2 | FTReports FINANCIAL TIMESThursday 30January 2020

Trade SecretsSanctions

F

or a long time the business

of economic and financial

sanctions was relatively

sedate. They were usually

applied in a fairly consist-

ent way to a generally predictable set

of countries. True, their sophistica-

tion increased with the complexity of

the world financial system and sup-

ply chains. But their use was often

politically constrained by corporate

interestsinthesanctioningcountry.

Then came Donald Trump. The US

president has been far more willing

than his predecessors to mix eco-

nomic and security considerations.

Indeed, since he regards reliance on

imports as intrinsically damaging to

theUSeconomy,hisworldviewisthat

thetwoarenecessarilylinked.

This has created an atmosphere in

which the US has been more prone to

reach for sanctions and much more

careless about their knock-on effects.

Further uncertainty arises from Mr

Trump’s readiness to shunt govern-

ments — notably Iran — between the

“friends” and “enemies” columns in

hismentalspreadsheet.

The extent to which security and

economic concerns can be inter-

twined was underlined by Canada’s

arrest of Meng Wanzhou, chief finan-

cialofficer of Chinese technology

company Huawei — at the US’s

request — for allegedly breaking

sanctionsonIran.

The issue is tied up with Mr

Trump’s obsession with China’s role

in the global economy and particu-

larlyintech,wherehehasbeentrying

to assert US self-sufficiency and dom-

inance. He has identified Huawei in

particular as a security threat to the

US, and is trying to drive it out of 5G

systems worldwide. Mr Trump even

mixed trade with security when he

offered to intervene in the Huawei

Trump weaponises

the dollar in drive

to put America first

President deploys

sanctions for his

political goals with

little concern for

collateral damage,

writesAlan Beattie

Companies operating in

Europe face a headache as the

UK prepares to diverge from

the European Union’s sanc-

tions regime, making it even

more complex to avoid doing

business with blacklisted peo-

ple,businessesandcountries.

A framework of EU restric-

tions against countries from

Venezuela to Russia, designed

to support goals such as

defending human rights and

fighting terrorism, is initially

set to be largely mimicked by

the UK following the end of the

Brexit transition period,

scheduled for the end of this

year.

But foreign secretary

Dominic Raab is expected to

outline a new British sanctions

regime in February, targeted

at individuals deemed respon-

sible for human rights abuses.

This is to be followed by the

publication of a list of people

whose assets in the UK are to

befrozen.

And compliance lawyers see

signs that the UK will eventu-

ally gravitate closer to the US

stance on sanctions. Mean-

while, the EU, shorn of a UK

that has been the driving force

behind much of the bloc’s

sanctions regulations, could

starttosoftenitsapproach.

“I see the UK drifting to

more of a mid-Atlantic posi-

tion,” says Sunny Mann, who

co-leads law firm Baker

McKenzie’s UK compliance

andinvestigationspractice.He

adds: “I can see the EU drifting

below the current benchmark

if the UK is not at the table

pushing for tougher sanc-

tions.”

Britain’s plan on sanctions —

measures that can range from

arms embargoes and travel

bans on specific individuals to

limits on trade and the use of

some financial instruments —

comes at the country seeks to

forge a new foreign policy

following its departure from

theEU.

The new policy is intended

to counter fears that concern

for human rights might fall by

the wayside in a post-Brexit

Britain more concerned about

courting new business and

tradeopportunities.

While Boris Johnson, prime

minister, has promised that a

new “global Britain” will be

“generous in temper and

engaged with the world”, the

challenges of putting its new

policy into practice have

become apparent in the past

month. The issue of sanctions

has come into sharp focus fol-

lowing the US’s decision in Jan-

uary to impose further sanc-

Business faces new headache if Brexit

Britain adopts stricter rules than EU

Europe

Lawyers expect

tougher stance, writes

Laurence Fletcher

tions against Iran after assassi-

nating Iranian military com-

manderQassemSoleimani.

The UK, France and Ger-

many have been trying to keep

alive a 2015 deal designed to

restrict Iran’s nuclear pro-

grammeaftertheUSpulledout

ofitin2018.Yetthismonththe

European trio triggered a dis-

pute mechanism in the deal

after Tehran abandoned its

uranium enrichment limits.

That pushes the 2015 deal

closer to collapse and could

mean the reimposition of UN

sanctions against Iran,

although the UK’s position

could end up being markedly

differenttotheEU’s.

