JONES DAY TALKS®: Navigating Sanctions and Export Controls: A Guide for EMEA Businesses
In this recap of a recent Jones Day client-focused webinar, partners Harriet Territt, Eva Monard, Sean Boyce, and Rick van 't Hullenaar review 2020's critical developments in U.S., EU and UK sanctions and export controls that directly impact EU, Middle Eastern and UK businesses operating in the global marketplace. These include:
- Expanded use of U.S. secondary sanctions and export controls;
- The emergence of global Magnitsky-style (human rights) sanctions regimes in the UK and EU;
- Increased pressure for more active enforcement of EU sanctions;
- The advent of an independent UK sanctions regime; and
- Growing divergence between U.S. and EU sanctions policies.
The panel then focuses on 2021, noting the key transitions occurring in the U.S., where a new administration will examine the mark left by the previous administration on U.S. sanctions and export control policy, and in the EU and UK, where the Brexit transition period ended last year. These transitions will have far-reaching implications for global trade.
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Read the full transcript below:
Dave Dalton:
On March 18th, Jones Day lawyers from our offices in Amsterdam, Brussels, Dubai, and London, hosted Navigating Sanctions in 2021 for EMEA Businesses. A webinar produced to review critical developments in the sanctions area in 2020 and comment on updated risk management strategies for 2021. That webinar was very well received. Today, we've reconvened the four lawyer panel to recap what was explained and to further discuss how developments in the US, EU and UK sanctions in export control policies have directly impacted EU, Middle Eastern and UK businesses operating in today's global marketplace.
Dave Dalton:
We're glad you're listening. I'll turn it over to the panel in just a moment, there's much valuable information coming. I'm Dave Dalton. You're listening to Jones Day Talks.
Dave Dalton:
Harriet Territt is a London based partner and has more than 20 years' experience in advising companies and financial institutions on complex sanctions, compliance and regulatory issues. More often than that, involving cross border elements. Increasingly, Harriet works with clients on sanctions and export control issues arising out of the cutting edge of technology, such as block chain and artificial intelligence. Harriet also co-chairs the Jones Day Women's Group, helping develop the firm's next generation of female leaders.
Dave Dalton:
Eva Monard is a Brussels based partner with broad experience assisting clients on obligations under EU export control laws and sanctions. She has a broad international trade practice ranging from export controls, sanctions, anti-dumping and foreign direct investment screening. Being in Brussels, she is obviously close to the relevant EU institutions and policymakers.
Dave Dalton:
Sean Boyce is an authority on US sanctions and export controls. His practice focuses on cross border issues, advising clients on compliance, with a full spectrum of international trade laws. Sean was previously based in the firm's Washington, DC office, but has been in Dubai since 2014, giving him particular experience addressing the extraterritorial application of US law and insight into the specific regulatory and commercial concerns faced by clients operating in the Middle East.
Dave Dalton:
Today's moderator, Rick van't Hullenaar, is a partner in our Amsterdam office. Specializing in EU and Dutch sanctions compliance and enforcement issues, oftentimes with cross border focus, where he regularly works together with Harriet, Sean and other colleagues from our global sanctions team in matters for clients having an EU, UK or US connection.
Dave Dalton:
Rick, over to you.
Rick van ‘t Hullenaar:
Hello and welcome everybody. My name is Rick van't Hullenaar and I suggest we jump straight into the topics. Harriet, if you could give us a brief overview of what our webinar covers and what we'll be recapping today and also, perhaps talk about why we chose those particular topics.
Harriet Territt:
Happy to, Rick. Our overarching aim for the webinar was to give clients a clear overview of the most recent global sanctions developments, but to make sure that we looked at it through the lens of what is really important to European based businesses. I'm including for these purposes, the United Kingdom. It's fair to say when we put our list of developments together, we had enough for about five hours of content. So for the webinar, we really tried to refine this down to four core issues, which really reflected the issues we most regularly get asked about.
Harriet Territt:
The four were number one and by far the most popular in terms of the voting on the webinar, are we seeing more coordination or actually more divergence in sanctions between the EU on the one hand and the US on the other? What impact is the updated blocking regulation having on European business? How should those same businesses be thinking about human rights or corruption related sanctions developments? And last, but by no means least, what does Brexit mean for cross border sanctions compliance?
