SANCTIONS CLAUSES IN A CHANGING SANCTIONS REGIME

How far can a sanctions clause protect a party from having to perform their contractual obligations – and in the case of Iran-related sanctions concerns, how does this interact with the Blocking Regulation? In Mamancochet Mining Limited v Aegis Managing Agency Limited and Others[2018] EWHC 2643, the High Court held that, in order to avoid payment of a claim, insurers were required to show that payment would expose them to sanctions under US or EU law. A mere exposure to the risk of a sanction was not sufficient.

In this post, our Insurance Disputes team consider the implications of the decision. Continue reading

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Filed under Announcements, Corporate Crime, Iran, Sanctions and Money Laundering, Sector Updates by Herbert Smith Freehills, US

OFSI publishes Annual Review

On 5 October 2018, HM Treasury’s Office of Financial Sanctions Implementation (OFSI) published its Annual Review for the 2017-18 financial year. This is the first such review published by OFSI and provides an overview of OFSI’s activities in 2017-18, as well as looking to the future. We set out some of the highlights of the Annual Review below.

The Annual Review confirms that 122 new asset freeze targets (or “designated persons”) were added to the UK Consolidated List, mostly under the DPRK and ISIL regimes. During this period, the UK also introduced ‘avoidance of delay’ provisions allowing new UN sanctions regimes to be implemented immediately after the relevant resolution is adopted (rather than waiting for EU action, as was previously the case), reducing the risk of asset flight.

In 2017-18, 122 suspected breaches of financial sanctions were reported to OFSI. OFSI did not impose any monetary penalties in 2017-18 (having had the power to do so since April 2017), but it is currently investigating several cases where a penalty may be appropriate. OFSI states that it is likely to impose monetary penalties in 2018-19, although the majority of cases will continue to be resolved by enforcement activity short of a penalty.

The Annual Review says that OFSI will continue to raise awareness of financial sanctions obligations in 2018-19, by producing guidance and speaking at events. It will ensure it maintains a central role in global sanctions implementation as the UK prepares to leave the EU. It is said that the Sanctions and Anti-Money Laundering Act, which received Royal Assent in May, will help to achieve this.

Susannah Cogman
Susannah Cogman
Partner
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+44 20 7466 2580
Daniel Hudson
Daniel Hudson
Partner
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Filed under Investigations, Sanctions and Money Laundering, Sector Updates by Herbert Smith Freehills, Uncategorized

FinCEN Issues Advisory Regarding Detection of Illicit Transactions Related to Iran

On October 11, 2018, the Financial Crimes Enforcement Network (“FinCEN”) issued official guidance entitled “Advisory on the Iranian Regime’s Illicit and Malign Activities and Attempts to Exploit the Financial System” (the “Advisory”). The Advisory intends to help US financial institutions to “better detect potentially illicit transactions related to the Islamic Republic of Iran.” The Advisory also aims to help foreign financial institutions understand the obligations of their US affiliates and avoid the breach of US sanctions laws.

According to the Advisory, the Iranian regime accesses, and abuses, the international financial system using a variety of methods. These methods include:

  • Using senior officials of the Central Bank of Iran to help procure hard currency and conduct transactions for the benefit of the Islamic Revolutionary Guard Corps-Qods Force (“IRGC-QF”) and the Lebanese Hizballah.
  • Using exchange houses to hide the origin of funds and to procure foreign currency for the IRGC-QF, through the use of front companies and complex currency exchange networks. Exchange houses and trading companies have also been used to process funds transfers to evade sanctions laws.
  • Using front and shell companies in order to help procure various goods and technologies that enable malign actors to further their illicit activities. Such goods and technologies include printing equipment, dual-use equipment (in support of Iran’s ballistic missile programs), and aviation-related materials.
  • Using deceptive shipping practices to hide the connection between certain business activities and Iran and thus evade US sanctions.
  • Using gold and other precious metals to help facilitate the sale of Iranian oil and other goods, and to further evade the imposition of US sanctions.
  • Using virtual currencies to evade US sanctions.