“One area where you could

seepoliticaldivergenceiswhat

to do with Iran,” says Baker

McKenzie’s Mr Mann. While

The regulations

tend to be a grey

area, leaving

plenty of room for

companies to trip up

Contributors

Alice Ross

Editor, Trade Secrets

Alan Beattie

Senior trade writer

Henry Foy

Moscow bureau chief

Laurence Fletcher

Capital markets correspondent

Bruce Love

Freelance writer

James Politi

World trade editor

Conor Sullivan

Commissioning editor

Steven Bird

Designer

Daniel Pudles

Illustrator

Esan Swan

Picture editor

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FT BriefingTrade Secrets

FINANCIAL TIMESThursday 30 January 2020 FTReports| 11

Trade SecretsSanctions

There was a time when export

controlswereanobscureback-

water of Washington’s trade

policy, involving licences for

thefewtechnologiesthatcould

be put to both military and

civilian use. But since he came

to office, President Donald

Trump has seized on them as a

way to contain China’s use of

innovation to gain an edge in

military prowess and intelli-

gencegathering.

“We are alert to China’s

civil−military fusion strategy,

and understand China’s tena-

cious pursuit of American

technologies it needs to mod-

ernise its military,” Wilbur

Ross, the US commerce secre-

tary and former distressed

asset investor, said in a speech

last July. “This cannot be toler-

ated, and we are updating our

export control policies to

account for this very real

threat.”

Mr Ross was speaking less

than two months after the

Trump administration made

its most high-profile and con-

troversial move on export con-

trols. Last year, after talks on a

comprehensivetradedealwith

China collapsed in acrimony,

the US commerce department

placed Huawei, the Chinese

telecoms network company,

on its “entity list”, preventing

American companies from

doing business with it in the

absence of a government

licence.

The move by the Trump

administration was met with

strong opposition in Beijing

and plenty of angst among US

companies, from chipmakers

to internet platforms, that sell

theirproductstoHuawei.

The backlash was so strong

that the Trump administra-

tion effectively watered down

the import ban by ensuring

that some American busi-

nesses could continue to sup-

ply Huawei. But the Chinese

group has nonetheless tried to

quickly cut its dependence on

American components and

software.

US officials contend that

they have good reason to mon-

itor and block business with

Huawei, given allegations of

espionage, sanctions viola-

tions and links to the Chinese

military that have been lev-

elled against the company.

And Huawei is not the only

target.

As the US administration

ratcheted up pressure on

China over the past year in the

midstofatradewar,whichwas

paused just this month, it also

imposed export controls on

dealings with other companies

including surveillance tech-

nologygroupHikvision,onthe

grounds that their products

are used by Beijing to perpe-

tratehumanrightsabuses.

“In recent years, China has

taken a sharp U-turn toward

control and oppression of its

own people,” Mike Pence, US

vice-president, said in a

speechinOctober.

“Today, China has built an

unparalleled surveillance

state, and it’s growing more

expansive and intrusive —

often with the help of US tech-

nology.”

The Huawei and Hikvision

designations are only the tip of

the iceberg — the US govern-

ment is subjecting those who

do business with Chinese tech

companies to much greater

scrutiny.

The US Export Controls Act

of 2018 paved the way for

Washingtontowidenthescope

of the restrictions to include

the most cutting edge technol-

ogies, from genomics to facial

recognition, robotics and arti-

ficial intelligence. The com-

merce department has been

busy translating that legisla-

tion into specific regulations.

Silicon Valley companies are

watching very closely, not only

for signs that their sales might

be jeopardised, but also to

ensure that they are not cut off

from innovative Chinese

research that could help their

businesses.

So far, fears that the Trump

administration could imple-

ment the law with a hatchet

have subsided somewhat,

since the commerce depart-

ment has moved slowly and

deliberately to put it into prac-

tice. But the US tech sector

remains anxious about the

final regulations. The US said

this month that it would apply

the new export controls to

geospatial imagery technol-

ogy, in the first specific meas-

urerelatedtothe2018law.

Samm Sacks, a cyber secu-

rity policy and China digital

economy fellow at the New

America Foundation, has

argued that the restrictions

could backfire dangerously if

they are too sweeping. “Unlike

the Cold War space race with

the Soviet Union, the line

between US and Chinese tech-

nological development is not

as clear as the political border

between the two countries,”

she told the House foreign

affairs committee, just a few

days before Huawei was

placed on the export blacklist

in May. “Efforts to segregate or

‘decouple’ the two systems will

comeatasteepcosttoUSinno-

vation and technological lead-

ership.”

