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The deep freeze: the growing impact of sanctions on Jersey

20 January 2015

What are sanctions?
A sanction is a measure adopted usually by several nations acting together (notably the European Union and the United Nations) against a regime, state, organisation, individual or entity believed to be violating international law.  Sanctions can also be imposed by individual states. They may include an asset freeze on financial assets, the withdrawal of financial services, bans or restrictions on trade of goods and travel restrictions on individuals. Economic or financial sanctions can be either "comprehensive" so that they are directed against a particular state or regime or "targeted" so that they are directed against named individuals or entities often connected to a particular state or regime.

Why are sanctions used?
The rationale for sanctions can differ but for the most part sanctions are introduced to bring about a change in the conduct of a country, regime or individual; to place pressure on a country to comply with set objectives; as a punitive measure when international peace and security are at risk or have been violated and diplomatic efforts have failed or to deter, prevent and suppress the financing of terrorism and terrorist acts. More recently targeted sanctions have also been used to prevent the dissipation of assets purportedly belonging to the country of origin from individuals connected with an overthrown regime. Some sanctions are unlimited in duration others remain in force for a specific time period.

Why the recent interest?
In recent times there has been a marked increase in the use of co-ordinated economic sanctions by the EU, the UN and individual states against rogue states and organisations and on a targeted basis against specific individuals and entities related to those rogue states and organisations. This is having material consequences far outside of those states and organisations.  Given Jersey's role as an international finance centre it is inevitable that international sanctions are and will continue to impact upon Jersey's financial services sector.

The number of countries which are the subject of the EU’s targeted economic sanctions continues to grow, with over thirty countries now affected.  The EU's response to the Ukraine crisis has been to pass legislation imposing financial sanctions on named individuals and businesses they believe to be responsible for the on-going situation in Ukraine. Council Regulation (EU) No 208/2014 of 5 March 2014, Council Regulation (EU) No 269/2014 of 17 March 2014 and Council Regulation (EU) No 692/2014 of 23 June 2014 (together the "EU Ukraine Regulations") provide for restrictive measures directed against certain persons, entities and bodies in view of the situation in Ukraine and in respect of actions undermining or threatening the territorial integrity, sovereignty and independence of Ukraine.

The EU Ukraine Regulations laid the groundwork for further targeted sanctions against Russian individuals and businesses. Council Regulation (EU) No 833/2014 of 31 July 2014 (the "EU Russian Regulations") concerns restrictive measures in view of what was perceived to be Russia's continued actions destabilising the situation in Ukraine.

The EU Ukraine Regulations were implemented in Jersey adopting the procedure detailed below by means of the EU Legislation (Sanctions - Ukraine) (Jersey) Order 2014 on 3 December 2014 as subsequently amended and similarly the EU Russian Regulations by way of the EU Legislation (Sanctions - Russia) (Jersey) Order 2014 on 12 December 2014 (together the "Jersey Orders"). By paragraph 4 of each of the Jersey Orders, the EU Regulations have effect in Jersey subject to certain modifications to the text reflecting the fact that Jersey is not a member state of the EU and by virtue of the EU Legislation (Sanctions) (General Provisions) (Jersey) Order 2014.

The EU Ukraine Regulations and the EU Russian Regulations followed the sanctions regimes already imposed against Syria, Libya, Egypt and Tunisia in the aftermath of the Arab Spring and the more long standing sanctions regimes imposed against Iran and North Korea, amongst others.

How are international sanctions implemented in Jersey?
In Jersey, the Chief Minister's Department is responsible for co-ordinating the introduction of local sanctions legislation, thus ensuring that the Island's sanctions regime is in line with international developments.

Jersey is not part of the EU for the purposes of sanctions.  To this extent international sanctions are brought into force in Jersey by way of domestic legislation.  EU sanctions measures will usually come into force by way of Regulations of the States or, more commonly now, by Orders of the Minister for External Relations pursuant to the European Union Legislation (Implementation) (Jersey) Law 2014 and the EU Legislation (Sanctions) (General Provisions) (Jersey) Order 2014 which provides a standard framework for the implementation of EU sanctions. In practice Jersey orders implementing EU sanctions will follow soon after the coming into force of the EU sanctions. 

A different procedure is adopted for the implementation of UN Security Council Resolutions, albeit if these Resolutions are adopted by the EU, recent practice has been to implement them by way of the procedure detailed above rather than by an Order in Council made under Section 1 of the United Nations Act 1946.

The territorial effect of sanctions
This issue is not straightforward but sanctions introduced by domestic Jersey legislation adopting the usual framework referred to above are capable of having effect both in and outside of Jersey. Sanctions will generally apply to any legal person or body incorporated or constituted under Jersey law in respect of any business done in whole or in part in Jersey. However, sanctions will also apply to any legal person, entity or body incorporated or constituted under Jersey law, regardless of where that person carries on business (e.g. so would extend to a Jersey company with its management and control in Switzerland).

It is also worth noting that EU regulations implementing sanctions will generally apply to any national of a member state of the EU, whether that person is inside or outside the territory of the EU. By way of example it would apply to employees of a financial services business in Jersey who are British nationals (as many will be) or nationals of another EU member state. The EU regulations will also generally be capable of affecting actions implemented in Jersey with regard to assets of a company or trust held within the EU (e.g. a Jersey company or trust with a bank account or investment portfolio held in the EU).

To the extent there is any doubt as to whether sanctions apply specific legal advice should be obtained.

