The state of United States (US), European Union (EU), and other sanctions regimes is in flux like never before, with significant implications for Middle East trade and finance. US sanctions against Iran are increasing following the US withdrawal from the Iran nuclear deal (the 2016 Joint Comprehensive Plan of Action (JCPOA)), with the first set of US sanctions re-imposed in August 2018, and another set looming in November 2018. Many companies are set to withdraw from Iran and the future of the JCPOA is in question.
Meanwhile, the US is increasing sanctions against Russia, with the EU anticipated to follow suit. Russia is fighting back with countermeasures that seek to prevent compliance with both US and EU sanctions.
Further to Baker McKenzie Habib Al Mulla’s recent seminars in Abu Dhabi and Dubai in October 2018, as part of the firm’s global Sanctions Roadshow, focusing on the implications of these sanctions for international trade, below are highlights of the key issues businesses operating in the Middle East are grappling with.
- Cautious climate
In a survey of participants conducted at our seminar, nearly 40% of respondents were most concerned about unwittingly breaching the sanctions regime and opening themselves up to penalties, with that caution resulting in a more conservative approach to doing business with Iran. Companies are balancing the costs and rewards, particularly if they may be barred from doing business with the US down the line.
- The approach of the United Arab Emirates (UAE)
Although there is no outright prohibition in the UAE of trading with Iran, the re-imposition of US sanctions and the increased vigilance of UAE authorities, particularly in the regulation of financial institutions and money flows from Iran, have made it very challenging to do business with Iran – particularly when it comes to payment. There is no question that the risk appetite of UAE companies for continuing to do business with Iran has diminished significantly in recent months.
- Impact of primary sanctions
Primary sanctions apply to all transactions and activities with a US nexus/connection, including US persons, US dollar transactions, US products (including products with certain levels of controlled US content), and US-owned/controlled foreign subsidiaries. These sanctions are enforced by the US Treasury Department’s Office of Foreign Assets Control (OFAC) and breach of the sanctions can result in civil and/or criminal penalties.
- Impact of secondary sanctions
Secondary sanctions have extraterritorial reach. Even if there is no obvious basis for US authority/jurisdiction, secondary sanctions can apply. Secondary sanctions do not prohibit the activities they target; rather, companies that engage in targeted activities related to Iran may be sanctioned by the US Government, effectively forcing non-US companies to choose between doing business with Iran or being sanctioned.
- Impact on third party relationships
The re-imposition of sanctions could jeopardize longstanding relationships that UAE companies have established with US companies or their foreign subsidiaries in the context of supply and distribution arrangements. The US supplier may simply not want their products to be sold to the Iranian market, even where such sales are authorized or permissible under both US primary and secondary sanctions. Many distribution agreements will already include explicit prohibitions on trading with sanctioned countries or black-listed companies and individuals.
- Indirect dealings
US primary sanctions prohibit parties from doing indirectly what they cannot directly. Likewise, even indirect Iran-related dealings can be targeted under US secondary sanctions. Because many companies operate in Iran via third parties such as intermediaries and distributors, best practices in the use of such third parties will be key.
- Contractual issues
Distribution agreements and/or contracts are likely to contain terms and obligations that require continued performance despite the tightening of Iran sanctions. Where such obligations would result in a violation of US sanctions and force a party to terminate, this could lead to a breach of contract and claims for damages/restitution. Examining contract clauses closely will be key.
- Impact on flow of funds and payment issues
The biggest concern of respondents to our survey in the UAE related to the restrictions on banking, payments and flow of funds to and from Iran. Some of the key financial issues arising out of the sanctions include:
- Banks are reluctant to get involved in potentially sanctioned transactions as well as legitimate Iran-related transactions that are not subject to sanctions.
- Financial institutions are taking an increasingly risk-averse position regarding any direct or indirect dealings with Iran. Compliance complexity and costs are increasing, further reducing the appetite of financial institutions for Iran dealings.
- Legitimate businesses cannot get paid/get their money out of Iran. With the UAE Central Bank scrutinising banks more closely, problems now arise from flow of funds through the financial system.
- Impact of EU blocking measures
In response to the US withdrawing from the JCPOA, the EU updated the Blocking Regulation in July 2018. This means it is prohibited for anyone in the EU to comply with the US sanctions against Iran. In some countries, violations are criminal (e.g. UK); others it is civil/administrative (e.g. Italy); others have not even introduced penalties (e.g. France).
This creates an irreconcilable dilemma for EU companies who may be faced with a decision of ignoring the Blocking Regulation (and face potential administrative fines from domestic regulators and contractual penalties as a result of decisions to terminate contracts that would expose them to risks under US sanctions). Our experience to date is that companies typically choose to prioritise US sanctions (due to the greater enforcement risks) and then mitigate any exposure that exists under the EU Blocking Regulation.
