Latest sanctions developments impacting New Zealand businesses

2021 has already seen a lot of activity in the international trade and financial sanctions space, and we expect this high level of activity will continue throughout the year. Some of the restrictions imposed to date are particularly contentious and far-reaching, including United States Government sanctions targeting Chinese telecommunications, surveillance and military companies, and various measures imposed to counter China’s Hong Kong policy and alleged forced labour practices in Xinjiang Province.

In this alert, we outline the most notable global sanctions developments of the past few months; explain why these matter to New Zealand businesses; and share some suggestions of what local businesses can do to ensure that they do not violate applicable sanctions unintentionally.

What just happened?

US-China “sanctions diplomacy”

The ongoing deterioration of United States-China relations has dominated the international headlines of late. Contrary to the expectations of some, the swearing-in of US President Biden in January has not put a stop to escalating tensions. Since any US-China conflict tends to have a ripple effect around the world, we start by outlining three key developments in this bilateral relationship:

  1. US blacklists Chinese telecommunications, surveillance and military companies

On 12 March 2021, the Biden Administration added five Chinese telecommunications and video surveillance companies, including ZTE Corp., Hytera Communications Corporation and Dahua Technology Company, to a new US Federal Communications Commission blacklist, all on national security grounds.[1] This move effectively prevents US persons from supplying most technologies to these companies. While imports from them remain lawful, transactions with blacklisted companies raise “red flags” and are often difficult to conclude on contractual or risk management grounds.

The blacklistings in the telecommunications sector follow the outgoing Trump Administration’s blacklisting of various “Communist Chinese military companies” on 14 January 2021.[2] That move hit the headlines as it effectively banned US persons from investing in the publicly listed Xiaomi Corporation, which is the world’s third largest smartphone manufacturer by volume. Xiaomi secured a temporary halt on the investment ban through the US Courts. The presiding judge called Xiaomi’s blacklisting “arbitrary and capricious” and noted that the Court is “somewhat sceptical that weighty national security interests are actually implicated here”. Investors will be watching with interest to see whether the US Government appeals.

While not generally subject to US jurisdiction,[3] we know that numerous New Zealand corporates are already encountering a variety of practical difficulties in transacting with the blacklisted entities mentioned above.

 2. US sanctions officials over China’s Hong Kong policy

In 2020, China introduced a national security law in Hong Kong that bans secession, subversion, terrorism and collusion with foreign forces. The law has been widely criticised for undermining the semi-autonomous, democratic system in Hong Kong. The law’s introduction saw widespread protests and mass arrests. In response, the US passed the Hong Kong Autonomy Act, which imposes sanctions on businesses and individuals that help China to restrict Hong Kong's autonomy. The Biden Administration has recently sanctioned an additional 24 Chinese and Hong Kong officials, including high-ranking members of the National People’s Congress and the Politburo, over Beijing’s alleged crackdown on the city.

Of particular interest to the New Zealand banking community, any foreign financial institution that knowingly conducts significant transactions with the listed individuals may be subject to US Government enforcement action.

 3. US, EU, UK and Canada impose sanctions in response to alleged forced labour in Xinjiang Province

Finally, the most significant sanctions development so far this year is the growing global response to the alleged human rights situation in China’s north-western Xinjiang Province. It is argued that China has detained more than a million Muslim minority Uighurs in camps, where allegations of forced labour and abuse have emerged. New US Secretary of State Antony Blinken says China is committing “genocide and crimes against humanity”.[4] China rejects all such allegations.

In September 2020, the US Uyghur Forced Labor Prevention Act came into force. It prohibits certain imports into the US from the region and imposes sanctions on entities and individuals deemed responsible for human rights violations. The Act arguably creates a rebuttable presumption that, subject to limited exceptions, all goods produced in Xinjiang are made with forced labour and ban all such imports unless it is certified that they are not produced with forced labour.[5] In March 2021, in a coordinated effort, the US, European Union, United Kingdom and Canada introduced sanctions on key senior officials in Xinjiang who have been accused of human rights abuses. The sanctions include travel bans and assets freezes.