The Advisory stresses repeatedly that US financial institutions should be particularly cautious at this time, in light of the fact that all sanctions on Iran previously lifted under the Joint Comprehensive Plan of Action (JCPOA) are to be reimposed (or already have been reimposed) following 90- and 180-day wind-down periods. Because of this, FinCEN expects that the evasive, deceptive, and illicit activities described above will increase in frequency. In order to better assist with the detection of deceptive activities, FinCEN provides a set of “red flags” that financial institutions should review and keep in mind when analyzing specific transactions.

Finally, the Advisory reminds US financial institutions of their various obligations under US sanctions laws, the USA Patriot Act, the Comprehensive Iran Sanctions, Accountability, and Divestment Act (CISADA), and other related regulations.

We continue to monitor developments in this area. Please contact the authors of this newsletter or your usual Herbert Smith Freehills contact for more information.

 

Daniel Hudson
Daniel Hudson
Partner, London
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Jonathan Cross
Jonathan Cross
Partner, New York
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David Atia
David Atia
Associate, New York
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+1 917 542 7841

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Filed under Announcements, Corporate Crime, Regulatory Reform, Sanctions and Money Laundering, Sector Updates by Herbert Smith Freehills, US

Navigating data privacy laws in multi-jurisdictional investigations

Our investigations team has published an article for Thomson Reuters Regulatory Intelligence looking at the impact of data privacy laws on investigations in Asia. This also summarises the potential impact of Europe’s GDPR and what else is on the horizon trans-nationally. Continue reading

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Filed under Announcements, Asia, China, Corporate Crime, Hong Kong, Investigations, Sector Updates by Herbert Smith Freehills

FATCA Update: First-ever conviction signals increased enforcement risk

The former CEO of Saint Vincent-based Loyal Bank pleaded guilty and was convicted on 11 September of conspiring to defraud the US by failing to comply with the Foreign Account Tax Compliance Act (FATCA). This is the first conviction obtained by the US Department of Justice (DOJ) since FATCA came into effect in 2014 and was the result of a sting operation. The FBI worked with the US Internal Revenue Service (IRS), the US Securities and Exchange Commission, the City of London Police, the UK Financial Conduct Authority and the Hungarian National Bureau of Investigation. The offender’s sentencing date is yet to be scheduled and he is facing a maximum of five years in prison.

This conviction, on the heels of a US governmental report critical of the IRS’s limited use of FATCA, could mark a more active enforcement environment going forward. Under FATCA, certain foreign financial institutions (FFI) must report US citizens’ account information to the IRS and the US has intergovernmental agreements with Hong Kong and other Asian jurisdictions to facilitate this. The DOJ has indicated that financial institutions in Hong Kong and Singapore are on the US authorities’ priority list in terms of FATCA enforcement. As such, both US citizens and financial institutions in the region should remain cognisant of FATCA’s requirements and ensure compliance. For our full briefing on the conviction, please click here.

 

Kyle Wombolt
Kyle Wombolt
Head of Global Corporate Crime & Investigations Practice, Hong Kong
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+852 2101 4005
Robert Hunt
Robert Hunt
Partner, Hong Kong
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+852 2101 4128
Pamela Kiesselbach
Pamela Kiesselbach
Senior Registered Foreign Lawyer (England and Wales), Hong Kong
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+852 2101 4032
Jeremy Birch
Jeremy Birch
Senior Associate, Hong Kong
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Filed under Announcements, Bribery and Corruption, Hong Kong, Investigations, Sanctions and Money Laundering, Sector Updates by Herbert Smith Freehills, US

SFC issues further reminder regarding paragraph 12.5 self-reporting obligation

The SFC has issued a circular to remind intermediaries to comply with the self-reporting obligation under paragraph 12.5 of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission. Licensed corporations and registered institutions should review their incident escalation and reporting mechanisms as soon as possible and consider whether any enhancements are required.

Paragraph 12.5 requires intermediaries to report to the SFC immediately upon the happening of (among other things) any material non-compliance with any law, rules, regulations and codes administered by the SFC or any such suspected non-compliance.

