Latest sanctions developments impacting New Zealand businesses

2021 is set to be another record year for international trade and financial sanctions.  So far we have observed: sanctions designations proliferating worldwide; new sanctions laws emerging in China and Australia; more sanctions targeting Iran, North Korea, Syria, Cuba, the Crimea Region, Russia, Venezuela, terrorists, human rights abusers and corrupt actors; new sanctions regimes targeting Belarus, Myanmar, Xinjiang Province and Ethiopia; heated sanctions debates regarding Afghanistan and cryptocurrencies; and significant sanctions reviews published by the US and UK governments.

In this alert, we discuss the most notable global sanctions developments of the past six 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.

1. Sanctions designations are proliferating worldwide

Since January, Russia, the United States (US), France, the European Union (EU), the United Kingdom (UK), Switzerland, Canada and China have all substantially increased the number of sanctions they impose on foreign governments, regimes, entities and people (see Figure 1).  With 9,421 current sanctions designations, the US Office of Foreign Assets Control (OFAC) has more in force now than ever before and 933% more than in 2000 (see Figure 2). [1]

The only major listing authority that has not increased its suite of sanctions so far this year is the United Nations (UN).  This is due to long-standing political tensions between Western governments, Russia and China, which continue to deter or block proposals for new designations.  In the absence of multilateral action, we have noticed a material uptick in coordinated unilateralism involving Western governments.

While foreign sanctions regimes primarily affect foreign nationals, these international developments are still directly relevant to a significant number of New Zealand businesses (especially traders and financial institutions).  This is due to the complexity of modern corporate structures and international trade and finance flows, as well as the significant ‘extraterritorial effect’ of certain foreign sanctions regimes and notably the US one.

Figure 1. Total sanctions designations by listing authority, January – September 2021

Figure 2. OFAC sanctions designations, 2000 – 2021

2. New sanctions laws continue to be introduced

Most of this year’s sanctions designations have been imposed under existing legal frameworks, but some have emerged under new authorities.  The two most significant new laws from a New Zealand perspective – China’s Anti-Foreign Sanctions Law and Australia’s Magnitsky legislation – are discussed below.

China’s Anti-Foreign Sanctions Law

China’s much anticipated new Anti-Foreign Sanctions Law 2021 enables the Chinese Government to impose sanctions in response to foreign designations it deems egregious, such as US, EU, UK and Canadian sanctions imposed in relation to the situation in Xinjiang Province. [3]

Most provisions of the new law will not materially impact New Zealand businesses.  However, the new private right of action created by Article 12 is noteworthy.  It allows Chinese persons to bring civil proceedings against any organisation or individual that implements a foreign country’s “discriminatory restrictive measures”[4] and to seek damages and/or injunctive relief.  This ‘blocking’ mechanism is available to parties within Chinese territory, as well as to foreign entities, which are prohibited from implementing or assisting in the implementation of foreign countries’ “discriminatory restrictive measures”. [5]

Article 12 will likely create compliance headaches for certain companies dealing with China, and especially those who need to balance their compliance with US sanctions on the one hand, with Chinese litigation risk on the other.  There is some comfort that liability under Article 12 appears to be civil only and any proceedings must be pursued through the Chinese People’s Court.  Therefore, even if proceedings can be brought against a foreign party, an unfavourable decision may not be enforced in their home jurisdiction.

As this law only came into effect on 10 June, it is too early to tell how often litigation will be initiated under this provision and how materially it will impact foreign companies.  It also remains to be seen how this private right of action will impact existing dispute resolution clauses in contracts with Chinese counterparties, particularly any that require disputes to be arbitrated.  We will be monitoring developments with interest.

Australia’s Magnitsky legislation

In September, Australia announced its intention to adopt the International Human Rights and Corruption (Magnitsky Sanctions) Bill 2021 before the end of the year.  If passed, a new regime would enable the Australian Foreign Affairs Minister to impose sanctions to prevent or respond to gross human rights violations, or acts of significant corruption, anywhere in the world.  Thirty-one democratic countries – including the US, Canada, EU and UK – already have similar “Magnitsky” laws. Up until now, New Zealand businesses have paid most attention to the US Government’s Magnitsky regimes, which have significant ‘extraterritorial effect’. [6]

Any Australian Magnitsky law is expected to strengthen the power of anti-corruption and human rights sanctions in the Indo-Pacific region, where the Australian business and banking communities reach deeper than their transatlantic counterparts.  Given the majority of New Zealand’s major banks are Australian owned, we expect the impact of the new legislation in this country will be material.

New Zealand’s Autonomous Sanctions Bill

In September, the New Zealand Parliament voted against progressing National MP Hon Gerry Brownlee’s Autonomous Sanctions Bill 2021 past the first reading stage.  Our earlier alert provides detailed commentary on this development.

