The following article explaining the differences between U.S. and EU sanctions has been written by Maureen Poh, the Director of Helmsman LLC, Singapore. Poh has significant experience with energy-related shipping and commodity-related matters and was cited in Legal 500 as “a key name for charterparty disputes, carriage of goods by sea and cargo claims”:
I am frequently asked about the differences between US and EU sanctions. For instance, when negotiating sanctions clauses in a contract; or, where the spectre of a breach of sanctions is raised during the performance of a contract. Commonly asked questions include: if a certain entity is under US sanctions, does it mean that it is similarly caught by EU sanctions? I am not a US company or citizen, do I have to comply with US sanctions laws? How will I be penalised for breaching sanctions? In essence, tell me what I should do in order to comply with sanctions laws.
Unfortunately for businesses (and fortunately for lawyers!), the US-EU sanctions landscape is a minefield, with overlapping and sometimes contradictory sanctions regulations. The sanctions policies and enforcement of sanctions vary widely between the US and EU. To illustrate the differences, I discuss below three aspects of sanctions: scope, extra-territorial reach and enforcement.
Scope of Sanctions
For starters, let us look at the scope of sanctions: the list of sanctioned entities differs between the US and the EU. The US has a far longer list of sanctioned countries, entities and individuals than the EU. US sanctions may also be implemented relatively quickly, sometimes overnight, by way of Executive Order. This leads to a situation where a company in a global supply chain may be in breach of one sanctions regime, while at the same time being allowed by another regime to deal with that same entity. Another example is in respect of sectoral sanctions. For example, US sanctions against Russia extend to Russia’s oil and gas industries; EU sanctions do not cover most Russian gas projects.
Reach of Sanctions
Another big difference is the reach of sanctions rules: do sanctions laws apply extra-territorially, i.e., do US sanctions laws apply only to US companies and citizens? US primary sanctions generally restrict or prohibit US companies (including their non-US branches) as well as US citizens, and non-US entities owned or controlled by US persons, from doing business with sanctioned countries, companies or individuals. This applies regardless of where they are located. In some instances, US secondary sanctions are more complex, applying to any company or individual in the world that wants to do business in the US, with US companies or individuals, or even non-US persons in possession of or dealing with US-origin goods. A transaction that involves a US nexus, for instance, the use of the US dollar, might be sufficient for US sanctions to bite.
Contrast this with EU sanctions – EU sanctions generally apply only within the jurisdiction of the EU, i.e., within EU territory; to EU nationals, whether or not they are within the EU; and, to companies incorporated under the laws of an EU Member State whether or not they are within the EU (including branches of EU companies in third countries). Companies incorporated outside the EU and non-EU nationals are generally not required to comply with EU sanctions, except in respect of business done in whole or in part within the EU. To add to the complexity of EU sanctions, individual EU Member States may also impose their own domestic sanctions in addition to any imposed by the EU.
Perhaps the most obvious gulf between US and EU sanctions is demonstrated in how the EU tries to block the extra-territorial effect of US sanctions. In 1996, the EU introduced the “Blocking Regulation” (EC Regulation 2271/96). It obliges EU residents and companies to refrain from complying with extra-territorial laws that are set out in the Blocking Regulation. The effect of this is that it allows EU entities to engage in activities with companies and individuals that are lawful in the EU but which might be sanctioned by the US. In other words, it makes compliance with US sanctions a violation of EU laws. Little surprise that this only adds to the already confusing situation!
Enforcement of Sanctions
I round off my discussion by touching on another area of difference, which is how breaches of sanctions are enforced. The US sanctions policy is administered and enforced centrally, by the US Treasury’s Office of Foreign Assets Control (OFAC). In the EU, each Member State administers and enforces EU sanctions. This means that they have their own approach to enforcement: some Member States impose criminal penalties, while others only impose civil or administrative penalties. In addition, in some EU Member States, companies and individuals have an obligation to report to the authorities if they believe there has been a breach of EU financial sanctions; it is a criminal offence in certain instances if they fail to do so. This obligation does not exist in other Member States.
What should you do?
So, back to the question: what should businesses do in order to comply with sanctions laws?
The answer is to check and double-check, otherwise it will be checkmate to you mate!
While the reality is that no one will be able to ensure compliance with 100% of oftentimes vague, complex and conflicting sanctions laws 100% of the time, you still have to try your best to keep on top of the different global sanctions regimes.
Due diligence is key – companies should check, and monitor, their customers, suppliers and all counterparties, including the end user of the product or service, together with their financiers’ requirements, as financial institutions usually have pretty stringent sanctions compliance regulations. Due diligence should be carried out not only before the deal but also constant monitoring during the performance or lifetime of the contract.
You should pay attention not only to trading with counterparties who are sanctioned entities, but also companies who are alleged or found to breach sanctions laws, for instance, by trading with a sanctioned third party. You might in turn be potentially exposed to penalties. It all depends on the type of sanctions – UN mandatory sanctions or unilateral sanctions by individual countries – that the company has breached while taking into consideration the place of incorporation of that company, your jurisdiction of incorporation and where your business is carried out.
Faced with a situation like that, is imperative that you quickly seek legal advice from multiple jurisdictions. As a rule of thumb, consider the following:
Appropriate due diligence processes, together with legal advice from relevant jurisdictions are your essential tools to navigate the ever-shifting international sanctions environment.
Maureen Poh can be contacted at:
Photo credit: Helmsman LLC
Published: 17 November, 2020
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