Harriet Territt:
We certainly didn't run out of things to talk about.
Rick van ‘t Hullenaar:
Absolutely not. Thank you for that, Harriet. I suggest we just start with a look at some of those broader cross border developments. Eva, starting with the question of is there more divergence or coordination between the US and the EU? I think there's no way to deny that in the recent past we've seen greater divergence between the US and the EU relative to their sanctions policies. If you take Iran for instance, and others may add Russia and China to that, is that accurate from an EU perspective, you think?
Eva Monard:
Absolutely, Rick. Under the previous US administration, for sure there has been increasing divergence. Of course, now we have a new US administration and that will certainly bring about some change and there is quite some hope in the EU that there will be again, more coordination. We've seen this month, two times that there were designations under the human rights sanctions that were coordinated between the EU and the US. The announcement was made at the same point in time, there was clear coordination. This is a good sign and it's promising that there's clearly an intention to cooperate, coordinate more in this field.
Eva Monard:
Now of course, there's quite some issues that are there to stay. There's the Iran deal. The revival thereof will not be easy. Then there is the related, but also independent issue of the extraterritorial sanctions of the US and we'll talk about the blocking regulation later. Then of course, Rick, you mentioned Russia. There's Nord Stream 2 issue, that is of course also really going to be a challenge on the relationship between the EU and the US.
Eva Monard:
Answering this question, we should also have a little bit of a broader look. If we look at the EU's new trade policy that it announced earlier this year, it's all about Europe's open strategic autonomy. Which is basically a couple of words that are now being used to describe an approach whereby the EU still wants to favor global coordination, but at the same time really marks its willingness to be more assertive. I think that also in the sanctions field, we will see that they want to do things together if possible. If it's not going in the right direction, that they are aiming to be more independent and that we might still see some increasing divergence.
Eva Monard:
Sean, maybe on the US field, how do you see this? Is this also your impression?
Sean Boyce:
Yes, that is my impression from the US perspective. Over the past few months, we've seen a bit of a return to more traditional approaches to cooperation with the European Union and the United Kingdom, as well as other allies throughout the world. That seems to be a deliberate effort to reset the status quo. We've seen certainly in the past few months, we've seen much more coordination in the aligned approach to the position of sanctions on Myanmar, to more recent sanctions on Russia. And those are all promising signs. We also have some indications that there are promising developments potentially in the future, in for instance, the United States appears to be working through the EU and its allies in Europe to re-approach Iran and perhaps reenter the Iran deal.
Sean Boyce:
There are though, as Eva has said, quite a few hurdles along the way. It's safe to say that there won't be a full return to the status quo. That perhaps too much water has passed under the bridge, but more importantly, there are too many longstanding asymmetries between the EU, the US, and the UK that really do need to be worked out over time. It seems to me that Europe has begun to stake out its own position and assert a bit more independence in its approach to sanctions and trade policy. The UK, likewise, is in a position of establishing itself as a independent power from Europe. And we'll see over the next year, quite a bit of coordination but also quite a bit of work in terms of re-establishing the dynamic between the allies.
Rick van ‘t Hullenaar:
Thanks, both. I think it's probably fair to say that there's perspective on closer coordination, but that companies who closely follow further dynamics, especially now that the change in the US administration is still relatively recent. If we are talking about EU, US relations in the sanction space, it's of course inevitable to discuss the EU's blocking regulation. Very quickly, the blocking regulation has been in existence since 1996 and in essence, it prohibits EU operators from complying with targeted US sanctions against Cuba, Iran and Libya. Which puts companies subject to the blocking regulation and with exposure to those targeted US sanctions, in a very difficult spot. That's even more so if you realize that violating the prohibition to comply with the target US sanctions is a criminal offense in many member states.
Rick van ‘t Hullenaar:
Sean, before we dive into the blocking regulation and take a look at the risks involved and how to address those risks, let's talk about the US sanctions the blocking regulation targets. In particular, relating to Iran and Cuba. What's the status there and what would you say you see coming?
