Businesses and natural persons that trade with Libyan ‘designated persons’ in contravention of the recent targeted economic sanctions, could face prosecution and severe fines. This article focuses on how targeted sanctions have been imposed against Libya by the United Kingdom, United States, European Union and the United Nations, how they operate and what businesses, particularly financial institutions, should be aware of, so that they do not inadvertently breach them.
THE UN AND US SANCTIONS
On 25 February 2011, President Barack Obama issued Executive Order 13566 ‘Blocking Property and Prohibiting Certain Transactions Related to Libya’. Similarly, on 26 February 2011, the United Nations Security Council adopted Resolution 1970 (2011) (UNSCR 1970) and on 17 March 2011 the UN Security Council adopted UNSCR 1973 (2011) (UNSCR 1973). These sanctions are outlined below.
United Nations Security Council Resolutions 1970 (2011) and 1973 (2011)
UNSCR 1970 creates a binding framework on UN member states to impose domestic sanctions that embargo the supply of arms or related material to Libya, in addition to enforcing travel bans and asset freezes on designated individuals.
The UK consolidated list of financial sanctions targets, for example, now lists 92 designated persons and entities, including 6 port authorities and 47 Libyan state entities (designated persons) from a number of sectors.
As discussed below, the combined asset freezes and prohibition on supplying economic resources, effectively prohibits an unlicensed person or company from doing business with an entity that falls within the list of designated persons, or which could make funds or economic resources available to a designated person.
United States sanctions: Executive Order 13566
Executive Order 13566 is extremely broad, applying to any US citizen, US-registered entity, overseas branch of a US entity, or any person (whatever their nationality) physically within the US.
Unless authorised by the US Office of Foreign Asset Control (OFAC), the Order freezes a designated person’s property (or property interests), or any entity in which a designated person owns, directly or indirectly, more than a 50% interest. The Order also prohibits any persons subject to US jurisdiction from providing funds, goods or services to or for the benefit of a designated person. However, it is not necessarily acceptable to enter into transactions with entities where a designated person has less than a 50% interest; OFAC advises US persons to check their website for the extensive list of blocked persons and to exercise caution before entering into any such transactions.
Breach of the US sanctions carries severe financial penalties, even if committed unintentionally, and can result in up to 20 years imprisonment. It is therefore critical for any US-connected persons or entities, or those within the jurisdiction of the US, to seek authorisation from the OFAC before entering into a transaction with an entity owned, directly or indirectly, by a blocked person.
THE EU’S APPROACH – EU REGULATION 204/2011
On 3 March 2011, the European Council adopted Regulation 204/2011 ‘Concerning Restrictive Measures in View of the Situation in Libya’ to give effect to UNSCR 1970.
Like Executive Order 13566, EU Regulation 204/2011 is also drafted in extremely broad terms, applying to all EU citizens, corporate entities and ships, as well as any entity (irrespective of corporate seat) that does business within the EU. Under the Regulation it is illegal to deal with assets owned or controlled, directly or indirectly, by designated persons or any other person who is not listed, but could be considered to be assisting or facilitating civil repression in Libya.
The breadth of Regulation 204/2011 is illustrated by Article 5(2), which states that it is illegal to ‘make available’ ‘economic resources’, directly or indirectly, to or for the benefit of any designated person. Economic resources are defined in the broadest terms as:
‘… assets of every kind whether tangible or intangible movable or immoveable, which are not funds but may be used to obtain funds, goods or services.’
In R (on the application of M & ors) v Her Majesty’s Treasury, the European Court of Justice (ECJ) made clear that Article 5(2) applies only to those assets that can be turned into funds, goods or services capable of being used to support the ends which the Regulation is designed to prevent. The ECJ also ruled in Möllendorf and Möllendorf-Niehuus (C-117/06) that the expression ‘made available’ has a wide meaning and encompasses all acts necessary under the applicable national law for a person to effectively obtain full power of disposal in relation to the property concerned.
Though Regulation 204/2011 has direct effect in the EU, member states are responsible for passing legislation that imposes penalties for breaching the Regulation.
THE UK’S IMPLEMENTATION OF THE UN AND EU SANCTIONS
On 27 February 2011, the UK adopted the UNSC resolutions by enacting the Libya (Financial Sanctions) Order (LFSO) 2011, and implemented EU Regulation 204/2011 on 3 March 2011 via the Libya (Asset-Freezing) Regulations (LAFR) 2011.