3. New sanctions targets include Belarus, Myanmar, Xinjiang Province and Ethiopia

While the world’s most extensive sanctions regimes continued to expand in 2021 – and target Iran, North Korea, Syria, Cuba, the Crimea Region, Russia, Venezuela, terrorists, human rights abusers and corrupt actors – significant new regimes have been created this year targeting Belarus, Myanmar, Xinjiang Province and Ethiopia.

Belarus

The UK, EU, US, Canada and Switzerland have all imposed trade, financial and diplomatic sanctions against Belarus in response to the forced landing of a civil flight to arrest an exiled journalist and allegations of election fraud and human rights abuses following the 2020 Belarus elections.  While New Zealand does not have a general legislative power to enable the Government to impose comprehensive sanctions in the absence of a UN Security Council Resolution, the country has suspended all high-level bilateral (political), defence and military engagement with Belarus until further notice. Given New Zealand’s relatively modest bilateral relationship with Belarus [7], these sanctions are unlikely to affect many in the country outside of the banking community.

Myanmar and Xinjiang Province

Our April 2021 alert provides details of the original measures targeting Myanmar and Xinjiang Province.

Since April, the US, Canada, UK, EU, Switzerland and France have all continued to ramp-up their sanctions on the military junta that seized power in Myanmar in February. [8] The US, Canada, UK and EU have also continued to clamp down on alleged forced labour exports originating from Xinjiang Province and show no signs of relaxing their stance on China’s alleged human rights abuses.  These deteriorating political situations may cause New Zealand businesses to rethink their ongoing engagement with these two markets.

Ethiopia

Finally, due to the ongoing Tigray war [9], the US has introduced a new sanctions regime targeting Ethiopia, which provides OFAC with considerable flexibility to impose measures of varying severity. [10] Of note, the effect of the sanctions may not flow down to entities owned by sanctioned parties due to OFAC’s usual “50 Percent Rule” not applying. This will likely limit the impact on New Zealand entities doing business with Ethiopia, but we still recommend keeping an eye on developments to avoid unintentionally dealing with a sanctioned person.

4. Significant ongoing sanctions debates regarding Afghanistan and cryptocurrencies

Two of the most significant sanctions debates of the past six months concern how the international community should respond to the current situation in Afghanistan and the heighted sanctions risks posed by cryptocurrencies.

Afghanistan

Following the Taliban’s return to power in Afghanistan in August, sanctions provide some of the only remaining leverage the international community exerts over the new government as it seeks to establish international legitimacy and source much needed funding.  While it remains to be seen how the international community will engage with the Taliban going forward, it looks increasingly unlikely that any of the existing UN, US and other autonomous sanctions targeting group members and the Haqqani Network will be relaxed in the near future.  Indeed, many expect that the international community (perhaps via the G7 [11]) will soon designate Taliban leaders who are not yet subject to sanctions and consider imposing broad jurisdictional sanctions, similar to those imposed on Iran or Syria, to deny the Taliban resources it could leverage to cause more harm.

Against this backdrop, various government agencies, including the UK Office of Financial Sanctions Implementation (OFSI) and the UK Financial Conduct Authority, have issued notices to caution those engaging or considering engaging in any financial activity involving Afghanistan. [12] Given the chilling effect that warnings like these have had on the flow of humanitarian assistance into the country, OFAC issued two general licences in September authorising certain humanitarian transactions and transactions related to exports of agricultural commodities, medicines, and medical devices to Afghanistan that would otherwise be prohibited by OFAC’s terrorism-related sanctions. [13] The licenses specifically apply to transactions involving the Taliban or the Haqqani Network or any legal entities owned 50 percent or more by them.  OFAC also issued a series of helpful FAQs in connection with the licenses. [14] We recommend that New Zealand businesses contemplating a transaction involving Afghanistan should monitor developments and review these materials carefully.

Cryptocurrencies

It is widely accepted that the growing prevalence of virtual currency as a payment method has generated heightened exposure to sanctions risks – like the risk that a sanctioned person, or a person in a jurisdiction subject to sanctions, might be involved in a virtual currency transaction.

OFAC has taken a number of significant steps in the past year to encourage the virtual currency industry to take sanctions compliance seriously.  In October, it published a practical, clear and relatively concise guidance document intended to assist the industry to mitigate sanctions risks. [15] As a side benefit, this will also help banks and others to assess the adequacy of the sanctions compliance programmes of the virtual currency firms with which they transact.

