Navigating Global Sanctions: Risk Management and Compliance for Businesses

Companies doing business in Myanmar can have complex compliance issues if they do business with international traders, suppliers and financial systems. A proper understanding of the global sanctions regimes, beneficial ownership and risk mitigation will be key. This insight will explain the key international sanction regimes, what the 50% rule means and how to manage compliance.

The applicable legal framework

International sanctions are a way of controlling trade, investment and transactions by imposing sanctions on certain individuals and entities by governments and international or regional organisations. The United States Office of Foreign Assets Control (OFAC) administers U.S. economic and trade sanctions; the United Kingdom’s Office of Financial Sanctions Implementation (OFSI) implements UK financial sanctions. The European Union (EU) and United Nations (UN) also adopt sanctions measures under their respective legal frameworks.

Each country will have varying legal regimes. The basis of sanctions in the United States can be found within Executive Order 14014 Blocking Property with Respect to the Situation in Burma (10th February 2021). This Order has been issued under several different pieces of legislation including the International Emergency Economic Powers Act (IEEPA) (50 U.S.C. § 1701 et seq.) and the National Emergencies Act (NEA) (50 U.S.C. § 1601 et seq.). The regulations can be found in 31 CFR Part 525 ‘Burma Sanctions Regulations’ which are administered by the OFAC. The regulations include restrictions, definitions, licensing rules and further requirements. Any applicable restrictions should be considered against the current relevant legal instruments, designations, directives and authorisations.

Within the UK, the legal basis for imposing sanctions can be found in the Sanctions and Anti-Money Laundering Act 2018 (SAMLA 2018), section 1. Specific restrictions, exemptions and licensing requirements will be contained within the relevant regulations. For Myanmar, these include the Myanmar (Sanctions) Regulations 2021 (SI 2021/496), as amended.

Within the EU, the legal basis for adopting restrictive measures in relation to the Common Foreign and Security Policy is provided in Article 29 of the Treaty on European Union (TEU). Economic and financial restrictive measures requiring EU legislation are implemented through EU regulations under Article 215 of the Treaty on the Functioning of the European Union (TFEU). For Myanmar, the principal instruments include Council Decision 2013/184/CFSP and Council Regulation (EU) No 401/2013, each as amended. The extent of any restriction will depend on the relevant Council decisions and regulations.

On an international level, Chapter VII of the Charter of the United Nations gives the Security Council the legal basis to act. Specifically, Articles 39 and 41 give the legal basis to identify threats to international peace and security and take non-military action. This can include economic sanctions. The specific obligations will depend upon the relevant Security Council resolutions and applicable implementing legislation. There is currently no Myanmar-specific UN Security Council sanctions regime, although other UN regimes may be relevant to particular counterparties or activities.

If your business operates internationally, you will need to ensure that you are complying with any sanctions. International founders, investors, cross-border transactions and foreign-currency payments may raise sanctions risks, but do not automatically make all of the above regimes applicable. The relevant jurisdictional connections must be assessed, as explained below.

This will depend on the scope of the sanctions regime concerned. For instance, US sanctions will apply to US persons and transactions in US jurisdictions. They will also affect any persons involved in certain transactions using the US financial system. UK and EU sanctions regimes will each have their own scope as well. Involvement of foreign investors, handling foreign currency payments, or dealing with cross-border activities does not necessarily mean that all of the US, UK or EU sanctions will apply. Careful consideration is required to identify what legal restrictions apply based on who is involved, ownership structure, transactions and payment types.

Overview of industry risk exposure and the 50% rule

Sanctions exposure can include dealings with entities that are not expressly listed but are owned or controlled by sanctioned persons under the applicable regime. Under OFAC’s 50 Percent Rule, the relevant test is ownership of 50% or more, directly or indirectly and in the aggregate, by one or more blocked persons. Enforcement and designation risks depend on the applicable legal authority and the circumstances; they are not automatic consequences of every sanctions-related connection.

Consequences can include blocked international transactions, banking restrictions caused by being unable to move funds freely through the USA financial system and business disruptions caused due to blocked vendors/supply chains. If you do not carry out due diligence on your counterparties it can cause significant financial loss, lost relationships and reputational damage.

An entity generally falls within the scope of OFAC’s 50 Percent Rule if one or more persons whose property and interests in property are blocked by OFAC own/hold directly or indirectly 50% or more of the entity in the aggregate. Blocked persons may be individuals or entities. For example, 25% ownership by each of two blocked persons meets the 50% threshold. Indirect ownership should be assessed in accordance with OFAC’s guidance on ownership through blocked entities. This means that entities which are not directly listed on the SDN List will still fall within the scope of sanctions.

