Managing The Risk Of Sanctions
Posted on 07 January 2015 by
The recent removal of Sheikh Yassin Abdullah Kadi from US sanctions last month following a 13-year legal battle brings to the fore the significant financial and reputational risks and challenges faced by high net worth individuals under threat of targeted sanctions.
The European Union, United Nations and the US rely increasingly on targeted or “smart” economic sanctions to achieve foreign policy aims. There has never been a greater number of sanctions regimes in the world as there are today. At the time of writing there are 73 sanctions regimes in force by the EU, the UN and the US targeting Syria, Iran, Russia, Belarus, Sudan and Zimbabwe amongst other jurisdictions. Increasing geo-political instability means these sanctions regimes are likely to widen in scope. This poses significant risks for HNW individuals and businesses engaged in international trade and finance.
Targeted sanctions are used for a variety of reasons: to achieve an improvement in the conduct of a repressive government (such as Myanmar), combat terrorism, or prevent nuclear proliferation. Yet the ways in which sanctions are imposed are remarkably similar. First, financial restrictions are placed on those individuals or entities believed to be responsible for the offending behaviour (such as senior military figures in a repressive regime) and the bank accounts of those persons are frozen. This freezing happens without prior notice to the individual. Second, it becomes a criminal offence to provide “financial resources” to the targeted persons. This includes economic assistance of the widest kind such as providing them with bank loans or paying sums due under contracts, to providing non-cash resources such as food, electricity or a seat on an aeroplane. Finally the targeted person may be banned from travelling to any jurisdiction where the sanctions take effect.
The impact of sanctions on a listed person can be devastating. Although sanctions are not meant to be criminal or punitive measures, their effect was described by one senior judge in the UK’s supreme court as tantamount to making the sanctioned person “a prisoner of state”. The international nature of modern banking and increasingly stringent banking compliance standards mean that any major bank will either cut off relations with a listed person or, if there is any ambiguity in their status, refuse to conduct banking transactions for them.
In these days of ever-increasing fines and penalties being imposed on the banking sector, banks are taking an increasingly cautious approach to these matters. Without access to accounts or credit cards daily life becomes a struggle. Successful businesses can flounder as they are deprived of banking facilities and forced to operate on a cash basis with all the inherent risks that this entails. In addition to financial losses, the reputational damage suffered by a listed person and their family – arising from an allegation they are associated with a repressive regime – can take years to repair.
The risk of a private individual unwittingly finding themselves caught in a sanctions measure is considerable. Sanctions not only target rogue governments or known terrorists but also wealthy individuals, businesses or charities who are suspected of “supporting” or “associating with” them. The rationale for those imposing sanctions is that private individuals or entities suspected of being supporters of terrorists or governments need to be targeted in order for the sanctions to be effective.
However the stated reasons for listing a businessman or company are often highly generalised and frequently no supporting evidence is provided. This can result in a Kafkaesque nightmare for a businessman or company which has been listed as they are unable to learn why they have been listed beyond a handful of generalised allegations – often one sentence – published in the sanctions legislation. This presents enormous difficulties to persons wishing to challenge the sanctions in court as they may need to do so before, or altogether without, access to the relevant evidence. Critical evidence may be withheld from them for security or public policy reasons.
Despite this gloomy picture, successful challenges are possible. In 2001 a Saudi businessman, Sheikh Yassin Kadi, unwittingly found himself included in sanctions imposed by the US Treasury Office of Foreign Asset Control (OFAC), and simultaneously the equivalent indeed identical regime of the UK. The allegations against Mr Kadi could not have been more serious, or more poorly explained. Following the US listing he was added to further sanctions regimes by the UN, the EU, the UK and many other countries around the world.
Carter-Ruck, on behalf of Kadi, challenged all of these sanctions through various court actions and legal petitions. In 2008, in a ground-breaking judgment, 14 judges in the highest EU Court ruled that the EU’s freezing regulation against Kadi be annulled. This historic and far-reaching judgement was the first time that the courts of the European communities held that EU legislation derived from a UN security council resolution must comply with fundamental human rights. The court held that Kadi’s right to be heard and his right to effective judicial review had “patently not been respected”.
The EU Court also ruled that the procedure for challenging UN sanctions was inadequate because it was in essence diplomatic and afforded Kadi no real opportunity of asserting his rights. This decision caused a diplomatic impetus which led the UN, in 2009, to create the Office of Ombudsperson whose remit is to receive challenges from individuals and entities to sanctions and make recommendations to the relevant UN committee.
Since then Kadi succeeded in annulling every sanctions regime against him and over the Thanksgiving holiday in November 2014 he was finally removed from US sanctions. Each of these victories was hard-won. However, Kadi’s case has paved the way for other successful sanctions challenges and the judicial safeguards for persons targeted in EU sanctions have since improved, although they remain far from ideal.
Managing the risks of sanctions can be difficult given that the legislation is often vague and its prohibitions uncertain. Those doing business in countries targeted by sanctions will need advice from competent lawyers to advise on their operations and the persons they do business with in the targeted country.
For individuals and businesses who find themselves listed in sanctions the key is to act quickly. Many sanctions regimes allow only a short deadline to challenge a listing: for example in the EU a person has just two months from the publication of the listing to file a legal challenge with the court. A considerable amount of evidence-gathering and preparation will need to be done in that period for a successful application.
It is crucial to quickly instruct lawyers with experience of challenging the relevant sanctions through the appropriate legal procedure. From our experience listed persons often spend the first critical weeks trying to remove their listing through contacts, PR consultants or lawyers who claim to have close relations with government officials. The result is often (considerable) wasted costs while the person risks missing the deadline for filing a formal challenge. Whilst back-channel discussions with officials can in some cases be helpful we have found them to be most effective when conducted in tandem with a well-prepared legal application.