Global Trade Sanctions Picture Growing Tenser and Murkier for General Counsel

Five years ago people didn’t know what a “sanctions lawyer” was, but now there is a growing demand among general counsel for outside legal expertise on trade sanction risks, according to Kirkland & Ellis partner Zachary Brez.

“When U.S. economic sanctions just involved Cuba and North Korea since 1996, multinational companies weren’t that affected,” said Brez, who works in the government and internal investigations group in Kirkland’s New York City office. “But add China, Russia, Iran and Venezuela, and suddenly it matters.” The latter countries are recent targets of U.S. sanction activity.
 
Kirkland partner Marcus Thompson agreed. Both lawyers spoke with Corporate Counsel about the growth and impact of economic sanctions, which generally ban trade with the penalized countries, on companies and their legal departments. Many of the recent changes have confused in-house lawyers and left companies facing dilemmas about which country’s laws to follow, the Kirkland attorneys said.
 
The shift in intensity began with Venezuela, which has seen the U.S. impose three rounds of sanctions since last August. The most recent hit on May 21.
 
“The big change now is the U.S. intention to withdraw from the JCPOA [Joint Comprehensive Plan of Action, which lifted economic sanctions on Iran],” Thompson said. “Another reason is the Russian sanctions. They have significant [corporate] trading partners in the U.S. and the European Union.”
 
Both lawyers predicted there would be an increasing corporate focus on sanction risks.
 
Thompson, who works in the government and internal investigations group in the London office of Kirkland & Ellis International, said, “I think the U.S. and Europe will increasingly use sanctions [against adversary countries] because it is cheaper and easier than putting troops on ground.”
 
Brez put it this way: “You have two choices—bullets or dollars. Dollars is a better and cheaper way to enact foreign policy.”
 
He spoke of the confusion earlier this week when the U.S. rolled out its latest sanctions against Venezuela. “It was so fast and so confusing that the Venezuela bond market froze on Monday,” Brez said. “The sanctions didn’t even relate to the bond market, but that wasn’t immediately clear and major multinational companies were impacted.”
 
Thompson explained that global banks and other organizations that invest or loan money to companies are extremely sensitive about deals with companies that do business in or with sanctioned countries. The financial institutions do not want to risk being banned from the U.S. financial market.
 
The other two areas of heightened concern are secondary sanctions and so-called “blocking statutes.”
 
Secondary sanctions affect companies that are not located in the U.S., but still have economic ties with the U.S. For example tens of thousands of European companies have significant trade with Russia, and started trading or operating in Iran after the JCOA was reached.
 
Now the U.S. is threatening to punish those companies doing business in sanctioned countries if they intend to keep their U.S. ties. The penalty for violating trade sanctions, even secondary ones, could be hundreds of millions of dollars and/or loss of U.S. business ties.
 
The U.K. has also imposed economic sanctions on Russia, and Thompson said Russia is considering imposing its own trade sanctions. “The tensions are ratcheting up,” he noted.
 
The situation becomes even tenser and confusing, Thompson added, if the U.K. and the U.S. “get out of step with each other,” as they have over the Iran deal.
 
Last week the EU announced that not only would it honor the JCPOA with Iran, but it was revising its blocking statute to legally prohibit most EU persons and companies from complying with the U.S. sanctions against Iran. The statute also makes unenforceable any foreign court judgments against EU people and companies for violations of third-party trade sanctions.
 
“If you are a U.S. company with a subsidiary in Europe that does business with Iran, you are caught in a dilemma. Do you break the law in the U.S. [by allowing your subsidiary to continue its business with Iran] or in the E.U. [by forbidding your subsidiary to do business with Iran]?” Thompson asked.
 
“Now everyone needs to pay extra attention, with the U.S. and U.K. diametrically opposed to each other,” he said.
 
It’s a “horrible dilemma” for companies and their general counsel, Brez explained.
 
Asked what he would advise a general counsel to do if caught in that situation, Brez hedged, saying enforcement actions involving blocking statutes are extremely rare.
 
“And I think companies are much more frightened about what will happen in the U.S.,” he added. “You only get in trouble in the EU if you decline to do business for sanctions reasons. But you can always decline for commercial reasons.”
 
To ratchet up the tension even further, the Russian Parliament on May 14 introduced legislation that would act as its own blocking statute, imposing criminal liability against any person or company that complies with U.S. or other foreign sanctions against Russian parties.

REPRINTED WITH PERMISSION FROM THE MAY 24, 2018 EDITION OF THE AMERICAN LAWYER © 2018 ALM MEDIA INC. ALL RIGHTS RESERVED. FURTHER DUPLICATION WITHOUT PERMISSION IS PROHIBITED