Collectively, these sanctions will affect supply chains all over the world. In addition to being an oil-rich region, Xinjiang Province produces roughly a fifth of the world’s cotton. This creates a significant risk of forced labour being used in the supply chains of many in the global textiles and fashion industries. Western companies that have expressed concern, or publicly declared that there is no cotton from Xinjiang in their products, are facing backlash in China, with giants such as H&M and Nike being among the first to face boycotts. Smaller companies are likely to face significant difficulties in accurately identifying the presence, or rather the lack of, forced labour in their manufacturing and supply chains.

The New Zealand media has shone a spotlight on this issue in recent months. In response, we know that local businesses are now receiving a significant number of enquiries from customers, supply chain partners and journalists about their ties to Xinjiang Province. While the New Zealand Government is very unlikely to impose sanctions in response to this situation, it may introduce a Modern Slavery Act that requires large New Zealand businesses to identify and address modern slavery risks in their supply chains. For more information on this topic, please see our earlier alert: Addressing modern slavery: What New Zealand businesses should know.

US and UK sanction Myanmar's two military conglomerates

On 1 February 2021, a military coup in Myanmar, in which the elected government was deposed and leader Aung San Suu Kyi was arrested, prompted protests across the country and the emergence of a mass civil disobedience movement. The military regime has responded violently, killing hundreds of civilian protesters and arresting thousands. The regime has severely restricted access to the internet and telecommunications services. In addition to measures imposed by the United Nations Security Council (UNSC), the US and UK have imposed various sanctions on companies associated with the regime as well as senior individuals within the new government and their family members (including asset freezes and travel bans). The primary aim of the measures is to limit the military’s access to financial resources.

Current international sanctions are unlikely to create many legal restrictions that affect New Zealand businesses trading with Myanmar, but the deteriorating political situation may cause many to rethink their ongoing engagement with this market.

US rachets-up sanctions on Russia over poisoning and imprisonment of Aleksey Navalny

US-Russia relations continue to sour under the Biden Administration. Last month, in response to allegations of the poisoning and imprisonment of Russian opposition politician, Aleksey Navalny, the US State Department imposed further financial sanctions and export controls on Russia.[6] The US Government added seven Russian officials to the US Specially Designated Nationals List and 14 entities to the Entity List. This is nothing new – the US has been ratcheting-up its Russian-related measures over the last few years.

New Zealand companies doing business with Russia should be keeping a careful eye on developments and re-screening Russian counterparties regularly (see our tips on this below).

What is the New Zealand Government doing?

New Zealand implements the full range of UNSC sanctions – from comprehensive economic and trade sanctions to targeted arms embargoes and diplomatic restrictions – via regulations made under the United Nations Act. Unlike its Five Eyes partners, New Zealand does not have an autonomous regime, so its ability to impose sanctions is largely limited to implementing UNSC programmes. Because of China and Russia’s permanent seats on the UNSC and their associated veto powers, the UN will never impose meaningful sanctions on China, Russia or their close allies (e.g. Cuba, Syria and Venezuela).

Efforts to implement an autonomous sanctions regime in New Zealand failed in late 2020 when the Autonomous Sanctions Bill finally dropped-off the Parliamentary Order Paper after languishing near the bottom since its introduction in 2017. Now, with increased attention on forced labour and supply chain transparency, as well as the deteriorating human rights situation in Myanmar, the National Party is calling for a reprisal of the bill, which it says would now “easily pass in Parliament”.[7]

The current Labour Government will be treading carefully so as not to damage diplomatic relationships with either China or the US (our first and third largest trading partners by export volume, respectively). The lack of an autonomous sanctions regime is arguably helpful in maintaining this balance. If the Government were able to impose unilateral sanctions, it would undoubtedly be under significant pressure to act in response to a number of the situations outlined above.

Government will be treading carefully so as not to damage diplomatic relationships with either China or the US (our first and third largest trading partners by export volume, respectively).

Why should New Zealand businesses be paying attention?

While much of what we describe above appears US-centric, it is still directly relevant to a significant number of New Zealand businesses given the complexity of modern international supply chains and the ‘extraterritorial effect’ of certain foreign autonomous sanctions regimes.[8] In particular, these sanctions developments pose a material risk to New Zealand traders, trade-facilitators and financiers whose dealings have a ‘US nexus’.[9]

Not all New Zealand businesses are subject to material sanctions risks. Therefore, as an initial step, we recommend considering the five points below to determine how exposed your business is. This assessment should inform the level of resources you dedicate to sanctions compliance going forward.

