In the world of geo-politics, 2011 was a defining year when it came to the use of economic and trade sanctions. For those of us that have been involved in having to implement sanctions or who have advised clients/customers on their impact, the level of activity in the sanctions world has been unprecedented.
One need only consider the impact of sanctions on Libya, Egypt and Tunisia following the Arab spring and the ongoing implementation of ‘smart’ sanctions against Iran and Syria to understand this. The effectiveness of these wide-ranging sanctions has been acknowledged as having improved dramatically, as governments and regulators across the globe start to consider more cohesively the manner in which sanctions can be used as an effective tool to persuade non-cooperative jurisdictions to come into line with the wider global community.
One historical complaint made by those having to implement sanctions has been that the impact on the commercial sector by their continued use was never adequately taken into consideration when drafting them and there is still a perception - rightly in my view - amongst certain commercial sectors that, although improving, the extent of this ‘assessment’ is still limited. This is certainly the case when it comes to the energy sector.
Why? One argument is that despite a perceived convergence in approach on the use and implementation of sanctions amongst the international community one fundamental issue still remains at the heart of their use – the individual foreign policy goals of certain jurisdictions, most notably the US.
The US has always been extremely pro-active in implementing unilateral sanctions and 2011 (and now 2012) showed us that this pro-activity continues unabated. A key example of this is the US attitude to implementing sanctions against Iran. As diplomatic efforts continue to try and persuade Iran back to the proliferation negotiating table, the US continues to pass ever more complex sanctions against the Ahmadinejad regime, but with key differences as compared to those implemented in the past – the extent to which non-US firms are also being targeted.Why is this significant?
The answer is that these non-US firms can be subject to US sanctions even though the relationships or transactions in question have no links to the US whatsoever, or indeed be connected to any nefarious activity. The transactions are not denominated in US dollars, no US persons are involved, including US companies, and still the US seeks to capture this conduct. These sanctions go far beyond those envisaged by the UN or indeed implemented by the EU or UK, and can have lasting impact on the ability of these companies to do business in the US.
This is potentially of relevance for the energy sector more than any other, given that a large proportion of the commercial relationships developed between key energy sector players and regimes such as Iran (or indeed other major OPEC producing countries) were developed many decades ago. Indeed these relationships were forged in an era where the only sanctions most people would have heard of were those against the apartheid regime in South Africa.
There can have been no real concept amongst the senior management of these companies that these long-standing and complex relationships could, in 2012 have potentially brought them up against the US Government. But that is precisely where the sector finds itself today. One need only look at the recent bad press and negative briefing against Shell and its activities relating to Iran to understand this.
The passing of the National Defence Authorisation Act at the end of 2011 by the US, brought into effect some of the most stringent extra-territorial sanctions against non-US firms to date. One could argue that the extra-territorial impact of these sanctions could be far greater than that of the existing CISADA (Comprehensive, Iran Sanctions and Divestment Act) Iranian sanctions and that they go beyond even the Cuban sanctions regime, which has sought to limit the ability of non-US firms to do business there (the other extra-territorial elephant in the sanctions room).
When it comes to Iran, for many, the argument may well be that it has been on the geo-political radar for many years now and indeed it is certainly the case that most, if not all, major financial institutions within the EU now refuse to do any business with the regime (and facilitate the business of their clients). Given this, they say, the energy sector should not complain or be surprised that they are now at the heart of the action.
However, it could be argued that for non-financial institutions, particularly those operating in the energy sector, the impact of these sanctions is far greater.
The financial services industry has been the focus of sanctions for some time now and has embedded complex due diligence and screening mechanisms that mitigate the risk of falling foul of these regulations. Certainly it can be no surprise to regulators that there may well have been a disproportionate investment in these systems and controls by those operating in the energy sector and that they may be a little behind the curve.
But the impact is also felt more sharply from a commercial point of view; by removing access to one of the largest markets available to companies operating in this sector, there comes added economic pressure in these extremely uncertain economic times. It has long been difficult for financial services firms to do business in Iran. That is not the case for the energy sector.
So one would hope that the governments and regulators at least inform these non-financial institutions on just what the potential relevance of their involvement with the energy sector in Iran may be and how sanctions impact upon its proliferation activities - a degree of flesh on the ‘with us or against us’ bones.
Certainly, to many companies that operated in and around the high-profile Iranian South Pars project, explaining the link between that project and the development of Iran’s nuclear enrichment facilities was, to begin with, a relatively difficult task.
However, given the recent impact of Sanctions on the Iranian economy, in particular, the collapse of the Iranian Rial and the decision by some of its other major trading partners to limit business with the regime (India being a good example), it is becoming clear that whatever our own individual views on the commercial impact of sanctions, from a geo-political perspective, they may be starting to have their intended effect.
So what should, and indeed could, be done by those operating in the energy sector to try and better prepare themselves for a climate of ever increasing sanctions? It is clear that, in the current climate, regimes such as Iran are a political and commercial no go area for any right-minded business. But where next?
Certainly Syria is the current political hot potato, and again its energy sector has been a key focus in the recent round of Sanctions imposed by the EU and the US. Putting to one side the Arab Spring and the more obvious candidates for sanctions where else may we see the sanctions radar expanding towards?
Without a geo-political crystal ball, that question is almost impossible to answer. For those operating in the energy sector (and indeed outside the sector), it will be no longer sufficient to just consider specific jurisdictional risk.
The reason for this is that as sanctions get smarter so do those that are being targeted. The IMO merry go round instigated by IRISL (Islamic Republic of Iran Shipping Lines) was a good example of the lengths that some regimes will go to in order to try and evade sanctions.
But that issue was also a good example of the increasing expectations placed upon commercial organisations comto better understand with whom, through whom and for whom they are doing business. Part of the answer, therefore, will be, as I have previously argued, by conducting ever increasing intelligence led due diligence and carrying out more comprehensive sanctions risk assessments upon new and existing relationships, going far beyond simple counter party diligence.
By investing more upfront resource to due diligence you may be able to stay ahead of the competition (and even the regulators) while ensuring that you and your business do not fall foul of ever energetic sanctions. That is one option. Another is to invest in your very own crystal ball.
Zia Ullah is head of Compliance Advisory at Pannone LLP and was formerly the Group head of Sanctions at Barclays plc. Consistently highly ranked in key legal directories, Pannone is a vibrant law firm with is own distinctive style and culture. With over 100 partners, 300 lawyers and a total team of over 600 people the business can deal with a multitude of legal requirements or challenges, delivering optimum results in every instance.
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