Indirect Sanctions: Navigating the Silent Disruptor in Global Business

3 min read

Jul 25, 2023 7:13:00 AM

Indirect Sanctions

Sanctions, a tool wielded by nations or international bodies to achieve specific objectives, come in various forms such as asset freezes, embargoes, trade restrictions, and travel bans. While the implications of direct sanctions are often clear-cut, the challenges posed by indirect sanctions are less visible but equally significant. This article aims to shed light on the complexities of indirect sanctions and their implications for businesses.

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Direct vs Indirect Sanctions: A Complex Landscape

Direct sanctions are straightforward: entities on a sanctions list, whether they are companies, individuals, or government entities, are explicitly prohibited from certain types of engagement. However, the waters become murkier when we delve into the realm of indirect sanctions. Indirect sanctions target entities that are not explicitly named in the sanctions regime. However, these entities are connected to sanctioned individuals or entities through either ownership or control. In other words, if a company or individual is not directly sanctioned but is majority-owned or controlled by a sanctioned entity, they too can fall under the purview of these indirect sanctions.

Understanding Indirect Sanctions: US, UK, and EU Perspectives

The criteria for triggering indirect sanctions vary significantly across different sanctions regimes. For instance, the U.S. Treasury’s Office of Foreign Asset Control (OFAC) applies a 50% rule based on ownership. In contrast, the United Kingdom and the European Union consider both ownership and control.

In the US, an entity is considered sanctioned if it is at least 50% owned, directly or indirectly, by one or more sanctioned entities. The UK and EU, however, have a broader definition. They consider an entity sanctioned if it is owned or controlled, directly or indirectly, by a person with more than 50% shares or voting rights. Control can also be established through the ability to appoint or remove board members, exercise a dominant influence, and share in the entity’s financial liabilities.

The Evolving UK Perspective

A recent UK court case demonstrates the evolving nature of indirect sanctions, particularly the intricacies of what constitutes “control”. The UK Government declared that an individual with a 28% stake in a company was deemed to have “effective control”, which led to the individual being classified under sanctions. The government’s evaluation accounted for associations with close associates, accentuating the import of “influence” in control assessments and the necessity for an exhaustive analysis of associated networks. The subsequent resignation of most of the company’s board members illustrates the perceived risks of association with a sanctioned party.

The JPMorgan Chase Settlement

The implications of indirect sanctions can be severe, leading to protracted legal disputes and significant financial penalties. A case in point is the JP Morgan settlement, which was found to have processed transactions that may have contained interests attributable to a sanctions-targeted party.

On October 5, 2018, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) settled with JPMorgan Chase Bank, N.A., for potential civil liability of 87 apparent violations of sanctions regulations. The settlement amounted to $5,263,171 and involved transactions related to Cuban, Iranian, and Weapons of Mass Destruction Proliferators Sanctions.

These violations included net settlement payments, with a small portion linked to airlines on OFAC’s List of Specially Designated Nationals, blocked persons, or operating in sanctioned countries. JPMorgan Chase voluntarily self-disclosed the violations, demonstrating cooperation and leading to a non-egregious classification by OFAC.

This settlement emphasizes the need for rigorous compliance with sanctions regulations and highlights the far-reaching impact of indirect sanctions. Vigilance and proactive measures are crucial for financial institutions to navigate the complexities of sanctions and avoid potential penalties and legal disputes.

Conclusion

The JPMorgan case underscores that transactions involving an indirect interest of a sanctions target fall within the scope of sanctions prohibitions and are subject to enforcement. Additionally, institutions must be vigilant not only of their direct clients but also their clients’ clients.

In conclusion, while indirect sanctions serve as a powerful tool in the arsenal of international diplomacy, their complexities pose significant challenges for businesses. Great care and competence in the understanding and compliance of these sanctions are needed to ensure that businesses can navigate this complex landscape effectively.