Since the US and China

reached their “phase one”

trade deal this month, a big

debate in Washington trade

circles has been whether the

detente would also extend to

areas like technology competi-

tion and export controls. But

the prevailing assumption is

that the US will continue piling

pressure on Beijing through

thesemeasures.

“The decoupling of the US

and Chinese tech sectors is

already disrupting bilateral

flowsoftechnology,talent,and

investment,”warnedtheEura-

sia Group, a risk consultancy,

this month. “In 2020, this

decoupling will move beyond

strategic tech sectors like sem-

iconductors, cloud computing,

and 5G into broader economic

activity.”

Trump uses

legal blocks

to curb

China’s rise

Export controls

Tech decoupling is

set to gather pace,

writesJames Politi

‘The line between US

and Chinese [tech] is

not as clear as the

political border’

Under observation:

Hikvision, whose

surveillance cameras are

pictured above, has been hit

by US export controls

Qilai Shen/Bloomberg

FINANCIAL TIMESThursday 30 January 2020 FTReports| 3

page 10). But caught between the

rock of US sanctions and the hard

place of EU retribution, businesses

will often choose the former. “Reality

dictates that enforcement risk on the

US side is significant, while on the EU

side it is manageable,” Ms Thoms

says.

The official European attempt to

avoid the collateral damage from

sanctions has been to create Instex, a

type of barter instrument which

avoids the dollar payments system.

But companies are still reluctant to

get involved in a mechanism which

will put them at risk of disfavour in

the US.

“There is not much information

about Instex and it only covers food

and medicine,” says Lourdes Catrain,

a partner at the law firm Hogan

Lovells. “The scope of US sanctions is

very wide and it [Instex] isn’t bullet-

proof against them at all.”

The world has discovered just how

much impact the US can have if it is

prepared to inflict collateral damage

on all companies connected to a sup-

ply chain with a country it wants to

sanction. Eventually, those compa-

nies and other governments may find

ways to cope with the threat. For the

moment, at least for broad sanctions

on a country like Iran, they are

mainly choosing to get out of the way.

Trade SecretsSanctions

anxiety where companies simply pull

out of Iranian trade altogether. The

modern globalised world’s extended

supply chains increase the risk that

some business in the process, perhaps

a transport company, could get sanc-

tioned even as products are being

shipped. “The practical reality is that

many companies decide they don’t

want to be involved at all,” she says.

The weighty consequences of

breaching US sanctions was under-

lined in 2018 when French bank

Société Générale paid $1.3bn to

resolve American accusations that it

handled billions of dollars in transac-

tions to entities in Iran, Sudan, Cuba

and Libya between 2003 and 2013.

BNP Paribas paid $8.9bn to settle a

sanctions case in 2014.

It seems highly unlikely that any

other major government will be able

to restrain or bypass the US’s whole-

sale remodelling of the sanctions

landscape. Governments in the EU,

which helped broker the Iran deal,

are unhappy with the effect of sanc-

tions. They talk enthusiastically

about the euro eventually replacing

the dollar as a primary currency for

bank funding and trade invoicing,

undermining the US’s ability to weap-

onise the payments system for its

own ends. But the European currency

has its own weaknesses which pre-

vent it playing that role and seem

unlikely to be fixed for decades.

Meanwhile, the EU’s attempts to

allow European companies to ignore

US secondary sanctions, which

America tries to enforce worldwide,

have largely failed. It has updated its

“blocking regulation”, which is aimed

at preventing companies from obey-

ing extraterritorial sanctions (see

ture of the current US sanctions on

Iran has generally been about the

same as before but there has been a

far broader reach.” Most big compa-

nies have quit Iran and do not even

attempt to supply pro duc ts

exempted from sanctions, such as

food or medicine.

Anahita Thoms, head of the trade

practice at the law firm Baker McKen-

zie in Germany, says that the overall

effect is to create an atmosphere of

the UK has so far aligned itself

with France and Germany,

British prime minister Boris

Johnson has called for a new

US “Trump deal” with Iran,

suggesting a move towards the

US’s position — although the

UK insists that does not con-

tradict the goal of saving the

2015 agreement.

The UK is also expected to

slap travel bans and asset

freezes on Russians responsi-

ble for human rights abuses,

similar to steps taken in the US

following the 2012 “Magnitsky

act” — named after a whistle-

blowing Russian lawyer beaten

to death in a Moscow jail in

2009 after uncovering a

$230m fraud by tax officials.