- Update on recent interim order by the United Nations (UN)
On 3 October 2018, the International Court of Justice (ICJ), the principal judicial organ of the UN, delivered its Order on the Iranian request to order the US to provisionally lift its economic sanctions ahead of more detailed arguments (Islamic Republic of Iran v. United States of America). The UN court issued an interim order to the US to lift Iran sanctions linked to humanitarian goods and civil aviation.
In its application, Iran argued that the reasons the US cited for re-imposing sanctions are unfounded and would violate several provisions of the 1955 bilateral Treaty of Amity, Economic Relations, and Consular Rights between itself and the US. It also argued that it has already suffered substantial economic and financial harm from the expected return of US nuclear sanctions.
Interestingly, the US still allows humanitarian exports as well as parts for safety of civil aviation. Nevertheless, it is expected that the Trump Administration would generally reject the order. Indeed, although the ICJ is the highest UN court and its decisions are binding, it has no power to enforce them. And countries, including the US, have occasionally ignored them and as such, this is likely to happen again in this case.
Further, the circumstances that existed when the bilateral treaty was concluded have changed so dramatically as to render it inapplicable. While its validity would likely be difficult to challenge as a matter of law, this is clearly an example of a so-called treaty of irrelevance: a decade-old treaty of friendship and cooperation between parties that have become bitter rivals, that no longer reflect the real world but somehow lives on in international law.
- Implications of US sanctions on Russia
The US Government continues to increase pressure on Russia, with a significant ramping up of sanctions in April 2018 and potential additional sanctions expected in November 2018. While not comprehensively sanctioned by the US Government, many key Russian individuals and companies they own or control have been blacklisted by OFAC. In addition, any entities owned 50% or more (individually or collectively) by these blacklisted parties are treated as blacklisted by operation of law. A big compliance challenge is knowing and understanding the ownership of any Russian parties with whom companies are dealing.
- Update on Qatar economic crisis
The political and economic embargo of Qatar by Saudi Arabia, the UAE, Egypt and Bahrain first announced in June 2017 remains in place, with a few notable developments since December 2017 that continue to impact supply chains and the ability of foreign nationals resident in Qatar to travel to the Gulf States that imposed the embargo. Qatar has also challenged the embargo by initiating proceedings before the World Trade Organization (WTO) and the ICJ.
We are currently seeing companies adjusting their distribution/supply chain models to the restrictions imposed by the boycott. However, there is no clear end in sight and no indication of deadlines that companies are giving themselves before changing their strategy/pulling out of Qatar.
Currently, the Qatar embargo is not subject to the US anti-boycott laws.
There are a number of elements that companies should think about now to ensure they are prepared for the developments in this field, particularly with the additional US sanctions coming in November 2018. Below are some useful tips when it comes to complying with sanctions in the Middle East, focusing for the moment on Iran (although these tips are equally relevant to sanctions against other territories/parties).
- Review your entire business model and screen your transactions for any potential connections with Iran or persons listed on any UN, US, EU or UAE sanctions lists.
- If you have any connections with Iran, assess: (i) whether there is any US nexus/connection; or (ii) even if there is no US nexus/connection, whether the activities would be within the scope of the US secondary sanctions, including any potential dealings, direct or indirect, with blacklisted parties. Based on that assessment, consider the potential risks.
- Review your contracts with US suppliers and other US counterparties to identify any sanctions-related clauses and consider whether they may impose obligations on you that may be even stricter than US sanctions laws.
- Review your contracts with customers, intermediaries, etc. to consider whether they contain robust sanctions compliance clauses, as appropriate, to help protect your company from sanctions-related risks.
- Consider whether your company has a sanctions compliance program, including policies, procedures, and training, that is tailored to address your particular risks.
- Don’t forget about sanctions against other countries (e.g. Syria, Russia, Cuba, Venezuela), and don’t forget that jurisdictions other than the US (e.g. the EU) have their own sanctions regimes.
How Baker McKenzie can help you
We can help you frame a risk assessment of your business to identify activities that may be subject to sanctions. If you identify any such activities, we can help you understand the potential compliance and sanctions-related risks. We can also help you understand and draft sanctions-related clauses in your contracts with suppliers, customers, intermediaries, and other counterparties, to help protect your company from sanctions-related risks. Further, we can help prepare or update your sanctions compliance policies and procedures, and provide dedicated training to your employees and third party relationship firms on what to do when faced with a sanctions violation. With respect to activities in US jurisdiction that implicate sanctions, we can help you consider your licensing options and can assist in drafting any license applications for submission to the US Government.
We will continue to monitor developments and provide updates from time to time. In the meantime, further information is available on our global sanctions and international trade websites:
This client alert is not meant to constitute legal advice, and specific advice should be sought from relevant professionals. Should you have any queries, please contact one of our lawyers below.