This OFAC guidance comes hot on the heels of a sequence of related events in the US including:

  • OFAC issuing an updated advisory document in September on sanctions risks involving ransomware payments; [16]
  • OFAC’s first designation of a cryptocurrency exchange in September, Russia-based SUEX, for helping ransomware, and other cybercrime groups, launder more than US$160 million in illicit funds; [17]
  • OFAC enforcement actions in December 2020 and February 2021 taken against two US-based virtual currency exchanges for providing services to users in comprehensively sanctioned territories; [18]
  • OFAC’s designation of two Chinese nationals in March 2020 who received approximately US$100 million in virtual currency stolen from cyber intrusions against two virtual currency exchanges; [19]
  • FinCEN taking enforcement action against non-compliant virtual currency money transmitters facilitating ransomware payments – BTC-e in 2017 and Helix in 2020; [20] and
  • President Trump’s 2018 sanctioning of Venezuela’s nascent cryptocurrency, the Petro, and any other digital currency that Venezuela may issue in the future. [21]

Given these recent developments – especially when considered alongside other international efforts to regulate cryptocurrency transactions, including the Chinese central bank’s recent decision to render them illegal [22] – we recommend that New Zealand-based cryptocurrency users should conduct careful due diligence when contemplating material international transactions.  To protect against potential sanctions violations, New Zealand-based cryptocurrency exchanges that want to attract US users should consider implementing measures to exclude targets of US sanctions from trading.  Non-US exchanges that permit access to certain US sanctions targets may risk imposition of US ‘secondary sanctions’ designed to deter non-US persons from engaging in business with targets of US sanctions.

5. OFAC and OFSI published sanctions reviews

OFAC’s 2021 Sanctions Review

In October, OFAC published its long-awaited review of the economic and financial sanctions that it administers and enforces, and issued recommendations to preserve and enhance their effectiveness. [23] As many expected, the review was very general (only seven pages) and focused on explaining the ongoing importance of: (i) tying sanctions to clear, reasonable policy objectives; (ii) incorporating multilateral coordination, where possible, (iii) mitigating adverse economic and humanitarian impacts; (iv) improving communication with financial institutions, civil society, and allies; and (v) modernising OFAC’s workforce and operational capabilities.

While the review itself is over, OFAC’s work to implement its recommendations is just beginning.  We expect some of the ongoing workstreams will produce material benefits for New Zealand businesses exposed to US sanctions risks:

  • First, implementation will likely stem the proliferation of OFAC designations going forward.
  • Second, we anticipate the future expansion of US Government ‘humanitarian exceptions’ and renewed efforts to remove obstacles to payments.  This would make it easier for New Zealand exporters of food, medicines and medical devices to get their products to market and ensure they get paid.
  • Third, we expect to see a sustained effort to standardise and clarify guidance across the various US sanctions programmes, including the use of more plain-language explanations – not legal jargon – to describe the scope and application of sanctions.  If successful, this initiative would save New Zealand businesses significant sums in relation to ongoing compliance activities.

As ever, we will monitor these developments with interest.

OFSI’s Annual Review

In October, OFSI published its Annual Review, which provides an overview of OFSI’s activities in the financial year April 2020 to March 2021. [24]

From a New Zealand perspective, the most notable things the Review demonstrates are that: (i) the UK continues to diverge from the EU’s sanctions policy post-Brexit; and (ii) OFSI is likely to be one of the most active regulators and enforcement agencies in the sanctions space going forward.  Up until now, many New Zealand businesses have kept a close eye on EU sanctions developments and assumed that UK developments will be largely aligned – this assumption no longer holds.  For some New Zealand businesses, an independent focus on UK developments is now warranted.

How can MinterEllisonRuddWatts help?

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

Members of our team have represented clients in sanctions investigations undertaken by the New Zealand 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.  Our team also includes one of New Zealand’s leading lawyers advising on cryptocurrencies.

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

This article was co-authored by Nathalie Harrington, a Senior Solicitor in our Public Law team.

Footnotes:

[1] See here, page 3.

[2] See here, page 2.

[3] See here (Google Translate for English), herehere, and here.

[4] Uncertainty remains as to the precise scope of the phrase “discriminatory restrictive measures” (“歧视性限制措施”), which arguably captures a wider array of measures than just sanctions. In any case, it leaves broad discretion to the Chinese Government to target any foreign sanction that it finds to be contrary to China’s interests.

[5] See here.

[6] This programme is considered to include ‘secondary sanctions’ liability. Section 1 (a)(iii)(A)(2) of Executive Order 13818 provides the authority for designation of any person who has materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to or in support of any person whose property and interests in property are blocked pursuant to this order.

[7] See here.

[8] See here.

[9] See a helpful explainer from the New York Times here.

[10] See here.

[11] The G7 comprises Canada, EU, France, Germany, Italy, Japan, UK and US.

[12] See here and here.

[13] See here and here.

[14] See here.

[15] See here. OFAC also amended two FAQs. One (FAQ 559) about the definition of digital currencies and some other terms, and another one (FAQ 646) about how to block them.

[16] See here.

[17] See here.

[18] See here and here.

[19] See here.

[20] See here and here.

[21] See here.

[22] See here.

[23] See here and here.

[24] See here.

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