U.S. sanctions include two types of sanctions: (1) primary sanctions, which impose criminal or civil penalties on U.S. persons (and, in certain cases, foreign entities owned or controlled by U.S. persons) who deal with sanctioned countries or persons; and (2) secondary sanctions, which threaten non-U.S. persons with sanctions for engaging in proscribed activities involving sanctioned countries or persons. 2018 provided an avalanche of changes for both types of sanctions, and we can expect even more changes in 2019. Directors must be aware of the new changes to U.S. sanctions to avoid risk for themselves and the companies they oversee.
U.S. sanctions risks are particularly acute for U.S. persons who serve on the boards of non-U.S. companies. Although non-U.S. companies are not generally subject to primary U.S. sanctions, U.S. directors at these companies must comply with these restrictions, and non-U.S. companies can be held criminally liable for causing U.S. employees to violate U.S. sanctions. Accordingly, non-U.S. companies should consider establishing blanket recusal policies that require U.S. directors to exclude themselves from engaging in any activities that might implicate U.S. sanctions and to wall them off from meetings discussions, decisions or other dealings related to such activities.
Furthermore, the United States has increased its use of secondary sanctions to target non-U.S. companies that engage with proscribed business with sanctioned countries, such as Iran, North Korea, Syria and Russia, as well as sanctioned individuals and entities. Non-U.S. companies targeted with secondary sanctions can face serious repercussions, including being completely cut off from business with the United States. Given this risk, directors are well advised to be mindful of whether the activities of their companies could put them at risk of secondary sanctions, even if they do not have a visible U.S. nexus or U.S. person officers, directors or employees.
Continuing the trend from last year, 2018 ushered in significant changes in the complex U.S. sanctions environment with an expansion of both primary and secondary sanctions that are of particular relevance:
- President Trump’s decision to withdraw the United States from the Joint Comprehensive Plan of Action (JCPOA) (i.e., the Iran nuclear agreement) triggered the reimposition of secondary sanctions targeting non-U.S. companies that engage in business involving Iran’s automotive, energy, shipping, shipbuilding, metals and mining, and financial sectors, and renewed primary sanctions that prohibit foreign subsidiaries of U.S. companies from engaging in business with Iran.
- In April 2018, the United States imposed sanctions on seven key prominent Russian businessmen and companies that they own or control, making these the toughest and most far-reaching sanctions measures that the Trump administration has imposed against Russia. U.S. persons are prohibited from engaging in transactions with these persons, and non-U.S. persons can face the risk of secondary sanctions for engaging in significant transactions with them. Additionally, the U.S. Department of State announced in November 2018 that the United States would impose additional sanctions on Russia related to its chemical weapons activities, creating additional risk for business involving Russia.
- The United States tightened sanctions on Venezuela, restricting certain transactions involving debt owed to, and digital currency issued by, the government of Venezuela, and further tightened restrictions on direct financial transactions with certain Cuban military and intelligence entities.
Combined with these significant changes, the Trump administration has increased enforcement of secondary sanctions to discourage non-U.S. companies from engaging in business with sanctioned countries and persons. In particular, the United States imposed secondary sanctions against a large number of foreign persons engaging in prohibited trade with North Korea and Iran, and recently sanctioned a Chinese company and its director for engaging in significant transactions with the Russian military.
The U.S. government also continues to track the actions of high-ranking officials in companies to assess penalties. Specifically, an individual’s knowledge of, or involvement in, a prohibited transaction is a factor that may influence civil penalty amounts, and a finding that an individual acted willfully in violation of sanctions laws could trigger a referral to the Department of Justice for criminal prosecution.
Given the constant evolution of U.S. sanctions and the current unstable geopolitical environment, directors of companies with a global footprint are well served to identify and monitor areas of current and future sanctions risks.
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