In recent years, international sanctions have become more prevalent, with China, Cuba, Venezuela, Hong Kong and Russia just a few of the countries upon which new sanctions have been imposed. These changing sanctions can cause complex regulatory risks to businesses that are difficult to manage. In this video, discover what sanctions are, their widespread effect on whole sectors of business, and how they can sometimes lead to contradictions in international law.
Jose María Viñals is partner in Squire Patton Boggs, in the International Trade team. He has more than 15 years of experience as a qualified lawyer, with a focus on internationalization and a well-established sanctions practice. He has been active in the fields of FDI and international commerce, as well as Project Finance, investment protection and more recently FinTech. He currently teaches E-Commerce, Digitalization and Trade Innovation at IE School of Global and Public Affairs. .
What are International Sanctions?
International sanctions are coercive political and legal measures imposed on states, non-state parties or individuals whose actions may threaten international peace and security. These include measures adopted by the United Nations, the United States, the European Union, or other states.
Their immediate objective is to restrict the maneuvers of those sanctioned, with the ultimate objective of pressuring them to undertake changes that are of interest to the imposing entity or state. International sanctions are a frequently used instrument of foreign policy, in line with the sanctioning entity’s policy strategies and are strongly related to the concurrent geopolitical backdrop.
Due to the increased use of international sanctions in politics—along with their geostrategic significance—they have become more prevalent in public broadcasts over the past few years. Sanction schemes from Cuba, Hong Kong, Iran, Nicaragua, Syria and Venezuela have recently been subject to quite significant changes, and international traders and investors are increasingly focused on how sanctions can affect them.
International sanctions are implemented as legal rules. How rigidly enforced these rules are depends on the ultimate objectives for which they have been imposed.
New laws and sanctions—often contradictory—are making it increasingly difficult for multinationals to operate legally. With the EU, China, Russia and the US all involved in trade sanctions, compliance is becoming increasingly complex. So much so that the UK has created The Office of Financial Sanctions Implementation (OFSI) to monitor and penalize breaches, some of which may be unintentional in a trade landscape that could look very different post-Brexit.
Similar in effect to international sanctions, there are policies and regulations that states may use to fulfill comparable objectives. These include regulations on export controls and commercial policies, and restrictions on imports or tariffs—all of which have a significant impact on international commerce and supply chains. In fact, as geopolitical tensions reach new heights, the US and the EU have significantly increased their use of both export controls and sanctions tools, further extending their scope and geographical application.
Any organizations engaging or participating in international business transactions must always consider the impact of sanctions and other financial crime laws on their activities.
How Sanctions Affect States and Entities
Financial institutions and businesses that operate internationally are increasingly exposed to the impact of sanctions imposed on different states. These sanctions may be overlapping and the institutions and businesses may not be aware of them.
Businesses in certain sectors, such as finance, energy, transportation or insurance, are unavoidably dealing with sanctions on a day-to-day basis. Nevertheless, the increasing scope of both territorial and regulatory international sanctions have made them a concern to businesses in almost every sector working with international supply chains or transactions.
The purpose of sanctions is to put pressure on a target country (or regime), but in doing so, business transactions with that country are restricted. For sanctions regimes to be most effective, imposing countries leverage the strength and impact of their economies on global trade. While the traditional use of sanctions is centered on imposing primary sanctions, secondary sanctions have recently become more common and their extraterritorial effects are more prominent. What is the difference between primary and secondary sanctions and what exactly are extraterritorial effects?
- Primary sanctions forbid natural and legal members of the imposing country from undertaking transactions with sanctioned members or sectors of a sanctioned country.
- Secondary sanctions have only been used by the United States as of now. They add a second level to the primary sanction by allowing regulators to add third countries members who engage in transactions with the sanctioned country to the US sanctions lists. If a person is added to a US sanctions list, then US members will have to abstain from engaging in transactions with them as if they were subject to primary sanctions. They will also encounter further extraterritorial effects that may hinder their normal course of business.
- Extraterritorial effects are any and all effects beyond the territory of the imposing country. Sanctions may have an impact outside of the sanctioned country, limiting the capacity of third countries to transact with them. These are tangible, practical issues, such as payment processing difficulties for sanctioned countries, or the loss of business relationships one may have with sanctioning countries, even under full compliance of sanctions regulations.
The resulting outlook is a global economy where the imposition of international sanctions, especially by the European Union, United Kingdom, United Nations, and the United States, has a disrupting ripple effect on the structure of supply chains and business networks.
Different sanctions’ regulations can contradict or interfere with one another. Especially the European Blocking Statutes for the US Sanctions in the application of Title III of the Helms-Burton Act, the US Secondary Sanctions against Iran or Russia, or the extraterritorial effects of the US sanctions on operations and investments. The EU Blocking Regulation’s prohibition against complying with identified extraterritorial legislation of non-EU countries broadly forbids direct or indirect compliance with such legislation.
Ignoring US Sanctions regulations entails considerable risks: The US Office of Foreign Assets Control (OFAC) and the Department of Justice have acquired billions of dollars in penalties against US and non-US financial institutions—many times where non-US entities had no physical presence in the United States. Yet, this presents EU businesses with a conundrum: Must I choose which regulation to follow or can I find formulas that mitigate the risks of both? Abstaining from any relationship with sanctioned countries is oftentimes not a realistic option, especially as business relationships in a globalized world are complex and intertwined, and supply chains and business networks may predate the sanctions regimes.
The globalization of the financial and insurance sectors along with the importance of US dollar-denominated transactions only heighten the tension between the US law and the EU Blocking Regulation. In practice, financial institutions and international businesses are being asked to square the circle by observing both, as obtaining authorizations from the EU to comply with US sanctions will be necessary for many.