Currently, the UK sanctions

policy is largely determined by

the EU. Some of these sanc-

tions are mandatory, arising

from membership of the UN.

Others, however, are set by the

EU itself. “It’s one of the areas

where the UK is exercising its

sovereignty resulting from

Brexit,” says Richard Eccles,

partner at law firm Bird &

Bird. While this will be subject

Most big companies do

not even try to supply Iran

with food or drugs, which

are sanctions-exempt

case if it helped seal a trade deal he

was seeking with China.

Mr Trump is also prepared to use

tools such as the dollar’s dominance

in banking and payments in a much

more aggressive way.

The requirement for foreign insti-

tutions to have correspondent bank-

ing arrangements in the US to under-

take dollar transactions increases the

reach of the Treasury’s sanctions

enforcers. This added scope means

manycompanies and policymakers

are paying attention to the threat of

sanctions for the first time. Leigh

Hansson, partner at the law firm

Reed Smith, says: “We are increas-

ingly being contacted by companies

from countries like China where

there hasn’t been much interest in the

past.”

Iran has proved to be a test of how

other governments and companies

react. Ms Hansson says: “The struc-

to any future trade deals

struck with the EU, “you get

the impression it’s the govern-

ment’s intention not to give

that [sovereignty] up”.

The 2018 Sanctions and

Anti-Money Laundering Act

means London already has the

legal powers to make its own

sanctions regulations. But nav-

igating post-Brexit sanctions is

likely to be tough because the

regulations tend to be a grey

area, leaving plenty of room

for companies to trip up.

The emergence of a UK

sanctions regime, differing

from that of the EU and US,

could mean extra cost and

complexity for business

already facing many Brexit-

related challenges including

the planned departure from

the EU single market.

A company dealing now

with Iran, for instance, might

need to obtain legal advice

about EU and US sanctions.

“Going forward you’re going to

have to get EU advice and US

advice and UK advice,”

depending on the circum-

stances, says Philip Roche, The Foreign Office in London, which is forging new policies for the post-Brexit world— Alamy

partner at law firm Norton

Rose Fulbright.

One example, which illus-

trates just how complex the

rules could become, is EU

sanctions on Russian banks.

These institutions’ EU-based

subsidiaries currently enjoy an

exemption from the sanctions

as long as any credit provided

to them is not then used to

fund the Russian-based par-

ent. Although the UK has lined

up legislation to mirror EU

rules, EU businesses and indi-

viduals could potentially be

prohibited from certain deal-

ings with London-based

subsidiaries if, as a result of

Brexit, Britain is no longer cov-

ered by EU exemptions.

Ross Denton, partner at

Baker McKenzie, points out

that the UK cannot fix this

kind of conundrum unilater-

ally. “It can be very difficult to

work out if any particular

transaction is on the right or

wrong side of what is permissi-

ble,” says Mr Roche. “Ulti-

mately a court will say ‘well it

means this’ even if the regula-

tion does not precisely say so.”

10 | FTReports FINANCIAL TIMESThursday 30January 2020

Trade SecretsSanctions

W

hen President Don-

ald Trump walked

away from the Iran

nuclear deal in 2018

and imposed sanc-

tions against the country, the intri-

cate landscape of global trade embar-

goes became even more complex for

multinational companies.

Not only did international busi-

nesses have to contend with the

resumption of US sanctions, they also

had to navigate EU rules that can

make it illegal to comply with the

American measures, leaving them

caught in the geopolitical crossfire.

Yet the legal labyrinth in which

multinationals find themselves is

likely to grow more challenging still

as other governments follow the US’s

enthusiastic use of sanctions.

The biggest challenge for compa-

nies is simply understanding what is

required of them to comply with the

rules, given how the policies and the

enforcement of them varies widely,

according to Bryan Early, a politics

professor at Albany university. The

US in particular has become an

“extreme outlier in terms of how

much it is willing to invest in the

implementation and enforcement of

its sanctions — and its willingness to

name and shame the companies it

identifies as violating sanctions”, he

says.

The US Treasury’s Office of Foreign

Assets Control (Ofac) administers

and enforces economic and trade

sanctions. But its statements and reg-

ulations leave “plenty of grey areas”

which means multinationals need to

be “very conservative and stay as far

away from those grey lines as possi-

ble”, says Clif Burns, senior counsel at

Crowell & Moring in Washington.

