The method of settlement, (e.g. if the transaction is to be settled in USD using the cross-border financial system and global banks, the banks will usually screen the transaction for compliance with US sanctions law, as the transaction will be settled through the US banking system)
- The citizenship and location of staff involved in the supply chain – the more parties involved in your value chains, the more likely it is that additional sanctions laws will apply.
Accordingly, if your business has a nexus to either the EU or US, you may also have to consider the impact of their sanctions regimes.
The export may be permitted – but can you get paid?
Sanctions compliance is not just a matter of export trade compliance – you should also check that you will be able to receive funds from the importer.
As financial institutions will likely handle the settlement of your payments and trade finance arrangements, they will apply their own sanctions due diligence procedures to transactions. These due diligence procedures often involve the screening of all international transactions for designated entities and prohibited countries. Furthermore, non-US banks will often apply US sanctions extraterritorially to certain transactions, because a substantial portion of world trade and financial activity is conducted in USD and at least one leg of a US dollar transaction will be settled in the US. This results in the application of US jurisdiction, and therefore, substantial financial penalties for non-US financial institutions that have not complied with US sanctions. Doing business in a country that is not supported by your banker can result in, at best, increased fees by using alternative payment methods, or, at worst, non-payment because the bank has blocked transactions in accordance with sanctions law.
Accordingly, exporters should be careful to ensure that they do not initiate transactions that are likely to breach sanctions requirements, or their bank’s sanction policies, as such transactions are likely to be identified and lead to difficult discussions between banker and client. The risk is heightened if your transactional bankers are also providers of debt, and the debt agreements require compliance with sanctions laws.
Other key considerations
- Are you aware of the origin of the inputs/component parts that you are exporting? The origin of the goods can both cause you to infringe sanctions (e.g. Iranian origin goods) or cause additional sanctions laws to apply.
- If operating in high risk countries, do you know who ultimately owns the counterparty you are dealing with?
- There are hundreds of sanctions regulations currently in force – do you know which apply to your business?
- The first step towards compliance with sanctions is to identify any business that you have with entities operating in sanctioned countries or on one of the many designated entity lists published by sanctions regulators such as DFAT. Then take steps to determine whether you should continue with this business
- Examine your product list to determine whether any products come with the scope of dual-use legislation, meaning that your products, if exported to a country subject to sanctions, are more likely to require an export licence.
- It is timely to also check that your filters/lists have been updated for the recently introduced lists, including the OFAC Foreign Sanctions Evaders list and Sectoral Sanctions list. With the large number of list changes it is pertinent to test your filters and lists to ensure that all relevant terms are present, and that your filter can detect variations of such terms or attempts to circumvent sanctions screening requirements.
- Closely monitor developments with reference to the Iranian and Cuban sanctions – many of the US Iranian restrictions will remain in place for years to come.
1. On July 14, 2015, the P5+1 (China, France, Germany, Russia, the United Kingdom, and the United States), the European Union (EU), and Iran reached a Joint Comprehensive Plan of Action (JCPOA) to ensure that Iran’s nuclear program will be exclusively peaceful.
2. Refer to the US Department of State Guidance on the lifting of Certain US Sanctions Pursuant to the JCPOA.
3. Refer to the Information Note on EU sanctions to be lifted under the JCPOA for a detailed summary of EU’s recent changes concerning Iranian sanctions.