  • First, determine the nationalities of your beneficial owners, shareholders, directors and senior managers. This will help you to establish what foreign sanctions regimes apply generally to your business.
  • Second, determine the origin of all significant business inputs, including capital, goods (including components) and services. Particular care should be taken when key inputs are of US-origin. For example, New Zealand companies that re-export certain US-origin goods are often subject to both US export controls and sanctions.
  • Third, check whether the products, services and sectors you deal in are subject to any sector-specific restrictions. For example, if you export technology products that have a potential military end-use, you may be subject to various restrictions, such as the need to obtain a licence before exporting. [10]
  • Fourth, map your corporate footprint and consider the extent to which you are likely to transact with sanctioned markets (especially the embargoed markets of the Crimean Region, Cuba, Iran, North Korea or Syria) or persons otherwise subject to sanctions.
  • Fifth, stepping back, consider how likely you are to be subject to a sanctions investigation and the potential financial and reputational consequences that could have.

For businesses exposed to material sanctions risks, you should consider:

  • conducting appropriate customer and transaction due diligence, and documenting your findings;
  • determining what your customers intend to do with your goods, services or capital, and securing undertakings or end user declarations, as appropriate;
  • identifying trade facilitators (e.g. banks, freight forwarders, international carriers and insurance companies) and trade routes that are not subject to, or unduly bound by, sanctions;
  • structuring deals in a way that avoids US jurisdiction (including US dollar payments) wherever possible;
  • securing payment up front wherever possible and considering opting for short-term contracts or projects, as these are less vulnerable to regime changes;
  • including suitable sanctions related exclusions, warranties and indemnities in contracts with parties associated to high-risk jurisdictions;
  • speaking with your bank(s) at an early stage before progressing a transaction with a sanctioned country or a person subject to sanctions; and
  • implementing and maintaining a sanctions compliance programme (SCP) that accords to your risk profile and international best practice. [11]

How can MinterEllisonRuddWatts help?

We have extensive experience of advising on sanctions compliance and enforcement related matters. We routinely assist clients to: conduct customer and transaction due diligence and screening processes; structure low risk transactions; and develop or refine their SCPs.

Members of our team have represented clients in sanctions investigations undertaken by the Customs Service, the UN, and the UK and US governments. We have also represented clients in sanctions-related judicial proceedings in New Zealand and the UK.

We work closely with partner firms in other jurisdictions, including the Asia-Pacific-wide network of MinterEllison offices, when foreign legal advice is required.

Footnotes

[1] See here.

[2] See here.

[3] A foreign sanctions regime generally applies to its country's citizens, permanent resident aliens, vessels, aircraft and corporations (and their foreign branches), wherever they are located in the world. However, in certain circumstances, some regimes have ‘extra-territorial effect'. For example, in the case of the US, this means the sanctions also apply to US corporations' foreign subsidiaries and to transactions involving any part of the US financial systems or concerning US-origin goods.

[4] See here.

[5] See here

[6] See here.

[7] See here.

[8] Ibid.

[9] A transaction can have a US nexus if it involves a US person or US-origin product, software or technology, or if it causes or involves activity within the US.

[10 Note that New Zealand has recently updated its export control regime, requiring exporters to obtain a licence from the Ministry of Foreign Affairs and Trade before exporting dual-use items, except under certain circumstances (e.g. where the goods are to be exported to one of the following countries: Australia, Canada, Iceland, Japan, Norway, Republic of Korea (South Korea), Switzerland, UK, US, and any member state of the European Union. China’s absence from this list is notable.

[11] Helpfully, the US Department of Treasury’s Office of Foreign Assets Control (OFAC), one of the key enforcement agencies in the sanctions space, has published “A Framework for OFAC Compliance Commitments” (Framework). This user-friendly document outlines what OFAC will consider when it evaluates a company’s SCP under the OFAC Economic Sanctions Enforcement Guidelines. The Framework details the five essential components of a SCP: (1) management commitment; (2) risk assessment; (3) internal controls; (4) testing and auditing; and (5) training. It also outlines the 10 root causes of SCP breakdowns or deficiencies. Essentially, this Framework has set the international standard for SCPs. It serves as a useful guide for any business that is interested in creating or refining a SCP.

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