Sean Boyce:
The past few years have really reflected a sharp reversal in US policy towards Iran and Cuba. Four years ago, there was certainly an appearance that the US was moving into sanctions and maybe a greater degree of discussion with both Iran and Cuba with promise for the future. The last four years though, have been a return to the more traditional and historic approach of the US towards overwhelming sanctions and incredible both extraterritorial and transactional restrictions.
Sean Boyce:
For Iran, that's certainly been the case and I think anyone who's read the news over the past few years has been keenly aware of that. The Trump administration adopted a widely advertised, maximum pressure campaign against Iran that required a return to US sanctions that were in place before the Iran deal, withdrawal from the deal itself. And over the past few years, an increased escalation of sanctions on Iran with an emphasis on extraterritorial sanctions. At this point, the Iran sanctions reflect the most extreme and restrictive sanctions the US imposes on any country in the world. It's important to highlight a few key areas.
Sean Boyce:
These sanctions were pointedly unilateral. There's not a reflected effort to have an aligned approach towards Iran. While there was certainly efforts and discussions with the EU and UK, the US has gone it alone during this time. The other important component is that there has been a trajectory of narrowing restrictions, narrowing license exceptions and really working to make the regime as restrictive as possible within the existing bounds. Then finally, in the last days of the Trump administration, there was an increased and obvious effort to employ other sanctions programs. The Global Magnitsky sanctions, which we'll discuss later, the Global Terrorism sanctions, as a means of hemming in Iran from multiple angles. Each of these points is going to complicate returning to the Iran nuclear deal in the future and certainly there'll be a long path to getting there.
Sean Boyce:
Cuba may have gone a bit more under the radar, but as we all know, the United States has maintained a longstanding embargo against Cuba. It's the longest standing US sanctions program. While it was eased slightly towards the end of the Obama administration, the past four years has seen a reversal in some of those trends. In fact, new restrictions added. At the moment, we are looking at still a relatively traditional view of the embargo with restrictions on travel, though not as great as there has been in the past. A particular emphasis on imposing sanctions and restrictions on Cuban military and security services and more recently, the return of Cuba to the state sponsors of terrorism list. As a practical matter, that return doesn't change a great deal about the Cuba sanctions program, but it certainly reflects the current state of US policy.
Sean Boyce:
In addition to returning Cuba to the state sponsors of terrorism list, the Trump administration also unleashed Helms-Burton for the first time, opening up the possibility of private rights of action in the United States against foreign and domestic companies that have benefited or otherwise trafficked in expropriated property and assets. Our colleagues in Miami, Rick Puente and Chris Pace, have done a number of Jones Day podcast talks on that specific topic, including one just within the past few weeks. I would encourage everyone to listen. There have been some interesting developments in the litigation that's come out of the Helms-Burton Act and the way it's been employed in the United States. It's something that anyone who is operating in Cuba, who is concerned about their risk, should take a look at.
Sean Boyce:
In the next few years, perhaps in the next year, we can expect some changes in these programs. An effort to ease them perhaps, and maybe a return to more traditional Obama era policy. But nothing has changed at the moment and so right now, both from a US perspective and from the perspective of the EU and UK, we are still working through two of the most restrictive sanctions regimes that the US maintains.
Rick van ‘t Hullenaar:
Thanks, Sean. That's very helpful. Turning back to the blocking regulation, it has been in place since 1996, as I said. But gained a new lease of life in 2018, when the US decided to pull out of the Iran agreement and the response of the EU was basically to dust off the blocking regulation.
Rick van ‘t Hullenaar:
Since then, there have been some notable rulings also in the Netherlands, but so far not on the criminal side, but in civil litigation where violation of the blocking regulation was invoked as one of the arguments against the termination of the agreement. But we've also seen interesting developments before the European Court of Justice. Eva, can you talk about some of the ECJ cases relating to the blocking regulation?
Eva Monard:
Sure. The most interesting case that is currently pending is case C-124/20. It's a reference for preliminary ruling made by a German court, of course in Hamburg. It concerns a dispute between Bank Melli Iran and Telekom Deutschland. What happened is that Telekom Deutschland was providing telecom services to Bank Melli, the branch in Germany. The turnover that they generated from this specific contract was around 3,000 Euro per month. At the same time, Deutsche Telekom generates US turnover which represents more or less half of its total turnover.
