Sanctions Update Part 3, Practical Steps.
Subject: Sanctions Update Part 3, Practical Steps.
Date: 15 Oct 2014
From: Paul Backer <email@example.com>
Part 3. Practical aspects of sanctions impact optimization for Russian companies.
Violating sanctions or hoping for a world without sanctions is not a sanctions policy. Effective sanctions policies optimize transacting and protect assets. They work at the nexus of regulatory, corporate, international, finance, litigation, procurement and other practices. They are local. An effective sanctions policy for Italy or US requires Italian or US counsel. Skala team attorneys protected hundreds of millions in transactions and assets. Skala Law is local, to the world.
NOTE: This note is not meant as actionable advice to listed persons. Contact us directly.
The author: Mr. Backer is a Moscow-based American attorney, with 20 years of sanctions experience, beginning as a U.S. government attorney advising on investment and technology transfer enforcement as to the Former Soviet Union. His email is firstname.lastname@example.org. Contact Skala Law at email@example.com, visit at www.skalalaw.com.
Five situations require a sanctions policy: selling abroad; importing equipment, disposables or intellectual property; raising foreign capital; protecting foreign assets and strategic foreign transactions.
Sanctions are intended to injure business, lack due process or enforcement consistency. This appears to cause self-damaging behavior. Specifically, local press articles on corporate governance steps, banking relationships, asset location, beneficiaries and offshore activities and especially, attacking enforcing agencies.
Russian press is covered by BBC Monitoring and agencies from Canada to Australia. Articles in Vedomosti, Kommersant, RBC, etc. are on the desks of responsible EC, OFAC or BIS officials next morning, in English. The one sure way to get an enforcement agency’s attention is trash talk in the local media.
Another “alternative” is sanctions Don Quixotism, railing against sanctions as a whole. Wastes resources and poisons enforcing agency working relationships. Global attacks on sanctions are transactionally irrelevant as every transaction or asset is local to a specific jurisdiction.
In that context, Rosneft’s choice of Zaiwalla, a law firm linked to Iranian interests is surprising, effectively rejecting positive engagement with North American or European sanctions bodies.
A brief aside. Expecting the imminent demise of sanctions ignores political reality. There is no potent North American or European domestic constituency to end sanctions. Ukrainian and other diasporas firmly back sanctions with the Russian diaspora at best split.
Retailers of “European business buckles under sanctions” or “people of … demand sanctions’ end” are either magical thinkers or pursuing their business model, not yours. Real European sentiment was shown when Norway, one of the biggest institutional investors in Russia toughened sanctions.
The Russian Federation government is aggressively pursuing the elimination of sanctions against their nationals. It’s their job. Stick to your knitting.
Common aspects of effective sanctions policies:
1. Know the law. Read the source legislative documents not “updates”. For example: EC sanctions are uniform, but their enforcement is at individual state level under local law and with very different sets of priorities and resource allocations.
2. Don’t break the law. Punishments are draconian, unpredictable and often retroactive.
3. Don’t break the law2. Company violations result in punishment of physical persons.
4. Goals. Identify exactly what, where and when needs to be transacted or protected.
5. Target resources. Don’t spend time and money on anything not linked to your goals.
6. Appropriately(!) monitor local enforcement activity relevant to transactions and assets.
7. Jurisdiction. Avoid transacting or banking from a sanctioned jurisdiction.
8. Compartmentalize for security. Specific local legal specialists for specific local tasks.
9. Message control. Media discussions of business, assets, governance, beneficiaries, etc. are not transactionally helpful. If public statements are unavoidable, such as for a publicly traded company, word for word consistency.
10. Document retention policies. Implement them. Police servers. Implement NDAs. Life punishes the lazy.
Be professional and polite. Feed your business not your ego. Don’t “enrage and engage” with enforcing agencies. Delegate to your, preferably local lawyers. Skala recruits local counsel with directly relevant background and proven relationships with enforcing agencies to effectively and appropriately promote transactions. No one can speak more effectively for you in Naples, Italy or in Tulsa, Oklahoma than a local.
Before you decide that you can’t, work with sanctions enforcement agencies directly. Not to grossly oversimplify, but if you have 20 types of goods at issue and can resolve 15 cheaply by your local counsel engaging with the agency without a fight, why fight all 20?
There is nothing better for transacting abroad than an enforcement agency statement that your goods are of no interest. Skala team attorney received a “no interest” note for a manufacturer, eliminating the sanctions issue altogether.
On to transactional situations.
1. Selling abroad, can be separated into two components: a) selling of clearly unsanctioned goods and b) selling potentially sanctioned goods.
In purely economic terms the lack of success of Russian exporters is surprising as the falling ruble materially decreased Russian companies’ domestic production costs.
Sanctions disrupt transacting by unlisted companies by creating a perception of a very high transacting cost of working with sanctioned nation companies. Economically advantageous tenders fail, long standing clients quit, banks and new clients refuse to transact or to offer fair market terms. There is no evidence that this is due to an ideological stance by major Western companies as to a regional conflict in Eastern Ukraine. It is simply a quality of life issue.
Selling requires showing that:
1. Company is not subject to relevant individual or sector sanctions.
2. Goods are not subject to the relevant sanctions regime.
3. Goods and/or company are not likely to become subject to a sanctions regime.
4. Insulation of transaction payments from SWIFT or correspondent account sanctions.
5. Stable frameworks for providing future disposables, repair materials and software independently of sanctioned jurisdiction.
The above measures objectively improved tender competitiveness and increased willingness to transact. They require a number of simple and complex components in Russia, on and off transaction site, are implementable within 4 to 12 weeks, historically, for under Euro 40,000. This documentation is replicable across multiple legal entities and product lines and updatable at minimal cost.
The most potent tool is compliance burden shifting. “Compliance burden” is not only legal costs, but also the simple lack of desire to be engaged in the compliance processes and the fear of attracting adverse interest by sanctioning governments. Western clients refuse to transact, because they don’t want to pay, don’t want to be involved, don’t want to be distracted and don’t want their other businesses impacted.
It’s not ideology or anything new. During my twenty year career, many national companies, particularly energy companies expressed concern about technology transfer provisions, sanctions regimes, etc. as a reason to avoid a vendor.
The key factor to overcoming this resistance is the vendor’s agreement to take on compliance burdens such as reporting, registration, certification, etc. at vendor’s cost. The cost to vendors is minimal as their legal advisers already manage these issues, the impact decisive.
Next, Part 4, transacting situations 2-5.
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