April 14 2011 – This Client Alert reviews further EU developments involving the imposition of trade and financial sanctions against Libya. This Alert follows on from our Client Alert earlier this week covering the UN and US sanctions and initial developments in the EU, UK, Switzerland and Canada.
On 3 March 2011, the EU published Council Regulation 204/2011 (the “EU Regulation”), which imposes trade and financial sanctions against Libya. The EU Regulation was effective immediately from the date of its publication. It implements UN Resolution 1970 (“Resolution 1970”), adopted on 26 February 2011, as well as additional unilateral measures adopted by the EU under the Council Decision of 28 February 2011 (the “Decision”). We set out below an overview of the key measures provided for by the EU Regulation, as well as some brief comments on the UK’s measures against Libya.
Application of the EU Regulation
The obligations within the EU Regulation apply to:
● any act within the territory of the EU (including its airspace), or on board any aircraft or vessel under the jurisdiction of an EU Member State;
● any EU Member State national, whether inside or outside the territory of the EU;
● any legal person, entity or body incorporated or constituted under the law of an EU Member State (including its non-EU branches); and
● any legal person, entity or body incorporated outside the EU, but only in respect of any business done in whole or in part within the EU.
Designated Party Controls
I. Funds Freeze
Under Article 5(1) of the EU Regulation, all funds and economic resources owned, held or controlled by certain designated parties are frozen. As well as those individuals identified by Resolution 1970 (Colonel Muammar Qadhafi (“Qadhafi”) and several of his children), the EU Regulation designates a further twenty individuals who are seen as closely associated with Qadhafi and/or have been involved in the violence against demonstrators in Libya.
It should be noted that the equivalent provision in the UK measure that initially implemented Resolution 1970, the Libya (Financial Sanctions) Order 2011 (the “UK Order”), requires the freezing of funds and economic resources owned or controlled “directly or indirectly” by designated persons. It is unclear whether the EU Regulation is intended to extend to indirectly owned funds and economic resources as well.
Accordingly, any person (especially financial institutions) who holds any assets of designated parties should take prompt action to freeze these, and report the freezing to the appropriate national authority.
II. Making Funds or Economic Resources Available
The EU Regulation (at Article 5(2)) also prohibits the making available of funds or economic resources, directly or indirectly, to or for the benefit of all designated persons. Under the EU Regulation, “funds” are defined very broadly as any kind of financial asset or benefit, including, amongst others, cash, deposits with financial institutions, stocks and shares, debt instruments, dividends, guarantees, interest, credit, letters of credit and any documents evidencing an interest in funds or financial resources. “Economic resources” include any assets that are not funds but that may be used to obtain funds, goods or services. The EU Regulation (at Article 11(2)) establishes a knowledge defence, whereby no offence will be committed where a person does not know and has no reasonable cause to suspect that their actions would infringe the prohibition on making funds or economic resources available to or for the benefit of designated persons.
This prohibition is potentially very broad. In particular, one area of uncertainty is the extent to which dealings with Libyan state-owned enterprises could fall within the scope of the prohibition on the basis that it indirectly benefits designated parties, including Qadhafi. Indeed, Guidance from HM Treasury, which accompanied the UK Order, highlighted that Qadhafi and his family ultimately control many Libyan state enterprises. That said, neither the UK Order nor the EU Regulation explicitly extends the freezing obligation or the prohibition on making funds or economic resources available to all state-owned or controlled entities in Libya. The HM Treasury Guidance merely indicates that this issue should be considered, on a case by case basis, in companies’ due diligence of transactions involving Libyan state-owned assets. Accordingly, in dealings with Libyan counterparties (and in particular with state-owned companies), companies should carry out due diligence to determine whether the counterparty in question is in fact directly or indirectly owned or controlled by Qadhafi, or another designated person. If it is, there is a risk that by dealing with the counterparty (and providing it with funds or economic resources), the company could be deemed to have reasonable cause to suspect the funds or economic resources are being made available indirectly for the benefit of a designated person.