Eva Monard:
Now, in 2018, Deutsche Telekom terminated its relationship with Bank Melli because Bank Melli was designated as an SDN by the US. Now, Bank Melli brought this to court and this is now pending before the Court of Justice. There are a couple of very interesting questions that are being raised. One of the key questions is, well, if you terminate a contractual relationship, does it need to be motivated? If no reason is given for termination of a specific contractual relationship, is it up to the party that terminates the relationship to demonstrate to the court that its decision to terminate the contract was unrelated to US sanctions? This is a key question that we all want to know. Is it only when you explicitly say, "I'm doing something in breach of the blocking regulation," that something would be an issue? Or does it go beyond that?
Eva Monard:
I think that the current reading of practitioners is you certainly have to be much more careful than that. It's not only what you put in writing explicitly. Of course, that's crucial. Now, we're really going to get an answer to this from the Court of Justice. There's also a number of other questions. For instance, what are the consequences of an act in violation of the blocking regulation? Does this result in the termination of the contract being ineffective? So a lot of other interesting questions, but the one that I was discussing before is it's certainly the most relevant one.
Eva Monard:
This case will probably provide not all, but at least some answers that we're currently all looking for. The hearing took place earlier this year, so let's hope that later this year we actually have a judgment that provides us with some additional guidance on exactly how to interpret provisions of the blocking regulation, because that's still quite unclear at this stage.
Rick van ‘t Hullenaar:
Exactly, so let's hope that that will bring some more light to how to indeed interpret the blocking regulation. But in January, the European Commission also published a document which contains elements of a new sanction strategy that also has an impact on the blocking regulation and seems to also introduce measures to counter extraterritorial effects of third party sanctions beyond the blocking regulation.
Rick van ‘t Hullenaar:
Eva, staying with you, could you give us an overview of that new sanction strategy and what you expect to happen?
Eva Monard:
Well, the commission anticipates a number of possible amendments to the blocking regulation. It for instance, specifies that it could clarify the procedures for private action for damages under the blocking regulation. There's a number of other elements that it points to. It also actually highlights the possibility of the commission of EU institutions intervening in foreign procedures in support of EU companies and individuals that are of course, facing issues that could be a concern in terms of the extraterritorial nature of sanctions. That is interesting to see what will come out there.
Eva Monard:
There's also a clear focus on enforcement. The commission explained that it will work with member states to make sure that EU sanctions are effective. It refers explicitly to national penalties, so I do think that we're going to see an increased enforcement of EU sanctions in the EU blocking regulation. Then as you mentioned Rick, and this is a very interesting development, the EU is clearly looking for additional tools to counter the extraterritorial nature of sanctions and particularly of US sanctions. The blocking regulation is there, but it's clear that it does not really do everything that is necessary to protect EU companies and the EU wants to go beyond that.
Eva Monard:
One of the elements that they are now bringing forward, and this is really interesting, is that they intend to look into this in the framework of foreign investment screening. So the EU FDI regulation provides for a mechanism of coordination between member states and the European Commission when foreign investments are being scrutinized, are being screened. What the commission now says, is that in that framework, it needs to be assessed whether a certain acquisition will make it more likely that a specific entity will become subject to extraterritorial sanctions or that it will move to abide to those sanctions. What does this mean in practice? It means that we might see in the future, that it becomes more difficult for a US buyer to acquire an EU entity because of those extraterritorial sanctions. This is certainly something, a development that we should all be watching.
Rick van ‘t Hullenaar:
Absolutely and that is very interesting indeed.
Rick van ‘t Hullenaar:
Harriet, so talking about this, clearly the blocking regulation is a hot topic in the EU. But let's talk about how the blocking regulation will be applied in the UK after Brexit. How has the blocking regulation been moved into UK law after Brexit?
Harriet Territt:
I think I can take this fairly quickly. The good news is that the EU blocking regulation was part of UK law before Brexit and it remains part of UK law after the transition period has ended. Obviously, with some adjustments. Probably the most useful point I can make here is that it is not called the UK blocking regulation, so if anyone is searching for that and can't find it, what you need to look for is something called the protection of trading interests legislation. That's what it's always been called since it was first implemented in the UK in the '90s. But that legislation has been supplemented with both a Brexit specific amendment regulation and a detailed guidance note.
