In June 2014 BNP Paribas – the fourth largest bank in the world – agreed to pay the US Government USD8.9 billion (this is not a misprint) as part of a plea agreement for conspiracy to violate US sanctions laws. And don’t be too impressed by the magnitude of that settlement, because the penalties that could have been imposed against BNP had it contested the charges would have been much more than that.

In July the US Government stepped up its efforts to use sanctions to force change in the activities of the Russian Government in eastern Ukraine and Crimea. Those sanctions target two important Russian banks (Gazprombank OAO and VEB), two Russian energy firms (OAO Novatek and Rosneft), eight Russian arms firms and a key shipping facility in the Crimean peninsula. The value of BP shares – owner of 19.75% in Rosneft, the Russian oil major – have fallen 4% since the beginning of July. The company has issued a warning that there will be a continuing adverse impact on profits by reason of the sanctions.

Australia has also imposed sanctions against Russia, in response to which the Russian Federation has now placed retaliatory bans on imports of Australian fruit, vegetables, meat, fish and dairy products. Meat and butter are the two major Australian exports to Russia – with a 2013 export value of AUD326 million – so these measures will have a major impact on the Australian economy.

So what are sanctions, in a legal sense? What about our own sanctions regime – how does it operate? Should Australian businesses be concerned about any extraterritorial effect of US sanctions? The answers are extremely important to Australian exporters of goods and services, and especially to the technology and financial services sectors.

Some cross border transactions are obviously risky, in a trade compliance sense. Others are more innocent but potentially just as dangerous. This Trade Law Bulletin alerts you to the kinds of international dealings that, without proper due diligence, could land your business in serious trouble.

Waging an economic war

Sanctions are one of the ways in which States react to situations of international concern or situations that threaten national security. Measures that block or restrict trade are employed to limit the adverse consequences of such situations and to influence those that are perceived to be either responsible for the situation or in a position to do something about it – by penalising them. From a political perspective, such measures are cheap to implement, relatively low on risk for constituents, and expedient. However, for sanctions to be anything more than symbolic, they must halt or restrict the flow of trade between the State imposing the measures and the State which is the target of those measures. Accordingly, sanctions must effectively restrict the commercial operations of the citizenry of the imposing State. And in order to make sure they work, and to underline the political intent of the imposing State, contraventions attract heavy penalties.

Sanctions are becoming more rather than less intrusive on the business of Australian traders, service providers and financial institutions. Australia currently has sanctions in place against 22 countries and against other “designated” groups, such as terrorist organisations. Each sanction regime is tailored to a distinct situation, and can therefore affect different goods, services and modes of dealing. Breach and prosecution means more than just a fine or other monetary penalty – it can mean international opprobrium, loss of custom and eventual bankruptcy. Individuals involved in sanctioned activities face prison sentences.

Australian sanctions are both UN and un-UN

The Australian Government has the power to implement sanctions of the following types:

• prohibitions on the supply of goods, whether as exports or imports;
• prohibitions on sanctioned commercial activities;
• prohibitions of dealing with designated persons of entities ;
• prohibitions of dealing with what are referred to as controlled assets; and
• prohibitions relating to sanctioned vessels.

There are two broad legal mechanisms by which this is done. The first of these is by way of the Charter of the United Nations Act 1945 (“the UN Act”). UNSC Resolutions do not have the force of law in Australia until actually implemented. So, the UN Act allows the Executive to make regulations to give effect to decisions made by the United Nations Security Council, to the extent that those decisions do not require Australia to use armed force. The Minister for Foreign Affairs promulgates individual implementing regulations for particular international situations. For example, the Charter of the United Nations (Sanctions – Democratic Republic of Congo) Regulations 2008 implements UNSC Resolutions against that country.

The second is the power to impose unilateral sanctions against other States, independently of actions of the UN, through the Autonomous Sanctions Act 2011 (“Autonomous Sanctions Act”). The Autonomous Sanctions Regulations cover all of the situations to which autonomous sanctions are applied, and are continually updated. These Regulations include lists that identify people and entities that Australian citizens and domiciled companies must not deal with, and specify sanctioned goods (whether exports or imports). For example, the Minister recently identified a Presidential Adviser to President Putin, the Crimean Oil and Gas Company, and Russkoye Vremya LLC – a Russian based soft drink company – as people or entities that are “responsible for, or complicit in, the threat to the sovereignty and territorial integrity of Ukraine”.

These Acts are implemented primarily by the Department of Foreign Affairs and Trade, however the Department of Defence, the Australian Customs and Border Protection Service and the Australian Transaction Reports and Analysis Centre all play a central role in applying and policing the sanctions.

You break it, you pay for it

Offences against the sanctions laws are said to be of a “strict liability” nature. What this means, essentially, is that there is no excuse. The fact of the offence is enough to attract liability, without intent being required. Fines of over AUD1.7 million, or of up to three times any profit earned on a banned transaction, apply.

Although bad intent is not required, good intent can be rewarded. A company can avoid prosecution if it is able to prove that it took reasonable precautions, and exercised due diligence, to avoid the contravention concerned. Also, there is an “out” if you find yourself in a situation where a contravention cannot be avoided, because if there is no policy objection to the dealing the Minister may grant a “national interest” exemption.

It can’t apply to us… oh yes it can

Despite being such a small country – or because of that – Australia is a very big exporter of goods and services in relative terms. Even then, you might think the potential that you or your company could be “dealing with the enemy” to be outlandish in the extreme. However, in the intensely interconnected world in which we live, it is just no longer possible to rely on the appearance of a website or on the claims made in an email as evidence of the bona fides of a prospective customer, supplier or business partner.