Without good guidance, most busi-

nesses tend to steer clear of countries

targeted by trade sanctions, he says.

Yet in practice, even a conservative

approach can be difficult. US compa-

nies are forbidden to do business with

organisations which in aggregate are

more than 50 per cent owned by indi-

viduals or entities on Ofac’s list of

blocked parties. “This means you

may have to go up and down the chain

of ownership to ensure you’re not

doing business with a sanctioned

entity,” says Mr Burns.

Ofac is willing to impose large pen-

alties against foreign sanctions viola-

tors, as well as inflicting reputational

damage, says Prof Early. Ofac also

encourages companies to voluntarily

disclose violations in exchange for

lower penalties.

While the US’s expansive sanctions

rules might be vague, they are also

relatively coherent, says Anna Brad-

shaw, a partner at Peters & Peters

Solicitors in London. This stands in

contrast with the EU, where member

states all have their own approach to

enforcement. “Some member states

criminalise breaches, yet others only

impose civil or administrative penal-

ties. These differences can have sig-

nificant consequences,” she says.

“In the UK, if you believe someone

has breached EU financial sanctions,

you must report it; it’s a criminal

offence for certain institutions, busi-

nesses and professions to fail to do so.

But that’s not the case in other juris-

dictions,” she adds.

In navigating all this, multination-

als must consider not only where they

and their subsidiaries are domiciled

and doing business, says Lourdes Cat-

rain, partner at Hogan Lovells. They

must also examine the currency of

any payments, the country of origin

of products, and the identity of the

people involved.

US primary sanctions prohibit US

companies (including their non-US

branches) as well as citizens, green-

card holders and non-US entities

owned or controlled by US persons,

from doing business with Iran and

Cuba. But the applicability of US

secondary sanctions against Iran and

Cuba is more complex, says Ms

Catrain, as these apply to any com-

pany in the world that wants to do

any business in the US.

“Secondary sanctions effectively

forbid EU companies from doing cer-

tain business with Iran or Cuba —

even if the goods or technology are

not subject to US law.”

Particularly problematic for Euro-

pean companies are EU laws known

as blocking regulations, which pro-

hibit EU companies from following

US secondary sanctions. The regula-

tion was updated in response to the

US’s withdrawal from the Iran deal.

“It’s a breach of EU blocking regula-

tions to follow the US secondary sanc-

tions,” says Ms Catrain. “The result

has been that EU businesses are effec-

tively caught between the require-

ments of the blocking regulation and

the US’s secondary sanctions.”

In recent cases involving US sanc-

tions violations by European compa-

nies, Ms Bradshaw says compliance

with the EU blocking regulation even

seems to have been treated as an

aggravating factor, justifying greater

punishment. “Evidence of steps taken

to follow the EU regime could be

invoked as proof of how a company is

violating the US regulations,” she says.

There is a little-used way out —

companies can apply for a waiver

from the EU if they feel they would

suffer irreparable harm. But the EU

has set a high bar for what constitutes

irreparable harm, and Ms Catrain

believes only 22 such authorisations

were granted last year. The EU does

not make the waivers public.

Most sanctions, in addition to tar-

geting specific sectors, include asset

freezes on certain people and entities.

Yet Ms Catrain says the EU and US

lists of sanctioned persons and enti-

ties differ, making compliance partic-

ularly complicated for global supply

chains.

“Businesses need to check their

customers, suppliers and all counter-

parties against the EU and US sanc-

tions lists — as well as lists of any other

applicable jurisdictions,” says Ms Cat-

rain. “To minimise exposure to sanc-

tions risks, they should also screen

the final user of the product or service

— even if not a direct customer — to

avoid unpleasant surprises.”

Businesses must strive to be “100

per cent” on top of all applicable sanc-

tions or they might as well not bother,

she adds. Even so, they may still find

thatbanks will not process transac-

tions from certain countries. “Finan-

cial institutions — who more often

than not will have strong links to the

US and rely on their continued ability

to do business there — may see too

much risk in allowing such transac-

tions to pass through their systems.”

And despite all that work, the most

diligent businesses may still find

themselves tripped up by vague rules

and opposing sanctions regimes.

“They must accept the reality that

they’re never going to be able to

ensure full compliance,” says

Ms Bradshaw.

Companies caught in the crossfire

BusinessStaying on

the right sideof the

law is no mean feat,

writesBruce Love

Secondary sanctions

apply to any company in

the world that wants to

do any business in the US