Harriet Territt:
What both of those documents do, is explain how the jurisdictional scope and the licensing process under the UK version of the blocking regulation has been implemented, to give it a UK only application. Effectively, as a very general matter, you can assume that if you understand the EU blocking regulation, you understand how the UK regulation works. But understand that it only has a UK scope of jurisdiction and that any request for licensing will have to made to the UK authorities. Obviously increasing the possibility that you may have to do multiple applications for licensing or exemptions, should that be the position you find yourself in.
Rick van ‘t Hullenaar:
Thanks, Harriet. During the webinar, we discussed that the focus of EMEA operators generally more on the criminal offense of violating the blocking regulation's prohibition to comply with the targeted sanctions. That's of course, a wise thing to do, but there are civil litigation risks too. Could you review those for us and tell us what could be general approaches to address those risks? Taking into account that I think it's fair to say that the EU and UK risks are generally aligned on this point.
Harriet Territt:
Thanks, Rick. It's fair to say, when we're advising clients on civil litigation risks, we tend to think about it in three distinct buckets. The first is obviously, the risk of non-performance for contracts as a result of sanctions. Both sanctioned parties and their counterparties, face breach of contract disputes when there are sanctions put in place midway through a contract that prevent contractual completion. What you typically see in that situation is defendants invoking things like force majeure defenses, contract illegality, failure to comply with contract representations or frustration, to manage their contract risk.
Harriet Territt:
Obviously, it's better if you can have specific drafting in your agreement which deals with the risk of sanctions in positions, no matter how unlikely it may seem that that could occur at the time you enter into it. Eva's made a really interesting point, which is obviously, it's the acquisition or selling of counterparties that possibly can introduce all kinds of indirect effects. Either because someone becomes controlled by a person who's subject to a different sanctions regime or it has a business which becomes subject to sanctions, even if that's not the main part of the business that you're dealing with.
Harriet Territt:
The second bucket is really around laws that give private rights of action to third parties. We've already mentioned the blocking regulation. There's the Helms-Burton Act in the US. That is a risk that you have to engage with when you decide how to comply or not to comply particularly with our extraterritorial sanctions, so it's something that our clients definitely need to think about.
Harriet Territt:
The third one I would mention is just something we're starting to see creeping into the sanctions space, which is where counterparties try and argue that contracts are either void or voidable because they were procured in breach of sanctions or perhaps in breach of the blocking regulation. Rick, you already mentioned we've had one example already. We've seen that trend a lot in the bribery space, we're starting to see it coming into the sanctions space, so that's definitely something to think about when you're communicating with a counterparty on sanctions issues.
Harriet Territt:
Terms of mitigation, we've talked about the benefits of having sanction specific language. The one thing I would probably add, is particularly when you're looking at the blocking regulation, there's nothing in that regulation that compels parties to do business with Iran or Cuba. The key is rather that commercial decision making is not based on compliance with legislation which imposes prescribed sanctions. So counterparties are able to decide whether or not to engage with a country or sector based on normal commercial decisions and we're certainly seeing companies taking a much more nuanced approach to analyzing the places in the world where they're happy to do business, not focusing on sanctions, but focusing on anti-bribery, anti-money laundering and other kinds of risk, to come up with a list of places where they are and are not willing to do business.
Rick van ‘t Hullenaar:
Thanks, Harriet. Let's turn our attention now to another important cross border development, which is that of the non-country specific human rights and corruption sanctions programs. With the US having been at the forefront of those, which have become known as the Magnitsky regime, other jurisdictions have followed, including the EU and the UK.
Rick van ‘t Hullenaar:
Sean, we know the US has made extensive use of its Magnitsky sanctions. Could you explain the US approach and how the US has applied these sanctions?
Sean Boyce:
Absolutely, Rick. The Magnitsky sanctions take two forms in the United States. First, the original Magnitsky sanctions program, which was implemented to address specific human rights and corruption concerns in Russia, and then in the last few years the Global Magnitsky sanctions. Transforming a more targeted regime into a transnational regime. They are to a certain extent, a bit of a catchall sanctions regime. They target corruption and human rights abuses wherever it occurs in the world and have been used widely in the last few years to address everything from money launderers and corrupt actors in Africa, in Central Europe, in Russia, as well as human rights abuses in oppressive regimes in places as far flung as Myanmar and more recently, China.