Both LFSO 2011 and LAFR 2011 are administered by the asset-freezing unit of HM Treasury and impose criminal sanctions including severe fines or imprisonment if they are contravened.
The provisions of LAFR 2011 and LFSO 2011 each have extra-territorial effect and apply to conduct by UK nationals or body corporates, irrespective of whether the offending conduct is committed outside the UK. ‘UK nationals’ under both regulations includes all British citizens, citizens of British overseas territories and subjects with a right to abode in the UK. LAFR 2011 has a slightly narrower definition, however, with British overseas territory citizens being restricted to those who acquired their citizenship through a connection to Gibraltar.
LFSO 2011 and LAFR 2011 prohibit the above-mentioned persons or entities from dealing with funds or economic resources that belong to, or are owned, held or controlled by a designated person, if the person or entity ‘knows, or has reasonable cause to suspect’ that it is dealing with a designated person’s funds or economic resources. To ‘deal with’ is defined very broadly and is intended to capture any conceivable use, transfer or change in the state of the funds or economic resources.
Despite its narrower application, LAFR 2011 is slightly broader in scope than its counterpart in certain areas. Sections 4 and 6 for example, prohibit the making of funds or economic resources available, ‘directly or indirectly’, to a designated person, whereas there is no such qualification of this prohibition in LFSO 2011. Thus, LAFR 2011 and not LFSO 2011 would capture situations where a person or company sells goods to a non-designated person, and they ‘know’, or have ‘reasonable cause to suspect’ the counterparty is making the goods available for the benefit of a designated person. Economic resources are ‘made available’ for a designated person’s benefit where the designated person obtains a significant financial benefit from receiving the goods.
Where both LFSO 2011 and LAFR 2011 contemporaneously apply, an entity will need to comply with whichever legislation has the broadest scope.
THE RISK OF BREACHING THE SANCTIONS
As noted above, the sanctions legislation is intended to deprive designated persons of any financial support and economic resources that could be used to obtain funds.
For those doing business with entities that are not designated but are directly or indirectly related to designated persons, a cautious approach is recommended, as the European Council expressly requires member states to ensure that individuals:
‘… exercise vigilance when doing business with entities incorporated in Libya or subject to Libya’s direction’;
so as to:
‘… [prevent] business that could contribute to violence and the use of force against civilians.’1
HM Treasury has also stated that:
‘… the effect of the asset freeze is not limited to assets held in the name of a designated person… [it] extends to any funds, other financial assets or economic resources owned or controlled by them. The financial sector and other persons should bear in mind that Muammar Qadhafi and his family have considerable control over the Libyan state and its enterprises in deciding how to conduct proper due diligence over any transactions involving Libyan State assets’.2
However, as discussed below, none of the asset freezing prohibitions apply to persons holding a licence issued by a competent national authority, such as HM Treasury or the OFAC.
Where the counterparty to a contract is a designated person, it is essential to obtain a licence from the competent authority, before receiving payments or continuing to supply economic resources to them. Where the counterparty to a contract is not a designated person but nevertheless an entity with whom continuing to trade could breach the sanctions, the safest approach is to consult the relevant competent authority, and if in doubt, obtain a licence.
It should be noted that although Article 6a of Regulation 204/2011 provides that the obligation to freeze funds and economic resources of designated persons does not extend to those entities in which designated persons have a stake, this exception only applies if the entity is conducting legitimate business and not making funds or economic resources available to a designated person. As this may be particularly hard for an entity to prove, it should not be relied upon as a prudent alternative to obtaining a licence.
General and specific licences
In the UK, a general licence3 has been granted that enables a person to undertake any acts in the course of business with non-Libyan financial institutions (ie an entity that is incorporated or constituted under the law of a country other than Libya and is authorised under the law of the place in which it is incorporated or constituted to carry out regulated activities, as defined in s22 of the Financial Services and Markets Act 2000) that are owned or controlled by designated persons, but only where the person does not know, or have reasonable grounds for suspecting that the act will result in funds, financial assets or economic resources being made available to a designated person. Though General Licence 1 does not refer to LAFR 2011, but only to LFSO 2011, it appears that the wording of paragraph 4 of General Licence 1 is broad enough to grant authorisation under LAFR 2011 as well as the LFSO 2011. General Licence 1 permits non-Libyan financial institutions to continue their own business, for example, inter-bank loans and deposits and to ensure that they may pay wages to employees.