The SFC has recently observed that some intermediaries have not promptly reported to the SFC non-compliance with various legal or regulatory requirements, such as suspected unlicensed dealing activities, non-compliance with the suitability requirements and order recording requirements under the above code of conduct, and breaches of record keeping rules.

The SFC reminds intermediaries that:

  • registered institutions (although primarily regulated by the HKMA) are required to fulfil their reporting obligation by making the report directly to the SFC, in addition to reporting to the HKMA;
  • all material non-compliance referred to under paragraph 12.5 should be reported as soon as practicable upon identification, ie, not after the intermediary has completed its investigation, obtained legal advice or taken remedial action;
  • failure to comply with the reporting obligation may result in disciplinary action against intermediaries and their management.

The SFC also reminds intermediaries of:

William Hallatt
William Hallatt
Head of Financial Services Regulatory, Asia, Hong Kong
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Hannah Cassidy
Hannah Cassidy
Partner, Hong Kong
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+852 2101 4133

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Filed under Announcements, Hong Kong, Regulatory Reform, Sector Updates by Herbert Smith Freehills

PRIVILEGE NO DEFENCE TO NOTICE REQUIRING PRODUCTION OF CLIENT’S PRIVILEGED DOCUMENTS TO REGULATOR

The High Court has held that an audit client could not withhold documents on grounds of privilege when responding to a notice requiring the production of documents in connection with an investigation into the auditor’s conduct: The Financial Reporting Council Ltd v Sports Direct International Plc [2018] EWHC 2284 (Ch).

The decision suggests that, where privileged documents are provided to a regulator for the purposes of an investigation into the conduct of a regulated person, and the privilege belongs to a client of the regulated person, there is no infringement of the client’s privilege. Accordingly, the fact that documents are subject to a client’s privilege will not justify a refusal to provide the documents to a regulator in response to a demand under its statutory powers, whether or not the statute can be taken to override legal professional privilege.

The decision also confirms (though it was not actually in doubt) that non-privileged documents do not become privileged merely by being attached to privileged lawyer/client communications for the purpose of giving or obtaining legal advice.

For our full briefing on the decision, please click here.

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Filed under Announcements, Regulatory Reform, Sector Updates by Herbert Smith Freehills, UK Regulations

Thailand’s new anti-corruption law targets foreign corporates

Thailand is the latest Asian jurisdiction to strengthen its anti-graft legislation. India, Japan, Singapore, Malaysia, Vietnam and China have all introduced anti-bribery legislation this year. The net effect is an uptick in the local enforcement risk for corporates operating in the region. Continue reading

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Filed under Announcements, Asia, Bribery and Corruption, Corporate Crime, Sector Updates by Herbert Smith Freehills, Thailand

SFC publishes AML/CFT inspection findings and urges intermediaries to ensure compliance

The Securities and Futures Commission (SFC) issued a circular on 31 August 2018 highlighting both deficiencies and good practices observed in relation to anti-money laundering and counter financing of terrorism (AML/CFT) compliance by licensed corporations (LCs) and associated entities (AEs). The observations were made over the past year from the SFC’s review of AML/CFT measures, policies, procedures and controls (AML/CFT systems) belonging to 13 LCs during thematic inspections and around 270 LCs during routine inspections. This follows on from the SFC’s circular issued on 26 January 2017, setting out its observations relating to AML/CFT compliance from inspections conducted in 2016 (see our earlier bulletin here).  Continue reading

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Filed under Announcements, Bribery and Corruption, Corporate Crime, Hong Kong, Sanctions and Money Laundering, Sector Updates by Herbert Smith Freehills

Stock Connect Northbound Investor ID Model set to launch on 17 September 2018

Late last month, the Securities and Futures Commission (SFC) announced that agreement had been reached with the China Securities Regulatory Commission (CSRC) to implement the investor identification model for Stock Connect Northbound trading (NB Investor ID Model) on 17 September 2018. This will apply to Northbound trading under both the Shanghai-Hong Kong Stock Connect and the Shenzhen-Hong Kong Stock Connect.  Continue reading

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Filed under Announcements, Asia, Banking, China, Hong Kong, Regulatory Reform, Sector Updates by Herbert Smith Freehills