Sean Boyce:
The sanctions themselves have a few key features though, that to one degree or another have carried over into the EU and UK versions of these sanctions. First, they have relatively broad extraterritorial application, in the sense that they target actors throughout the world. Second, the US and this is not something that's carried over into the EU or UK, specifically address corruption. This comes with pluses and minuses. First, it's a means of ensuring that transnational crime is addressed even where jurisdiction is not clear. By the same token, there's a lower standard of proof applied to sanctions regimes. So there is a interesting balance here between the approach of criminal law, for instance to foreign corrupt practices act, and these sanctions programs for the same types of offenses.
Sean Boyce:
Finally, this is the key that has carried over into other regimes, is the importance of having a sanctions regime that generally and widely targets human rights abuses. That is one of the primary ways in which the US has applied the Magnitsky and Global Magnitsky sanctions.
Rick van ‘t Hullenaar:
Harriet, if we talk about the human rights regime in the UK, could you comment on the status there?
Harriet Territt:
Sure. I think I can do it really by reference to both the US regime that Sean's just talked about and the planned EU regime that Eva's going to talk about. Simply to say, the UK regime is slightly more limited in scope than both of those. Currently, the UK regime can be used to impose sanctions for serious violations or abuses of three human rights. The right to life, the right not to be subjected to torture or inhuman, degrading treatment and the right to be free from slavery. I will say that when announcing the new regime, UK ministers indicated they were already exploring whether to add other types of human rights in the legislation. Including specifically consulting on whether to include corruption as a ground for sanctioning by the UK, but we haven't seen that development occur yet.
Harriet Territt:
At the moment, it's an interesting development. The UK has acted very quickly, but it's a fairly specific framework and we'll have to wait to see whether it gets expanded in future years.
Rick van ‘t Hullenaar:
Okay, so the EU launched its own human rights sanctions regime last December. And based in Amsterdam, I hope you will forgive me for stressing that the Netherlands initiated the EU level discussions on the topic at the end of 2018, which ultimately led to the launch of the regime in December last year. In a speech given a couple of days after the launch by the Dutch foreign minister, he said and I quote, "With this new EU sanctions regime, we can show the EU has teeth and human rights abuses will feel their bite."
Rick van ‘t Hullenaar:
Now Eva, those are strong words, obviously. But does the program indeed have teeth? And could you talk about the current status of the program?
Eva Monard:
Well, this month actually, the EU made its first designations. First at the very beginning of the month, there were four Russians that were sanctioned for human rights violations related to the arrest of Navalny. This week actually, we saw a new range of designations. There were Chinese individuals in one entity I believe, that were sanctioned in relation to the Uighur situation. Then there's another two Russians for gay rights violations and then there's a number of other persons in some other countries. So this month we've seen quite some action, quite some designations.
Eva Monard:
Now, does this have teeth? Well, I think first of all, there is the symbolic nature of sanction designations under this human right regime that cannot be underestimated. I think that the symbolic importance of such an action is very clear and that this is also illustrated very well by the immediate reaction of China to the designations that took place this week.
Eva Monard:
The biggest challenge going forward, is going to be probably the unanimity requirement that the EU still has in place to adopt sanctions. That means that any single member state can block a designation. This is true not only for the human rights regime, but more broadly for EU sanctions in general. There is an ongoing debate to move to qualified majority voting and that will of course, make a big difference in terms of the effectiveness of EU sanctions in general.
Rick van ‘t Hullenaar:
Thanks, Eva. That'll certainly mean a lot to the agility of the EU sanctions' framework in general. And just to round this off, this trend of increasing human rights sanctions programs is not limited to the US, the UK and the EU. There are several other key nations that have also adopted or are considering Magnitsky style or human rights sanctions like Canada, Australia or the Ukraine.
Rick van ‘t Hullenaar:
Harriet, let's switch gears again and round off our overview of all our international developments, by touching on Brexit. There's no escaping from that question, I think. What does the UK sanctions regime look like after Brexit? More general notion may be that the UK just copied and pasted the EU regime, but that doesn't seem to be the case. Can you describe the UK sanctions regime after Brexit and the need to know differences with the EU regime?
