International Trade Sanctions: Avoiding the Pitfalls

It is increasingly important for businesses to understand the restrictions imposed by international trade sanctions. The recent measures implemented against Russia and Crimea are prime examples of the devastating effect that sanctions can have on trade. Although in most cases sanctions will not prevent companies from carrying on their day-to-day business, there are still many significant pitfalls to be aware of.

International sanctions are political measures designed to restrict exports of goods to particular countries or individuals. The types of goods affected can vary tremendously, from embargoes on military equipment to extremely specific restrictions on goods used in particular industry sectors. For example, the EU has recently prohibited exports of equipment for use in certain deep water, Arctic oil and shale oil exploration production projects in Russia. Sanctions can also restrict the provision of services (such as financial assistance, brokering services and technical assistance) in relation to sanctioned goods or persons. Businesses should therefore obtain legal advice and carefully review their products and services to understand whether they may be affected by sanctions. Non-compliance with sanctions programs can lead to goods being seized and significant penalties and/or prison terms being imposed.

International businesses can often be caught out by the scope of sanctions programs. For example, EU sanctions measures will generally be binding upon all EU companies and all companies (wherever incorporated) carrying out business in a Member State. EU sanctions also apply to all nationals of a Member State, wherever located. EU nationals who are directors of non-EU companies must therefore take care not to “facilitate” any transactions by that non-EU company which the EU person could not undertake directly.

As branches are not separate legal entities, EU sanctions will also generally apply to all branches of an EU company, even if the branch is located outside the EU. This can be very problematic if EU companies have branches operating in a sanctioned country, as interactions between the company and the branch could potentially breach EU sanctions. Branch operations should be carefully reviewed for compliance with the sanctions program applicable to the main company.

International businesses are particularly at risk as they may be subject to multiple sanctions programs. Like in the EU, the U.S. sanctions program has extra-territorial effect. In certain circumstances it can apply to non-U.S. companies or individuals, including non-U.S.subsidiaries of U.S. companies. Employees in such companies must ensure that all transactions comply with the laws of both their own country and the U.S. This can lead to some tricky situations. For example, EU companies with a U.S. parent will be bound by the current U.S. trade embargo on Cuba. However, in direct contrast, the EU actively prohibits compliance by EU persons with the U.S. sanctions on Cuba. EU subsidiaries of a U.S. parent can therefore find themselves caught between conflicting sanctions regimes.

Financial sanctions introduce further difficulties, as they are usually designed to prevent all trade with particular individuals or entities. For example, EU persons are generally prohibited from making available (directly or indirectly) any funds or economic resources to any sanctioned persons. In practice, this wide-ranging prohibition means EU companies are unable to trade with sanctioned persons or any corporate entities controlled by such persons (whether as shareholders, directors or otherwise).It is therefore very important for businesses to know exactly who they are dealing with.

In order to minimise risk and ensure compliance with applicable sanctions, all businesses should:

• Review their products and obtain legal advice to determine which products may be subject to export restrictions;
• Keep and maintain clear export policies, procedures and records;
• Train all staff regarding the potential impact and scope of sanctions;
• Conduct thorough due diligence on all customers, suppliers, distributors and agents, including checking the names of connected persons against relevant sanctions lists;
• Use contractual safeguards in relevant agreements, including:
  • representations and warranties related to exports and sanctions compliance;
  • termination rights in the event of non-compliance;
  • indemnification for breaches and potential penalties; and
  • product end-use and end-user certificates.

Overall, any business engaging in international trade should carefully consider the ways in which it may be affected by sanctions and adopt sufficient safeguards to ensure its operations comply with all applicable restrictions.

Douglas Badder, Associate, Faegre Baker Daniels