What is prohibited?
In recent times EU regulations implementing economic sanctions, which are subsequently brought into force in Jersey pursuant to the procedure detailed above, adopt a similar framework.  By way of example Article 2(1) of Council Regulation (EU) No 208/2014 provides "All funds and economic resources belonging to, owned, held or controlled by" the designated persons, entities or bodies listed in Annex 1 "shall be frozen".  By Article 2(2) "No funds or economic resources shall be made available, directly or indirectly, to or for the benefit" of the persons, entities or bodies listed in Annex 1. A designated person for these purposes is one of the targeted individuals specifically blacklisted in the sanctions.

The freeze broadly covers all assets of targeted individuals or entities. It means that financial assets, such as cash, cheques, bank deposits, stocks, shares, etc. may not be accessed, moved or sold.  The criterion in determining ownership includes being in possession of 50% of the proprietary rights of an entity or having a majority interest in it. Criteria taken into account in establishing control include, inter alia, control over the board membership or sharing the financial liabilities of a company.

The asset freeze also includes a ban on providing resources to the targeted persons and entities. This means that EU citizens and companies must not make payments or supply goods and other assets to them. In effect, business transactions with designated persons and companies cannot legally be carried out although it may be feasible to obtain a licence from the relevant authorities authorising a particular action by way of an exception to the ban.

The EU Russian Regulations reflect a wider package of sanctions against Russian individuals and businesses. These sanctions include, inter alia, a prohibition on the buying or selling of transferable securities and money-market instruments with a maturity exceeding ninety days issued by certain entities to include major state-owned Russian banks. The export of certain dual-use goods and technology for military use and energy-related equipment and technology are restricted in the form of prior authorisation requirements from competent authorities.

In light of the above, Jersey businesses which undertake Russian business should check the scope of any pre-existing contracts with Russian counterparties to ensure these do not relate to the provision of prescribed products and services for use in Russia. Likewise, Jersey financial services businesses which are party to financing transactions with Russian banks should take legal advice to determine whether these transactions are caught and, if so, what options are available in the circumstances. Noting the penal sanction for breach if there is any doubt at all about whether the sanctions apply legal advice should be obtained.

Are there any exceptions to the asset freeze and other restrictive measures?
In certain cases, national competent authorities can permit derogations from the asset freeze under specific exemptions, for instance to cover basic needs (such as foodstuffs, rent, medicines or taxes) or reasonable legal fees.

In respect of the EU Russian Regulations there are certain exemptions for orders under pre-existing contracts. Alternatively, if contracts are caught there may be scope to obtain authorisation to perform the contract from competent authorities by way of licence.

Do trustees need to be concerned?
With regard to the EU Ukraine Regulations, which are consistent with other EU regulations implementing international sanctions as applied in Jersey, the essential question is whether, on or after the coming into force of the legislation, any assets of a trust can be said to be "funds" or "economic resources" which are "belonging to, owned, held or controlled by" a designated person. If they can, they must be "frozen" and no person may "deal with" the assets.

Whether trust assets constitute a fund or economic resource of a designated person is not necessarily a straight forward question for a trustee.  Indeed, a settlor or third party reserved with a power to direct a trustee to pay trust assets to himself or to another person, or to direct the sale and investment of trust assets, may well fall within the meaning of "controlled". The reference to funds and economic funds simply being "held" shows that there is no need for the designated person to actually have any beneficial interest in the assets or title to the assets.  Trust issues by their nature are rarely the same and will require careful analysis on a case by case basis. Given the complexity of these issues and the severe penalty for breach (see below) trustees should take legal advice as early as possible with a view to avoiding any breach.

What about frozen assets owned jointly by designated and non-designated persons?
The EU Ukraine Regulations as applied in Jersey (which are consistent with other EU regulations implementing international sanctions as applied in Jersey) do not address the position where a designated person under those sanctions holds an interest in an asset with others who are not designated persons under the sanctions. Guidance issued by the EU[1], although not legally binding, does suggest co-mingled assets should be considered subject to the sanctions. However, the guidance contemplates the possibility of an application being made to the relevant authority for permission to deal with the portion of a jointly held asset belonging to a person who is not subject to any sanctions. In some circumstances it may be feasible to segregate the assets between designated persons and non-designated persons. Again service providers with this issue, whether in a trust context or not, should take legal advice as early as possible to determine whether segregation of the assets is an option.

Penalties for breaching sanctions are set out in the legislation implementing the particular sanctions measures. Breaches may well result in prosecution for criminal offences and fines. The penalties are usually imprisonment for a term of up to two years and/or a fine. If an offence has been committed by a corporate entity, that entity will in all likelihood be culpable of an offence as well as any senior officer if they consented to such breach or it can be attributable to their neglect.

Plainly the penalties for breach are material both in terms of criminal sanctions, personal liability and reputational damage.

Responsibility for monitoring of sanctions in Jersey
Individual businesses are responsible for monitoring and ensuring compliance with sanctions orders through their compliance officers and are overseen by the Jersey Financial Services Commission ("JFSC") which circulates updates with regard to the introduction of new sanctions as well as producing practical guidance notes.

It is clear that the JFSC will expect financial services businesses to have proportionate systems and controls in place to reduce the risk of a financial sanctions breach taking place. How those systems and controls are formulated will depend on the business model, profile and customer base of the relevant business.

Bedell Cristin Sanctions team
Whether or not events in Ukraine prompt a further round of sanctions remains to be seen. However, what is more certain is that this is a rapidly expanding practice area which is here to stay.

Bedell Cristin's dedicated sanctions team advises institutions, trust companies and individuals on the impact of sanctions in relation to substantive trust structures, funds and individual accounts. Noting the particular complexities which arise with trusts the team comprises both trust specialists and litigators.

[1] See "Restrictive measures (Sanctions) – Update of the EU Best Practices for the effective implementation of restrictive measures" -8666/1/08 REV 1.

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