The US has similarly created ‘General Licence 1A’, which authorises all transactions involving banks owned or controlled by the Libyan government, provided those banks are organised under the laws of a country other than Libya and the transactions do not involve the Libyan government or blocked persons. In addition, there are four further general licences that have been issued by the US, relating to Libyan diplomatic missions in the US, authorisations for the provision of legal services, investment funds that have a minority, non-controlling interest held by the Libyan government and certain transactions related to oil, gas and petroleum products exported from Libya.
In other cases within the EU, a licence may only be granted on seven limited grounds under Regulation 204/2011. These are:
- where frozen funds or economic resources are:
- necessary to satisfy the basic needs of designated persons and their dependent family members; or
- intended exclusively for the payment of reasonable professional fees and expenses associated with the provision of legal services; or
- intended exclusively for payment of fees and service charges for routine holding or maintenance of frozen funds or economic resources;
- where the funds or economic resources are necessary to meet extraordinary expenses incurred by the designated person;
- where the funds or economic resources are the subject of a judicial or arbitral lien established prior to the date the designated person was designated;
- for payments of interest or other earnings on the frozen accounts provided that those payments are also frozen;
- for payments due to the designated person under contracts or agreements that were concluded before the designated person was designated, provided those payments are also frozen once made;
- for payments due from the designated person under a contract or agreement concluded before the designated person was designated; and
- where making funds or economic resources available, is necessary for humanitarian purposes such as delivering assistance, medical supplies, food, electricity, humanitarian workers and related assistance.
This last ground is designed to ensure that vital supplies continue to reach the civilian population in Libya.
In most ordinary commercial contract cases where goods are to be supplied under contracts with designated persons, the exemptions above will not apply except to facilitate receipt of payments due for economic resources supplied to designated persons under pre-existing contracts. Consequently, any direct or indirect supply of economic resources to a designated person in performance of an existing contract, without an appropriate licence, will be illegal as a matter of UK, EU and US law.
From an English law perspective, it would be customary to treat such a supervening illegality as a frustration of the contract in question. Under EU law, Article 11 of Regulation 204/2011 offers some protection, stating that individuals who refuse to make funds or economic resources available to avoid breaching the Regulation, will not be held liable for any claims of any kind. Article 12 reaffirms this protection, by prohibiting Libyan authorities from being granted compensation for claims that relate to transactions affected by the sanctions.
Similarly, s1702(3) of the United States’ International Emergency Economic Powers Act provides that compliance with Executive Order 13566 shall discharge a person of their contractual obligations, and provided they have acted in good faith under the Order, afford them immunity from any liability.
Accordingly, if a company is obligated to supply goods under a contract with a designated person, that company will not as a matter of US or EU law be held liable for failing to perform the contract, if it believes in good faith that performing the contract would breach the Regulation or Executive Order 13566.
Similarly Article 11(2) of Regulation 204/2011 states that an EU entity will not be held liable for a breach of the Regulation, if it did not know and had no reasonable cause to suspect that their actions would infringe the prohibition in question. The Regulation requires the defendant to prove on the balance of probabilities a negative proposition (ie that they did not have reasonable cause to suspect the sanctions would be breached). On the other hand, under LAFR 2011 and LFSO 2011, the prosecuting authority must prove beyond reasonable doubt that the defendant either knew that making available economic resources to the entity would breach the regulations or had reasonable cause to suspect that supplying the entity would breach the LAFR or LFSO prohibitions. In a case where the entity is not designated, this may be a difficult element for HM Treasury to prove.
The sanctions imposed by various nations against Libya are not equally applicable and the punishments for breaches of each of them vary. The immediate challenge faced by companies involved in business with Libyan entities is to determine whether or not their business transactions involve designated persons, and, if sanctions laws do apply, whether it is possible to obtain a licence from their local competent authority, to ensure that no civil or criminal breach of sanctions law is committed.
- European Council Decision of 23 March 2011 2011/178/CFSP
- HM Treasury, Financial Sanctions notice dated 27 February 2011
- General Licence 1