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Embargoes and sanctions. What should the business know?

20/07/2016

In the complicated regime of embargoes and sanctions, it has proved essential for companies to know what kind of impact international restrictive measures would have on their operations. Having in mind the increasingly global nature of businesses, the restrictive measures acquire more comprehensive and extraterritorial features. Today, the effect of economic sanctions is not limited to banning trade with states under embargo regimes. Imposed economic sanctions could affect the commercial relationship between two companies, even when both companies are located in countries outside the scope of the restrictive measures, but one of them trades with third countries under embargoes or sanctions. Like a domino effect, the commercial relationship of companies trading with third countries against which restrictive measures are imposed can affect also their business partners by imposing fines on them without being directly involved with these third parties. Moreover, the imposition of international restrictive measures could have "surprising" effect with no grace period in which the investment already launched to be realized or companies to end duly their relationship. It is therefore necessary to keep up with the imposition of restrictive measures.

What do restrictive measures mean?

Generally, restrictive measures refer to sanctions and embargoes. While sanctions may be aimed at individuals or companies, the embargo affects rather international trade. Sanctions and embargoes have different purposes; the most essential for business are the economic and financial sanctions. Such sanctions may consist of a prohibition on export/ import of products, a prohibition on rendering of services and on investment and free movement of capital.

Who can be the target of sanctions?

Economic and financial sanctions can be targeted against individuals or companies. Such sanctions include the freezing of assets affecting funds and economic resources owned or controlled by the persons targeted by sanctions. Funds as cash on hand, bank deposits, shares and stocks can be frozen so not to be accessible or transferred. A prohibition on selling or renting property is also possible. In fact, companies or individuals against whom the sanction is imposed are not able to perform legal commercial transactions. Exceptions in specific cases are possible, for example covering basic needs (food, taxes) or court expenses.

Who can impose sanctions?

Sanctions can be imposed by individual countries, the UN or the EU. The question who imposes the sanctions is closely related to the respective restrictive measures that will be imposed. Sanctions imposed by the EU are applicable:

on the territory of the EU;

  • for EU citizens, no matter if they are situated in the EU;
  • for companies and organisations, under the application of the law of a Member State, no matter if they are located in the EU, including branches of EU companies in third countries; and
  • for every economic activity, exercised entirely or partially on the territory of the EU.

The scope of the sanctions imposed by the US should also be taken into consideration. Their regime relates to:

  • US citizens and persons with permanent residence status in the US, no matter if they are located on the territory of the US;
  • all legal and natural persons located on the territory of the US;
  • companies and organisations, registered in the US as well as their branches in third countries;
  • foreign companies, with a US majority owner; and
  • payments in USD, no matter where and by whom are done. Transactions executed in USD can be restricted by the respective US correspondent bank, when the parties involved are subject to sanctions by the US.

Consequences from violations

With respect to the EU, the competent authorities in the Member States determine the penalties for violations of the sanctions. In case of non-compliance with the US sanctions, the US competent authorities can impose penalties up to USD 20 million as well as prison sentences for up to 30 years in jail.

Focus on Iran

Recently, Iran sparked interest after the decision for abolishment of the sanctions, imposed due to its nuclear program. By lifting the sanctions effective as of the beginning of 2016, the Iranian market once again becomes accessible by foreign investors.

What should the business consider when trading with Iran?

The EU abolished all of its economic and financial sanctions, imposed in relation with Iran’s nuclear program. Consequently, a wide specter of activities become available, including:

  • financial and banking activity, whereas the prohibition for making money transfers to and from Iran was removed;
  • trade with oil, gas and oil-chemical products from Iran; and
  • activities in the transport and shipbuilding sectors.

Despite the abolishment, there are certain EU restrictions that remain in place. For example, the EU continues to restrict activities in the nuclear sector, as well as certain persons are subject to freeze of assets.

In the same time, the US approach to relieve sanctions towards Iran seems to be more restrictive. The US sanctions remain in force against US citizens and persons with permanent residence permit, companies registered under US law, as well as persons located in the United Stated. It should be pointed out that transactions relating to Iran (for example dealings with Iranian oil products), agreed upon and paid in USD, respectively performed through US financial institutions are still subject to monitoring of the competent US authorities.

Return of sanctions against Iran?

In the agreement with Iran, the countries lifting their sanctions reserved the right to bring back the restrictive measures, in case Iran violates the undertaken commitments. Despite the fact that the imposition of sanctions back on Iran seems hypothetical and it is a last resort measure, this brings up a number of actual practical matters. The issues are mostly related to whether the sanctions would have a retroactive effect which subsequently shall affect the transactions concluded in a period without restrictive measures. Where the EU allows for a grace period, the US approach is more deterring and the availability of such period in certain scenarios is questionable.

Intra-company strategy

In order to minimize the risk of surprises, companies shall create internal programs, focusing on the restrictive measures. Such programs can include a range of preventive steps, which shall be systematically and regularly applied:

  • preliminary review whether a certain transaction, for example in relation to its currency, persons, goods and services, fall within the lists of sanctions on both national and international level. The lists of financial and economic sanctions are published on the internet websites of the competent national authorities as well as on the websites of the international organisations;
  • as to the extra-territorial application of the sanctions, a preliminary check whether or not the transaction falls within the scope of the sanctions, especially when international companies are involved. It is not necessary to be a citizen of a given country, in order to fall within the scope of its sanctions; and
  • upon preparation of agreements, the inclusion of specific clauses which will prevent the violation of imposed restrictive measures, as well as will protect the parties from the effect of future ones.

Authors

Picture of Desislava Todorova
Desislava Todorova