Transacting with Sanctioned Countries

Sanctions pose an additional problem – and, of course, they are very topical at the moment. The problem is simple: while everybody is anxious to comply with all the rules and regulations, there are always situations which require some element of judgment, or where the rules are not totally consistent. With sanctions, the main issue which arises is that some trade continues to be permitted, usually for humanitarian reasons, and generally involving medical products. But, while medical products can still be sold to Russia and Iran, for example, most banks refuse to handle the cash settlements related to these transactions.

There can also be inconsistencies between different sanctioning regimes: the US still applies sanctions against Cuba, while most other countries do not. Even for Russia, members tell us the EU’s sanctions list is not fully identical to that of the US.

To avoid potentially repeating legal considerations we cannot verify, we have decided not to produce a detailed report of our discussions, but to provide a list of the general conclusions and things to watch out for. The items below do not constitute legal advice, but rather, a list of things to beware of. As always, treasurers and their companies are responsible for ensuring compliance with all relevant and applicable laws, and obtaining professional advice.

• Most international banks will not handle even legal transactions with a sanctioned country.
  • They have generally shut down their operations there, and so no longer have the resources or expertise to ensure compliance
  • The risk/reward ratio is not symmetrical. The financial benefit of processing these transactions is greatly outweighed by the potential penalties – regularly going into the hundreds of millions of dollars – for a single compliance failure. One French bank paid a $6bn fine several years ago.
• This can mean that cash left over from former operations in a sanctioned country can effectively be blocked for the duration, and it can be difficult to get paid for transactions which are legal.
• Even transactions which are allowed are often held up for some time due to compliance reviews. Usually, the bank is not allowed to confirm or deny that this is the reason for the delay – this can be very concerning and worrisome.
• It is usually possible to find some banks which will still process transactions, subject to all the legal caveats and the risk of delays. These will typically not be the major international banks, who simply have too much to lose.
• Also, any bank which provides this service will usually expect some share of wallet for other transactions – this can complicate the management of banking relations.
• In these situations, the pricing of FX and fees simply cannot be discussed. The bank will apply its margins and fees – competitive bidding does not work.
• Most of our participants have closed their operations in the sanctioned countries, or sold them – often to the local management. It is generally advised to make sure that there is no ongoing involvement by group management in decisions related to any activity in a sanctioned country, especially by citizens of countries, such as the US and the UK, which can add personal liability.
• Not all countries sign up for all sanctions regimes. So, it is legal for a company in the EU to do business with Cuba, while it is not legal for a US company to do so. Similarly, China and India are not participating in the current sanctions against Russia. However:
  • Most international transactions have to transit via the US dollar. Any bank which facilitates such a trade will find its US activities and its future ability to transact in dollars under threat – so most prefer not to, even if the trade is legal in the country where it is being executed.
  • The consistent legal recommendation is that any entity domiciled in the US or EU should avoid using its Indian or Chinese subsidiaries to execute transactions which cannot be done via the US or the EU.
  • It might be possible to use banks in a country which does not participate in the sanctions, such as India or China, to process payments from a sanctioned country – provided, of course, these are permitted transactions, such as the sale of medicines. To date, there is no evidence this is happening – and the company will have to demonstrate that it is complying with the rules.
  • In the case of Russia, most companies headquartered in the US, the UK or the EU now have Russia’s own sanctions applied against them, so it is difficult to originate the transaction.
  • Of course, not all sellers can control their products: some can be bought in retail outlets and then shipped to sanctioned countries. Similarly, once a product is sold via a distribution channel, it becomes difficult for the principal to prevent re-export in contravention of sanctions.
    • In these situations, it is strongly advised to include in any reseller agreement language which obliges the reseller to comply with all existing sanctions regimes
    • It is also strongly advised that there should be periodic checks that the reseller is complying.
  • The US’s Office of Foreign Assets Control (OFAC), part of the US Treasury, publishes a denied parties list. It is highly recommended that companies have a process for screening customers and suppliers against this list. There are commercially available software packages which do this.

General advice:

• All CompleXCountries members are anxious to comply with the rules. Companies should be aware of the severe penalties for failure to do so: one major Chinese company had their CFO arrested at an airport in Canada, while another nearly had its whole business shut down, after US suppliers were forbidden to provide it with essential components
• If you run a very international business, it is important to make sure that all staff in all countries are aware of the rules and the importance of compliance. Local staff in China and India, for example, may not be aware of the sanctions, may not agree with them, or may consider that they are not concerned, as their own governments are not applying them. These views may have some validity – but they do not affect the need for the organisation to comply, or face possible adverse consequences.

Bottom line: any transaction which involves a sanctioned country will, at some point, involve cash. For this reason, the banking system is heavily scrutinised, especially by the US authorities, to identify possible non compliance with US rules – whether they have been adopted by other countries or not. The result is that it becomes very difficult to execute even those transactions which are authorised, and very few banks are willing to take the risk of becoming involved.

It is the treasurer’s responsibility to try to enable transactions which are legal, and which are part of what the business needs to do. But it is important to also make sure the business understands that, even for authorised transactions, ongoing business will be difficult and costly – while some cash will remain trapped.