Consider the example of an Australian bank that intends to lend money to an Australian exporter for the supply of a road signal network in South Africa. Part of the contract involves installation services and training, and the exporter offers to provide short-term finance for part of its customer’s procurement at an above-market rate. The exporter asks its bank to deposit part of the money into an account in an African bank. As it turns out, the deposit actually ends up in Zimbabwe, the road signal network turns out to be an armed defence perimeter, and the customer is not the benevolent civil engineering firm that either the exporter or the bank expected.

Zimbabwe has been the subject of autonomous sanctions since 2002. However, it is not necessarily the case that all business dealings with Zimbabwe are prohibited. This is because the sanctions are targeted – which is to say that the prohibitions that are imposed are not blanketed across all dealings, but only arise in relation to certain situations. For example, the prohibition on supplying goods to Zimbabwe covers arms and related materiel. So an Australian exporter could happily export stuffed koalas to Zimbabwe without fear of falling afoul of the sanctions regime. Of course, if the exporter in our example was actually involved in the provision of defence technology services to Zimbabwe, even if that was not apparent to the exporter, a contravention of the sanction would be committed.

The bank in our example finds that it has deposited money into the account of a company involved in the acquisition of weapons and related materiel. The Zimbabwe autonomous sanctions program prohibits the provision of pretty much all services – including financial services – to Zimbabwe, where they are provided in relation to the types of products that are subject to sanctions, in relation to the manufacture or supply of such products, or generally in relation to military activity.

Finally, and more blatantly, it might be that a designated entity is on the other end of the deal – for example, Zimbabwe Defence Industries Pvt Ltd. The provision of any “asset” – using the broadest possible definition of that term – to a designated entity is prohibited under Australian law. Prima facie, the bank would be in breach of that specific prohibition as well, as would the exporter.

The “take home message” here is that it is absolutely critical to do the best you can to work out what’s really going on in relation to any commercial deal that you enter into, and to have systems in place to ensure you had good intent even if things turn out badly.

We’re all American – the reach of US sanctions

Outside the tangled web of Australian sanction laws lie other, less obvious traps that Australian businesses might stumble into. Obviously, the very nature of a sanction dictates that it will have an international effect – however the full scope of this effect can be surprising. For example, the two primary pieces of legislation under which the US Government can create and impose sanctions are the Trading with the Enemy Act (“TWEA”)and the International Emergency Economic Powers Act (“IEEPA”), which allow the President of the United States to regulate a broad range of transactions insofar as they are made by any person, or with respect to any property that is subject to the jurisdiction of the United States. The exact scope of prohibitions imposed by sanctions need to be determined on a case-by-case basis, because their reach can be quite unexpected. Obviously, legislatures make laws with effect to citizens and to companies domiciled in their country. However that is not the limit of the powers that a legislature, or an empowered member of the Executive arm of government, can claim to exercise. Even non-US entities that are controlled by US entities, or that have become involved with a breach, can be “subject” to US jurisdiction.

Under IEEPA it is an offence to violate, attempt to violate, conspire to violate, or cause a violation of any order, regulation or prohibition issued under that Act. It is quite common for the US Treasury’s Office of Financial Assets Control (“OFAC”) to take action against non-US entities for involvement in sanction violations. For example, in 2009 the Australia and New Zealand Bank Group Ltd (“ANZ”) – a financial institution registered and organised under the laws of Australia – agreed to pay a penalty of USD5.7 million to OFAC for 31 trade finance transactions which allegedly breached US sanctions against Sudan and Cuba. These transactions were said to have utilised payment methods that concealed the involvement of the sanctioned entities, and had been undertaken through correspondent accounts held at US financial institutions. OFAC reduced the potential penalty, based on ANZ’s substantial cooperation and its prompt and thorough remedial response.

Importantly, in that case, a review initiated by ANZ found that it had not breached any Australian government economic sanctions, and that it had not contravened any Australian laws. This is not an isolated event. In recent years the reach of OFAC enforcement has embraced companies such as the Royal Bank of Scotland plc (registered and organised under the laws of England and Wales), Aviation Services International, B.V. (a company based in the Netherlands) and as mentioned above, BNP Paribas (registered and organised under the laws of France).

The US is very active when it comes to imposing sanctions. The underlying message for Australian businesses is that it may not be enough to ensure that you abide by Australian sanction laws, you must also be aware of the operation of US sanctions. For instance, despite the fact the Department of Foreign Affairs and Trade advises that Australia and Cuba have “long enjoyed friendly relations”, our advice would be to approach any business with any States subject to US sanctions with full awareness that one day OFAC might come a-knocking.

Look before you leap

Sanctions laws are of extreme importance to the international business dealings of Australians. Saying you didn’t know won’t help to excuse a breach – but proving that you thought about it and tried your best to avoid it will help. Make sure your internal policies are up to date, and that your due diligence is first rate.

Moulis Legal acts for Australian and multinational clients in their trade affairs, and has advised in the specific area of sanctions for engineering, mining services and information technology companies.

For more information, please contact Alistair Bridges on +61 2 6163 1000 or alistair.bridges@moulislegal.com.

This memo presents an overview and commentary of the subject matter. It is not provided in the context of a solicitor-client relationship and no duty of care is assumed or accepted. It does not constitute legal advice.

© Moulis Legal 2014