Whilst an entity falling within the scope of the OFAC 50 Percent Rule relies upon ownership, control alone does not automatically bring an entity within the scope of this ownership-based rule. However, an entity may be directly listed or fall within the scope of other applicable sanctions. Businesses should consider both direct and indirect ownership, as well as control and transaction risk.

The 50% rule may not necessarily apply across all sanctioning regimes. In relation to UK Sanctions, the ownership and control test must be considered based on the relevant sanctioning regulations. This includes more than 50% of shares or voting rights, rights to appoint or remove a majority of the board, or the ability to ensure that the entity’s affairs are conducted in accordance with a designated person’s wishes. OFSI does not simply aggregate separate designated persons’ holdings without a relevant joint arrangement or other basis for attribution or control. The EU restrictions must also be considered based on the relevant EU legislation and guidance. Businesses should not assume a 50% rule applies.

Depending on which legal regime the sanctions are from, businesses may be exposed to a number of issues. These can include blocked funds, restrictions to deal with the entity, civil and criminal penalties (if applicable) and disruption to banking/commercial relationships. Some legal authorities may expose non-US persons to further sanctioning risks under certain circumstances. For example, section 1(a)(vi) of Executive Order 14014 permits designation for specified assistance or support, including goods or services, to or in support of a person blocked under that Order. Such designation risk is distinct from a penalty for breaching an applicable prohibition.

Transactions which would otherwise be prohibited can be authorised by OFAC through either general licenses or specific licences, subject to their applicable terms and conditions. A general licence pre-authorises a category of transactions and does not require a separate application, provided all license conditions are satisfied. A specific licence is a written authorization issued by OFAC on a case-by-case basis following a formal application and applies only to the approved transaction and parties. An OFAC authorisation does not remove restrictions under other applicable sanctions regimes.

Maintaining compliance through due diligence

Mitigate sanctions risk by having good internal controls and data in place. You should have thorough sanctions screening processes in place to identify potential sanctions exposure involving your customers, suppliers and partners. This should be done before transactions take place and through ongoing monitoring appropriate to the risks, including when sanctions measures or relevant facts change. Monitoring should cover relevant sanctions lists, ownership and control, applicable restrictions and licensing changes. Weekly list checks alone cannot ensure continuing compliance.

Having strong KYC and CDD processes in place will help maintain compliance. Having accurate business identification information, official company extracts and verifying UBOs can improve the reliability of your information but does not, on its own, establish sanctions compliance. AML beneficial ownership thresholds should not replace the applicable sanctions ownership and control tests.

Where undertaking a risk-based due diligence exercise businesses should check applicable parties (directors, beneficial owners, intermediaries etc.) to confirm ownership details, assess any indirect ownership risks and to check the payment flows and structure of the transaction. If there are any potential sanction matches or uncertain ownership structures, additional due diligence and legal checks should be undertaken.

Businesses should keep a relevant record of these checks. This includes the screening checks, ownership verification, risk assessments and mitigation decisions made. It is important to regularly monitor these as sanctions lists, regulations and licensing requirements can change over time. This can be the case if there have been changes to ownership, control or parties involved.

Contractual protections and mitigations

Businesses should also include sanctions compliance in relevant business contracts, proportionate to the transaction and its risks. This can be achieved by ensuring contractual documents are updated to clearly set out the obligations of a party.

Depending on the nature of the transaction, contractual protections can provide for representations and warranties regarding sanctions; notice requirements; cooperation requirements; prohibitions against prohibited transactions; and rights to suspend/terminate contracts where appropriate. Contracts can also provide for processes in respect of potential sanctions matches; information requests and escalation to legal for consideration. These should be written in accordance with relevant law and cannot require any party to enter into a prohibited transaction. Contractual protections will assist with compliance, but do not replace statutory requirements or permit any prohibited transaction.

ILPC sanctions compliance support

Before engaging in any high-risk international activity or revising your compliance processes you should consider how exposed your business is, assess whether the counterparty and proposed transaction present sanctions risks and create bespoke KYC processes. At ILPC we can offer legal support and advice on sanctions risk assessment, creating a compliance framework, reviewing contracts and providing regulatory advice. Contact us today to find out how we can assist with your compliance needs.