Harriet Territt:
Yes. Well, there's certainly no getting away from it here, that's for sure. The first point you make Rick, is probably the most important one. The new UK sanctions regime is not just what we call retained legislation. In other words, the UK did not just take the existing sanctions regime that it was subject to as an EU member state, translate it into UK law and say, "That's it. We'll make amendments in the future." This is a completely redrafted regime. Albeit, one that on the surface has strong similarities to the EU regime. It introduces some US style concepts that I'll talk about, but I think the key message is if you are someone who is responsible for EU and now UK sanctions compliance in your business, you need to be thinking about these independently. The analysis may well be the same under both, but there are lots of little tips and tricks that really could trip someone up if you make an assumption.
Harriet Territt:
This is going to be very high level, but I'll try and rattle through it. First key point, fairly obvious one, there is a geographical and nationality nexus that has been redrawn around the United Kingdom. The power to impose sanctions prohibitions extends only to conduct in the United Kingdom or conduct elsewhere, but only if the conduct is by a United Kingdom person. Obviously, if there is a UK incorporated entity, that will be subject to the UK regime, no matter where in the world it's doing business. But there are obviously, complexities around non-UK incorporated entities and the extent to which they may actually be conducting business in the United Kingdom.
Harriet Territt:
Second key point, there are some minor differences and designations and prohibitions from the EU regime. Not all of the EU designations have been continued under the new UK regime's Ukraine, Egypt and Tunisia are the three that I think jump out to most people. But it's really important to check. If you're checking a designation of a person or an entity, check under both the EU comprehensive list and the UK comprehensive list because they are no longer precisely in tandem. I mentioned there are also some changes in prohibitions. Again, these are very minor, but have the potential to really trip someone up. A really good example is the UK Russia regulations. There's a provision in there about requiring a license for provision of financial services. The definition and the terms upon which a license is required is now different between the EU regime and the UK regime. It's broader under the UK regime. That kind of thing again, means you really have to go back to the source regulation to do that check.
Harriet Territt:
Probably the third and practically one of the most important changes is around the definition of ownership and control. Asset freezes under both the EU and the UK legislation generally prohibit dealings in assets that are owned or controlled by designated persons. The new UK regime has an extended and frankly, fairly detailed description of the circumstances in which direct or indirect ownership or control via a corporate vehicle will be found to take place. Again, if you're looking at that on a cross border, pan European, including the UK basis, make sure you don't assume the same test is going to apply in all circumstances.
Harriet Territt:
Finally, in terms of big picture issues, one of the things that the UK government has noted is that it's given itself the power to issue general licenses. As in the US, these general licenses would allow multiple parties to undertake specific activities that would otherwise be prohibited by sanctions without needing their own personal license. Interesting development, US style. Haven't seen any general licenses yet, but it will be really interesting to see what they look like when they come out and whether, as we suspect, that is really the UK drawing from a specific feature of the US regime.
Rick van ‘t Hullenaar:
Thanks, Harriet. Indeed, talking about the similarities to the US regime, Sean, is there anything you want to add when you compare the UK sanctions program after Brexit to the US approach to sanctions?
Sean Boyce:
It's hard to draw a perfect comparison between the new UK program and the US program. To a certain extent, there certainly are and will be commonalities and that'll be a function of the similar common law background that both countries have. Time will really tell though, whether there's any actual similarities in both approach or enforcement. At the very least though, the key commonality that we would see is one that Harriet has noted very well. Both in their approach to rules on ownership and the possibility of general licenses or sweeping authorizations, the UK has followed or at least taken a similar approach to the United States. And the type of certainty that those approaches allow is very helpful when navigating these sanctions programs and something that we'll be watching very closely as the UK program takes shape and begins to really be enforced and implemented.
Rick van ‘t Hullenaar:
Thanks, Sean. We're going to wrap up shortly with an overview of what each of us believes will be a key development over the next 12 months. But first, we'd like to summarize what we think are the key messages or takeaways from this conversation.
