Keeping the US at bay

As the US flexes its muscles beyond its own borders and seeks to enforce its economic sanctions laws in Europe, British businesses face stark choices.

Last month, the US Administration announced a new series of unilateral economic sanctions against Iran, significantly raising the stakes in what is one of the most pressing diplomatic wars on the international stage. Media attention has focused on the imposition of sanctions on the military and the targeting of the Iranian Revolutionary Guards.

For businesses, however, the impact of these sweeping new measures will be felt through the instruments designed to freeze Iran out of the international financial system. For example, the US has now imposed sanctions upon three major Iranian banks, Bank Saderat, Bank Melli plc and Persia International Bank, which have a significant overseas presence and which are regulated financial institutions operating within the UK.

The US has now also adopted the attitude that ‘if you deal with our enemy, you are our enemy’. US officials have stated that they will seek to impose their unilateral sanctions measures on non-US entities that do business with Iran.

This policy was expressed in slightly more diplomatic tones by US Treasury Secretary, Hank Paulson, on 25 October 2007: “We call on responsible banks and companies around the world to terminate any business with Bank Melli, Bank Mellat, Bank Saderat, and all [designated Iranian] companies and entities… It is plain and simple: reputable institutions do not want to be bankers to this dangerous regime. We will continue to work with our international partners to prevent Iran from abusing the international financial system and to advance its illicit conduct.”

These are not hollow words. The US has already shown itself willing to punish non-US businesses that breach its unilateral sanctions laws. The US enforcement action against the Dutch bank ABN Amro is a case in point. ABN Amro received fines totalling $80m (£38.5m) from the US authorities in relation to financial transactions involving Libya and Iran, initiated by branches of ABN Amro situated outside the US.

The only link with the US was that the transactions in question were in US dollars and therefore were cleared through ABN Amro branches in the US. For the US Treasury’s Office of Foreign Asset Control (OFAC) this was sufficient to bring the bank within the scope of the US laws which prohibited virtually all trade with Iran and Libya. Last year, OFAC also fined the US company Varian for the export by its subsidiaries in Switzerland and Germany of US origin software to Iran and Iraq in violation of the US sanctions against those two countries.

The US is also targeting individuals. The British-based oil broker, John Irving, is currently the subject of a US request for his extradition to face trial for allegedly breaching the US sanctions against Iraq and violating the terms of the UN-administered ‘oil for food’ programme which operated in the 1990s. If extradited, Irving faces a potential sentence in the region of 60 years in prison.

For some time now the US authorities have been putting ‘softer’ pressure on UK banks with a presence in the US to stop any Iranian-related business. There are also a number of draft bills currently before the US Congress which, if enacted, could further increase the pressure on non-US businesses that do not comply with US economic sanctions laws.

This increasingly robust US attitude exposes UK citizens and businesses to particularly harsh criminal and civil penalties for conduct that is not unlawful here in the UK. Under US Federal law, for each violation corporate criminal penalties can range up to $500,000 (£240,860) and individuals face fines up to $250,000 (£120,430) and a maximum of 20 years in prison. OFAC may also impose administrative penalties of up to $50,000 (£24,087) per violation.

This ‘global policeman’ attitude of the US has drawn criticism. Earlier this year, the House of Lords Economic Affairs Committee published its wide-ranging report on the impact of economic sanctions as a tool of foreign policy and one of its recommendations was that the Government stand up to the US’ increasing extra-territorial application of its own sanctions laws. This concern was raised before the Lords’ Committee by the Confederation of British Industry (CBI) and the British Bankers Association.

Given the increasingly robust attitude of the US, the call by the House of Lords for an effective response by the UK Government is welcome. However, the response suggested by the Lords’ Committee is cause for concern. The Committee has recommended that the Government make use of existing UK and EU legislation designed to protect UK and European trading interests from the extra-territorial application of US laws.

This domestic legislation makes it a criminal offence for British businesses to comply, actively or by deliberate omission, with certain US sanctions laws (such as those targeting the Iranian petroleum industry) that adversely affect UK trading interests. So far, the Government has chosen not to utilise these tools (prosecutions cannot be instituted without the consent of the Secretary of State or the Attorney General). If, however, the Government heeds the recommendation of the House of Lords and adopts a more robust approach, British businesses may soon find themselves between a rock and a hard place.

In the immediate term, what does the latest US action mean for UK businesses and, in particular, for financial institutions with exposure in the US? It means that they must go further than simply adopting compliance practices designed to ensure that UK and European economic sanctions programmes are properly implemented.

UK businesses are increasingly aware of the need to ensure that they do not do business with individuals and entities designated on sanctions lists published in the UK by HM Treasury (this function transferred from the Bank of England to the Treasury on 24 October 2007) and generally originating from the UN Security Council or the EU. In addition to complying with these sanctions programmes and the more familiar anti-money laundering regulations, UK entities must also be aware of the content of the stricter US sanctions that may affect their business.

This need becomes acute where they have some US exposure and, particularly, if the transactions in question are in US dollars. A company aware of the dangers will be able to undertake the necessary business risk assessments. If a UK entity determines that there is a real risk that a transaction will violate the US sanctions laws, it may be possible to take steps to avoid committing an offence. For example, some US sanction prohibitions may be avoided by obtaining a licence.

In contrast, British businesses that ignore the US sanctions laws may jeopardise any corporate manifestation they may have in the US (be they US branches of European institutions, subsidiary or parent companies), rendering them vulnerable to vigorous US enforcement action.

Rachel Barnes a barrister at 3 Raymond Buildings