Kalita Partners met with Aline Doussin, Partner at Hogan Lovells in London, to review this years' main sanctions trends and discuss what new developments could emerge in 2020.
Kalita Partners: What do you make of 2019 in terms of sanctions enforcement and major changes compared to previous years?
The impact of international enforcement of US sanctions remains the biggest concern for our non-US clients. The reach of US jurisdiction from the perspective of various regulators — OFSI, OFAC, DOJ and others — stays on top of the risk agenda at board level. In 2019, we have seen more regulator’s activity and enforcement outside the US with the UK taking the lead from a European perspective. The UK is still behind any significant OFAC fine; however, OFSI (UK Office of Financial Sanctions Implementation) has been more active and imposed three civil penalties under the new powers of the Policing and Crime Act.
This year in Europe, sanctions enforcement targeted banks, financial institutions, and regulated persons; however, corporates were perhaps less under the scrutiny of regulators. Having said that, we saw the OFSI taking a new approach, looking at businesses outside the regulated world. That was a new development in 2019. We can expect EU regulators to take a similar approach soon, targeting companies outside the world of regulated financial institutions.
At enforcement level, in the course of judiciary enforcement outside the US, we have seen European judges being more often confronted to conflict of law situations than before. The new enforcement of the revised version of the EU blocking regulation led a number of contracts to be terminated in Europe on the back of the application of US primary and secondary sanctions law. What we see now, to some extent, are those commercial decisions being challenged before the European courts. This is a brand-new development, as we now have a piece of EU blocking regulation with a jurisdictional scope that is much wider than what it was before. Judges in Europe now have to figure out how to make these compliance decisions and judge whether they are coherent with EU laws. In this respect, the high court judgement from last September [Lamesa Investments Limited v Cynergy Bank Limited (2019)] was very interesting for our clients, and I think we can expect more of these cases and type of enforcement in front of EU courts in 2020 and the years after.
Kalita Partners: What will the UK post-Brexit sanctions framework look like?
This will be something to follow closely. Of course, we are still waiting to see the results and impact of whatever the new UK government’s priority in regards to sanctions in January will be. The shape of sanctions policy in the UK will significantly change, either way with a Tory or a Labour government. The UK government has been very vocal and active at the Council of the EU in Brussels, influencing the process of deciding EU sanctions policies. It is very unclear at the moment what the EU 27 will do once the UK will leave. We know — when we look back at 2014, when the EU sanctions regulations on Russia were adopted — that member states had very different views. Without the UK in the room it will be very interesting to see if this disagreement or a more fragmented view of Russia over sanctions regime will impact the EU sanctions policy decisions. That’s really something at this stage we are not able to pre-empt, but our clients are watching very closely both what will be the EU sanctions policy without the UK, and what the UK will do independently from the EU. Whether there will be much more of an alignment with the US sanctions or not is a question.
The question remains: will the UK push a more proactive enforcement agenda of its own, in line with the US? Or will the UK decide to stay closely associated with the EU 27 on sanctions? At this stage, it is very difficult to predict what will happen from January, and of course we will be watching closely.
KalitaPartners: When we look at OFAC’s enforcement actions in 2018 and 2019, we find that improper third-party Due Diligence appears amongst the common compliance deficiencies responsible for sanctions violations. What is your advice to businesses to ensure that their sanctions due diligence screening is not missing the point?
Our clients have been closely analysing what OFAC issued over the summer — the sanctions commitment framework — even though there was nothing specifically new. It was the very first time OFAC established its expectations on sanctions compliance and drew red lines. It prompted clients to review each of these principles set out in that specific framework and to audit their sanctions programme to ensure it matched OFAC expectations.
In terms of Due Diligence on third parties, an interesting case this year was the Apollo Aviation OFAC enforcement decision. OFAC announced a settlement of $ 210,600 with Apollo Aviation Group for 12 violations of the Sudanese Sanctions Regulations. According to the US Treasury, Apollo appears to have warranted sanctions regulations when "it leased three aircraft engines to an entity incorporated in the United Arab Emirates, which then subleased the engines to a Ukrainian airline, which then installed the engines on an aircraft wet leased to Sudan Airways. At the time of the transactions, Sudan Air was identified on OFAC’s List of Specially Designated Nationals and Blocked Persons as meeting the definition of "Government of Sudan."
In the context of a transaction, a number of clients think that once there is a sanctions or export controls wording in their contracts, followed by an initial screening of entities, the compliance aspect is then covered. However, the key message we are getting from OFAC and other regulators, is that third party due diligence screening is not a one-off exercise. Third party screening must be an on-going monitoring process throughout the life of the transaction, from the start to the very end. There is a clear expectation from OFAC and all the regulators that compliance is an obligation that spans throughout the length of any contractual relationship and reaches beyond immediate contractual partners to other parties involved in the supply chain structure.
Kalita Partners: What about screening and secondary sanctions?
From a non-US perspective, our clients outside the US are still trying to figure out the nature of their exposure under secondary sanctions, and how to mitigate any potential secondary sanctions risks. This aspect of US sanctions law is very new for non-US and European companies. The US withdrawal from the JCPOA and the new unilateral action that the US took on Russia clearly exposed European companies to the risk of secondary sanctions. It had a huge impact on the market. Trying to understand precisely where the risk is while relying on very complex OFAC policy and sometimes non-existent guidelines, makes it a real challenge for non-US clients. It remains very difficult for non-US clients to understand whether they can enter into transactions and if there are any secondary sanctions risks. European companies and non-US clients need support to assess their exposure on contracts, anticipate sanctions policy developments, and analyse enforcement cases and precedents, in order to fully understand their secondary sanctions specific risks.
Kalita Partners: What major development do you foresee in the UK in 2020?
Sanctions will continue to play a key role, but to some extent we tend to pay less attention to export controls — a different area of the law but still connected to sanctions. I think the next big development will be export controls related enforcement cases. Export controls are about access to US technology, US goods, and US components as well as figuring out where the supply chain risks are for non-US companies.
Also in the next few years, we are likely to see more enforcement on corporates outside the US and the UK, with the continuity of the extended reach of the US jurisdictional arm, with an increased use of export controls enforcement to address the geopolitical agenda.