Global enforcement outlook
Sanctions and trade
Overall, the sanctions and trade arena promises to remain a highly fraught battleground in 2021 – creating complexity for international businesses looking to sell assets, move money, make new deals and maintain compliance across borders.
Biden’s impact on sanctions and export controls
Sanctions and export control issues in 2020 presented great challenges to international business, leaving companies struggling to stay on top of rapidly changing rules.
For example, we saw the US-China trade war’s acceleration, the ‘maximum pressure’ campaign against Iran and its influence in the Middle East right up to the final days of the Trump presidency, heightened tensions with Russia (especially regarding cyber, military, intelligence and energy export issues), continued grappling with Venezuelan interests, and enhanced sanctions on Syria taking hold.
While President Biden may use sanctions and trade controls more conventionally than his predecessor, they will remain an important part of this administration’s foreign policy, national security and economic toolkit. Sanctions and trade controls will likely continue to become more complex and to proliferate on a global scale, requiring well-informed and globally co-ordinated strategies to mitigate the risks they present.
Looking ahead, the Biden administration is primed to change course on some – but not all – of these programmes and shift US sanctions’ focus. For example, President Biden may revisit Obama-era rapprochement with Cuba, and he committed to lifting some Iran-related sanctions provided Iran move toward compliance with the Joint Comprehensive Plan of Action. European leaders remain committed to the nuclear deal for now and are pressing for US participation, so a renewed agreement could bolster’s Biden’s commitment to diplomacy and multilateralism.
President Biden is unlikely to reverse course on China, at least in the short term. With COVID-19 further sharpening US-China tensions, the US government will likely continue to use export controls and sanctions as foreign policy tools. Additionally, there has been broad support across the political spectrum for US countermeasures to the Hong Kong national security law.
US foreign policy under President Biden will likely involve greater co-ordination with allies on the imposition of sanctions, including a strong emphasis on using sanctions to address human rights issues.
Meanwhile, China enacted ‘blocking rules’ in January 2021 designed to counteract the extraterritorial application of foreign laws by, among other things, authorising a working group led by China’s Ministry of Commerce to prohibit Chinese parties from complying with designated foreign laws, potentially including US secondary sanctions.
This has left many companies caught between the world’s two biggest economies, struggling to avoid significant regulatory risk in a rapidly escalating conflict that has seen (among other things) the US government intervene in high-profile corporate transactions and the Chinese government institute its first-ever unified export controls regime.
2021 is also likely to see a continuation of this recent trend of introducing far-reaching foreign investment and public interest review regimes, as examined in more detail in our Global antitrust in 2021: 10 key themes report.
It remains to be seen whether the Chinese blocking rules will operate as more of a political statement or if they will create serious, practical difficulties for companies, forcing them to choose between two conflicting legal systems.
Other tensions that emerged in 2020 and may continue into 2021 and beyond include:
- the EU imposing sanctions on China relating to its actions in Hong Kong;
- India banning dozens of apps operated by Chinese companies following military confrontations between the two countries high in the Himalayas; and
- the UK, Italy, the Netherlands, Spain and others proposing new or expanded official processes to review foreign direct investments for potential national security concerns.
Finally, the US-Russia relationship will be an area to watch when it comes to sanctions. President Biden has taken strong anti-Russia positions in the past, and is unlikely to change his stance in the near term.
Many expect a likely change in policy towards Russia – new designations, new sanctions programmes and increased enforcement priority. Like China, Russia introduced domestic legislation to protect its companies against foreign sanctions. Major Russian companies have been focused for years now on allocating sanctions risk.
EU sanctions strategy
In January 2021, the European Commission published a communication setting out its new strategy for the European economic and financial system, which deals with sanctions implementation and enforcement.
The communication suggests the EU is clearly seeking to be far more active in the sanctions arena in the years ahead. When it comes to the US, the Commission has recognised the impact of policy divergence on Iran in recent years. Even though their respective policies may well start to converge in 2021, the Commission is keen to counter the extra-territorial application of unilateral sanctions by the US as well as other third countries.
The Commission wants to:
- foster the cross-border implementation and enforcement of sanctions;
- conduct a review of practices that circumvent and undermine sanctions (such as the use of cryptocurrencies); and
- work with member states to ensure that national penalties for breaching EU sanctions are effective, proportionate and dissuasive.
As a first step, the Commission intends to set up an expert group on sanctions and extraterritoriality, composed of representatives of member states, to cover technical issues of implementation of the EU Blocking Regulation.
Another area to watch in the coming months will be the EU’s new ‘Magnitsky-style’ human rights sanctions regime. Following similar legislation in the US and the UK, in December 2020, the EU established a new framework for imposing asset freezes, travel bans and other restrictive measures on persons the European Council determines are responsible for (or associated with) a wide range of serious human rights violations, regardless of where they occurred.
Increasing efficiency and transparency of EU sanctions enforcement at member-state level will ensure that European sanctions programmes are being taken sufficiently seriously around the world.
UK sanctions and trade realignment
Now outside the EU, the UK is no longer implementing EU sanctions, with the British government instead having the legislative powers to implement, update and lift its own restrictions.
The expectation is that UK and EU foreign policy will remain broadly aligned in the short term at least. But there will be differences in approach that will add to complexity and may lead to a divergence between the two regimes.
For now, UK sanctions broadly replicate the EU regime, but they are not, in all cases, exactly the same. It is possible that the two regimes may diverge further as the UK strikes out on its own now that the Brexit transition period is over.
On enforcement, the UK’s Office of Financial Sanctions Implementation (OFSI) has reported increased levels of activity and an appetite to penalise firms for non-compliance, including a recent fine of £20.4m against a financial institution.
OFSI received 140 reports of potential financial sanctions breaches in the 2019-20 period, a 40 per cent increase from the previous year. The total value of potential breaches reported was £982.34m, representing an almost four-fold increase from the previous year.
In November 2020, Giles Thomson took over as director of OFSI, a role which has recently been expanded to include economic crime policy. This is in recognition of ‘the importance to the UK government’ of tackling money laundering and counter-terrorist financing (CTF) and their ‘interconnection’ with sanctions. Companies (particularly financial institutions) can expect their compliance with sanctions, CTF and anti-money laundering laws to remain under scrutiny in the UK, bringing enforcement and reputational risk.
We’re likely to see sanctions and trade controls continuing to intersect with international financial crime investigations into bribery, corruption and money laundering. Facing enforcement if they fail to comply, multinational corporations and financial institutions alike need to stay on top of the specifics of the shifting requirements. But they will also be well served by adopting a holistic approach – assessing and mitigating sanctions and trade risks alongside other key risks.