International Trade and Financial Sanctions Update

2019 will be a record year for international trade and financial sanctions. This alert explores the first half of the year's key international and domestic developments of relevance to New Zealand businesses, including:

• the Trump Administration's heightened activity on the sanctions designation and enforcement fronts;
• the publication of the United States Office of Foreign Assets Control's long-awaited framework for sanctions compliance;
• the New Zealand business community's response to sanctions targeting Iran; and
• the progression (or otherwise) of New Zealand's Autonomous Sanctions Bill.
   

Trump Administration's heightened activity on the sanctions designation front

Since entering office in January 2017, President Trump has relied heavily on the imposition of financial penalties (especially sanctions and tariffs) to further his foreign policy objectives. A crude way to measure the spike in President Trump's use of sanctions is to look at the number of additions his Administration has made to the United States (US) Treasury’s Specially Designated Nationals (SDN) list. This is effectively a blacklist of foreign nationals and organisations that US citizens and residents (and others subject to US jurisdiction) are restricted from doing business with. As Figure 1 below demonstrates, the Trump Administration brought the number of names on the SDN list to an all-time high in 2017, then broke its own record in 2018, and is set to do so again in 2019. At present, there are 33,273 names on the list.¹

Complying with the US Treasury's ever-expanding SDN list is costly for companies, as it disrupts their international business flows and mandates investments in due diligence to prevent unintentional violations. New Zealand businesses also incur compliance costs, as the US sanctions generally impose restrictions on US citizens, permanent resident aliens, vessels, aircraft and corporations (and their foreign branches), wherever they are located (including New Zealand). In addition, in certain circumstances, the wider US sanctions regime also restricts transactions involving US dollars and concerning US-origin goods.

Trump Administration's heightened activity on the sanctions enforcement front

Despite this dramatic expansion of the SDN list, the Trump Administration initially adopted a softer stance on sanctions enforcement than previous administrations. However, following a major change in the US Office of Foreign Assets Control's (OFAC) enforcement policy, 2019 is now likely to be a record year for both the number of penalties issued / settlements reached (18 to date) and the total value of those penalties/settlements (US$1.3 billion to date).²

The major area in which OFAC’s recent enforcement policies have been more stringent is in punishing foreign sanctions violators (as opposed to American ones) and penalising those businesses more severely. In 2017, 2018 and 2019 (to date), OFAC has imposed its largest fines against foreign firms:

• China’s ZTE Corporation was penalised over US$100 million in 2017 (along with a much larger fine imposed by the Department of Commerce for strategic trade control violations);
• the French bank Société Générale S.A. was fined US$54 million in 2018; and
• the United Kingdom's (UK) Standard Chartered Bank was penalised US$657 million in April 2019.³

The Trump Administration's heightened activity on the sanctions designation and enforcement fronts (especially regarding foreign sanctions violators) should cause New Zealand businesses to reflect on the importance of maintaining an effective sanctions compliance programme (SCP).

OFAC published its sanctions compliance framework

On 2 May 2019, OFAC published its framework for sanctions compliance: A Framework for OFAC Compliance Commitments (Framework). This long-awaited and remarkably user friendly document outlines what OFAC will consider when it evaluates a company’s SCP under the OFAC Economic Sanctions Enforcement Guidelines (also a useful document). The Framework details the five essential components of a SCP: (1) management commitment; (2) risk assessment; (3) internal controls; (4) testing and auditing; and (5) training. It also outlines the 10 root causes of SCP breakdowns or deficiencies.

While the broad elements of the Framework should be familiar to seasoned compliance officers in New Zealand, the details provide a useful road map for businesses that are keen to create or refine a robust and risk-based SCP. In our view, the Framework is a must-read for sanctions compliance officers representing New Zealand's banks and leading exporters, as it effectively sets a new bar for SCP international best practice.

New Zealand business community's response to sanctions targeting Iran

Following the US Government's withdrawal from the Iran nuclear deal on 8 May 2018, the US Government re-imposed various sanctions on Iran, including:

• primary sanctions, which impose restrictions on 'US persons' (wherever located) and transactions with a 'US nexus' (wherever made); and
• secondary sanctions, which target non-US persons (primarily foreign financial institutions) who do business with sanctioned Iranian parties, even when there is no US nexus to that business.

In light of this, most (if not all) New Zealand banks adopt a cautious risk management approach to facilitating transactions involving Iran. Some banks refuse to handle Iran-related business altogether. Others only handle it for key clients, or when transactions are of a significant value. When on-boarding or reviewing Iran-related business, it is not unusual for a New Zealand bank to request: (i) a letter of undertakings with respect to the client's dealings involving Iran; and (ii) evidence that enhanced due diligence (EDD) checks have been carried out on all potential parties to those dealings. These EDD checks help to ensure that the client's business would not lead a bank to facilitate transactions on behalf of individuals or entities that are SDNs.

The progression (or otherwise) of New Zealand's Autonomous Sanctions Bill

At present, there is no general legislative power to allow the New Zealand Government to impose economic sanctions in the absence of a UN Security Council Resolution. In May 2017, the previous National Government introduced the Autonomous Sanctions Bill to Parliament. The Bill proposes to enable the New Zealand Government to impose unilateral restrictions on trade and financial dealings with designated foreign individuals, entities, assets and services. It also proposes new reporting obligations for New Zealand registered banks and a ten-fold increase in the maximum potential penalty for domestic sanctions breaches.

If passed, the Bill is likely to further complicate the regulatory compliance obligations of New Zealand exporters, importers and trade facilitators (e.g. banks, freight forwarders, international carriers and insurance companies),some of whom already struggle to conclude cross-border contracts as they are unsure whether their proposed transactions comply with New Zealand's existing sanctions and the myriad of foreign autonomous sanctions that may also apply.

The Bill has been languishing on the Parliamentary Order Paper since May 2017, and is currently sitting at number 23.⁴Throughout its term in office, the current Labour-New Zealand First Coalition Government has shown a lack of interest in progressing the Bill. The National Party published an International Affairs Discussion Document in May 2019 that calls on Parliament to "pass the [Bill] as a priority so that [New Zealand] can stand with likeminded countries against aggression and breaches of human rights". In response, the Prime Minister (and Leader of the Labour Party) Jacinda Ardern, stated that she had not come across a situation where she has felt that New Zealand has needed an autonomous sanctions regime to take a stand on an issue. Similarly, the Minister of Foreign Affairs (and Leader of the New Zealand First Party) Winston Peters, has queried the usefulness of New Zealand being able to impose sanctions unilaterally.⁵ Without this Government's support, we do not expect that New Zealand will implement an autonomous sanctions regime any time soon.

How we can help you

Russell McVeagh has extensive experience of advising on sanctions compliance and enforcement related matters. We routinely assist clients to conduct customer and transaction due diligence and screening processes, to structure low risk transactions, and to develop or refine their SCPs. We also represent clients in sanctions investigations undertaken by the Customs Service, the UN, and the UK and US governments. Members of our team have represented clients in sanctions-related judicial proceedings in New Zealand and the UK. We work closely with partner firms in other jurisdictions when foreign legal advice is required.

Figure 1.

Graph compiled by Gibson Dunn using OFAC data available here.

This article is intended only to provide a summary of the subject covered. It does not purport to be comprehensive or to provide legal advice. No person should act in reliance on any statement contained in this publication without first obtaining specific professional advice. If you require any advice or further information on the subject matter of this newsletter, please contact the partner/solicitor in the firm who normally advises you, or alternatively contact one of the partners listed below.