Tuesday, February 18, 2020

Update on Exposure to U.S., U.K., E.U., and U.N. Sanctions

Given recent events in the region and abroad, it is timely to increase internal awareness of international economic sanctions, and give thought as to how they may impact your company’s current or future dealings. The issue is particularly important given that the newly passed Foreign Capital Investment Law (Royal Decree 50/2019) will likely lead to increased foreign investment into the Sultanate, and recently imposed sanctions have an impact on how companies can transact and trade with sanctioned nations and individuals.

We remind readers of our in-depth article on sanctions contained in our 1 September 2018 Client Alert, in which we discussed the U.S. having issued an Executive Order that re-imposed certain sanctions with respect to Iran as part of the United States’ withdrawal from the Joint Comprehensive Plan of Action.[1]

Since publication of that article, the relationships between Russia, Iran, Syria, and North Korea and the U.S., the U.K., and the E.U. have become ever more complex, and the levels of sanctions overall have increased (including with respect to the transfer of materials in specific sectors such as construction within sanctioned countries).

U.S. legislation enacted recently (such as the 2020 National Defense Authorization Act (“NDAA”)) authorises the imposition of sanctions on companies that provide goods, services, or other support for certain sanctioned countries. Of note and by way of example of growing sanctions, incorporated into the NDAA is the Caesar Syria Civilian Protection Act of 2019 (“Caesar Act”), which authorises sanctions on senior Syrian government officials, military leaders and others.

Of specific importance under the Caesar Act is the provision that those subject to sanctions include any individual or entity that “knowingly sells or provides significant goods, services, technology, information, or other support that significantly facilitates the maintenance or expansion of the Government of Syria’s domestic production of natural gas, petroleum, or petroleum products.”

This month, similar actions have been taken by President Trump by way of Executive Order against Iran, authorising the imposition of additional sanctions against any individual owning, operating, trading with, or assisting sectors of the Iranian economy including construction, manufacturing, textiles, and mining.

Types of sanctions

As a reminder, we outline below the structure of U.S. sanctions generally.

The U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) is the primary body that enforces U.S. economic sanctions, which are imposed by Congress and the President through a combination of legislation and executive actions.

OFAC sanctions programs fall into two broad categories: “primary” sanctions and “secondary” sanctions. Primary sanctions apply to any “U.S. person,” which is defined to include any U.S. citizen or permanent resident alien, regardless of location; any person who is in the United States, regardless of nationality; and any entity organised under the laws of the United States or of any jurisdiction within the United States (and including that entity’s foreign branches). By contrast, secondary sanctions render every person and entity, anywhere in the world, subject to U.S. sanctions for engaging in certain activities or transactions with (or for the benefit of) specified individuals or entities, or with (or through) specified countries or regions.

Why are sanctions important to your business?

If a contract party is sanctioned, U.S. persons would be barred from providing funds, goods, or services to contract parties and their majority-owned companies and subsidiaries, and receiving funds, goods, or services from those parties. Non-U.S. persons would be effectively foreclosed from using U.S. dollars to transact business with the sanctioned party which could have potential implications for the financing of a project. In addition, non-U.S. persons could themselves risk becoming subject to sanctions based on their dealings with the primary sanctioned party.

E.U. and U.K. companies would likely follow suit due to the risk of themselves being sanctioned.

With respect to the U.K./E.U., if a contract party or its executives are added to the E.U.’s asset freeze list in the future, E.U. nationals would be prohibited from working on the potential project, and the affected Omani company would be unable to conduct any business within the E.U.

We note that following its departure from the E.U., the U.K. is likely to adopt existing E.U. sanctions, but may also implement its own additional sanctions in the future. This is another area that should be watched carefully.

Future sanctions

The risk of future sanctions being applied to a contract party or venture partner should be carefully considered before entering into a contract.

Usually the risk of future sanctions can be mitigated substantially by way of thorough due diligence, contractual representations and warranties, covenants requiring the divestiture of problematic interests, and venture exit provisions in the event sanctions come into force. U.S. sanctions sometimes provide for a wind-down period during which potentially affected entities can divest themselves of sanctioned interests. However, as we have seen under the Caesar Act, entities engaged in sanctioned conduct on or after the date the legislation was enacted are subject to sanction without any opportunity for their business partners to wind down their partnership with the entity. Getting legal advice ahead of any business dealings that may be impacted by sanctions is therefore critical.

Curtis has a world-class sanctions team who regularly advises governments and companies on sanctions-related issues around the world. We would be delighted to advise on any specific sanctions queries our clients may have.

[1] https://omanlawblog.curtis.com/2018/09/united-states-issues-executive-order.html