Rick van ‘t Hullenaar:
First of all, sanctions are expanding in complexity and reach. This is just a natural conclusion if you followed this discussion. There are multiple symptoms of this. The increased use of US secondary sanctions, but also the layered Russian sectoral sanctions. There's also a trend where states pursue their own sanctions policies like the Gulf states have done.
Rick van ‘t Hullenaar:
Second, the current divergence between the US, UK and the EU sanctions programs, although we will have to see if the gap will become smaller in the coming year, increases sanctions risk and obviously creates new compliance challenges. We didn't even have time to talk about it during this session, but just look at the increase of potential conflicting regimes in the past year and the beginning of this year. Not only the UK has been developing its own regime and departing in some parts from the EU, but also China is developing export controls and their own blocking statute that could in the end, leave EMEA operators with interests in China, Europe, the Middle East and the US, for instance, squeezed between all those laws. So conflicting approaches do create new compliance challenges.
Rick van ‘t Hullenaar:
Thirdly, adding expanding reach and complexity to conflicting approaches, results in increased risk of non-compliance for EMEA based operators. With that, the current global sanctions climate requires companies even more to stay on top of their compliance programs. First of all, of course to prevent failures, but second of all, because it may be your only defense when it comes to discussions with regulators.
Rick van ‘t Hullenaar:
Okay. Let's come to a close by asking each of you what you think is a development you see coming in the 12 months ahead of us. Just to set this up, I would think we're going to see a gradual but steady increase in enforcement in the EU, fueled by policy changes at EU level, the new EU strategy and a growing call for a more centralized supervision by the setup of a European sanctions authority. Now, that's far from realized, but it sets the tone of focus on enforcement at EU level right now. If you add to that, local member states' efforts, notably also the Netherlands, this is a development that is crucial to address I think, in the coming year.
Rick van ‘t Hullenaar:
Somewhat ironically, I think that increased enforcement is also necessary for the EU when it wants to obtain closer coordination with, for instance, the US because a significant lack of serious enforcement in the EU is actually one of the criticisms of the US and one of the reasons it goes its own way in some instances.
Rick van ‘t Hullenaar:
Harriet, we'll turn to you. What would be your number one development?
Harriet Territt:
I'm going to go slightly left field and pick up something wearing my fintech hat, that again, we didn't really get a chance to talk about in this webinar or podcast, but hopefully will in future. The dividing line between sanctions and other types of business controls, particularly export controls and FDI that Eva mentioned, will just become increasingly blurred. And within that, I think we'll see a particular focus on technology related controls over the next 12 to 18 months.
Rick van ‘t Hullenaar:
Thanks, Harriet. Eva, what would you say?
Eva Monard:
I think we've already pointed to quite a number of key developments. I'll maybe point to the one that I am really curious about to see how it will look, which is China. There's now the designations of Chinese persons under the human rights sanctions. China immediately reacted. This is going to be crucial for the relationship between the EU and China going forward. There's the Uighur issue, there's the Hong Kong issue, so there might be some developments and if so, that would really be very relevant also, more generally for the trade relationship between these two powers.
Rick van ‘t Hullenaar:
And Sean?
Sean Boyce:
My final point would be that we'll see increased coordination between the US, UK and EU over the next year. That's certainly been the trend so far, a concerted trend by all parties involved. The fronts of enforcement, new sanctions programs and really aligning approaches to sanctions, both existing and coming in the future, will see quite a bit of coordination and alignment between the US, UK and EU. That said, that trend may certainly operate in parallel with efforts to balance longstanding asymmetries, but certainly I think the watchword for the next year is coordination.
Rick van ‘t Hullenaar:
Thank you so much Harriet, Eva and Sean, for this session. That actually leads me to the final comment, which is that we will be planning further sessions around sanctions and export controls with other colleagues of our sanctions bench behind the microphone. Really to dive deeper into certain particular topics. Harriet also already alluded to export controls but there are certainly others as well. So please keep an eye on those announcements and we hope you will be joining us for those sessions as well.
Dave Dalton:
Thank you, Rick. Great work and thanks also to Harriet, Eva and Sean. As Rick noted, there's more information coming regarding developments in the sanctions space and Rick and company will continue to provide information and analysis as we get it.
Dave Dalton:
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