One of the key exemptions under this offence is in relation to payments due under contracts concluded before the date of the relevant party being designated provided that the payments are made into a frozen account. Provision is also made by the EU Regulation for a licence to be sought for payments that would otherwise be prohibited, but such licences may only be granted where certain strictly limited conditions are met.
There is an anti-circumvention provision in place in respect of the offences described in sections (i) and (ii), prohibiting those caught by the EU Regulation from knowingly and intentionally participating in activities which circumvent the offences. The anti-circumvention provision could catch, for example, EU companies transferring business that would be prohibited under the EU Regulation to non-EU affiliates.
III. Travel Ban
The Decision imposes a travel ban, requiring EU Member States to prevent those individuals designated by Resolution 1970, as well as those designated unilaterally by the EU, from entering their territory.
The EU has also implemented the arms embargo required by Resolution 1970. The EU Regulation additionally prohibits the sale, supply, transfer or export, directly or indirectly, of any equipment that might be used for internal repression to any person, entity or body in Libya or for use in Libya. The list of the internal repression equipment includes, amongst other items, certain firearms, tear gas, anti-riot shields and so on. However, the list has a broader relevance to certain industry sectors, as it also includes items such as devices designed to detonate explosions (including firing sets, detonators, igniters, boosters and detonating cord), which are commonly used by the energy and extractive sectors. The provision of technical and financial assistance in respect of both military and internal repression items is also prohibited.
The product controls apply irrespective of where the product in question is to be supplied from: for example, an EU company supplying items from a non-EU Member State is still bound by the measures in the EU Regulation. An anti-circumvention provision is included in respect of these product controls as well.
It should also be noted that standard export controls (for example, the EU Dual-Use Regulation 428/2009) will continue to apply. These are likely to be monitored and enforced more stringently as a result of the situation in Libya. It is unlikely that new licences will be granted, and a number of authorities have already been revoking existing licences.
EU Member States are now moving to implement national controls in relation to the administration of the UN and EU sanctions, including licensing, enforcement and penalties. It is down to each individual Member State to determine maximum penalties for violations. Whilst legislation is still in the process of being adopted in certain Member States, the following are examples of penalties that may be imposed:
In the UK, breach of the financial sanctions may be punished by up to 7 years’ imprisonment and/or an unlimited fine; breach of the product controls may incur up to 10 years’ imprisonment and/or an unlimited fine.
In Germany, breach of an arms embargo may incur up to 15 years’ imprisonment. The maximum fine that may be imposed on a legal entity is €1 million, or the value of the benefits obtained by breach of the sanctions (whichever is the higher).
In the Netherlands, the maximum penalties include a prison sentence of up to 6 years. Alternatively, a fine of €76,000 (or up to €760,000 for legal persons if the lower amount is not considered sufficient punishment for the violation) may be imposed.
In Spain, breach of financial sanctions by a company may incur a fine of up to the highest of: (i) €1.5 million; (ii) 5% of the net equity of the company involved; or (iii) twice the value of the relevant transaction.
It is important for all companies active in Libya to conduct a risk assessment in respect of the EU Regulation’s application to their business. In particular, due diligence should be conducted on counterparties in order to ensure that the business is not dealing directly or indirectly with designated persons. Further, an assessment of products intended for Libya should be undertaken to ensure that there is no breach of the product controls and arms embargo.
It is crucial for organisations to take swift action to ensure full compliance with these measures. Breach of these sanctions can undoubtedly lead to significant reputational damage, as well as legal exposure under national law.
Because additional sanctions are possible in the near future, Baker & McKenzie is monitoring this situation closely. In this context, all potential transactions and activities involving Libya should be carefully reviewed for compliance with the Libya sanctions in each relevant jurisdiction.
The foregoing is intended only to provide a general overview of the new Libya sanctions. Please do not hesitate to contact us if you have any questions about how these changes might affect your company or if you require advice on any specific transactions or plans.