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member law firms around the world. In accordance with the common terminology used in professional

service organisations, reference to a "partner" means a person who is a partner, or equivalent, in such

a law firm. Similarly, reference to an "office" means an office of any such law firm.

© 2015 Baker & McKenzie LLP

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Update on Trade Sanctions

Amber Road “Complying with Export Controls”

5th. November 2015

© 2015 Baker & McKenzie LLPDM Ref:

Why Do We Care About Trade Compliance?

• Prison sentences for individuals

e.g. up to 10 years in UK, and 20 years in US

• Extradition (e.g. Tappin)

• Significant fines for companies (e.g. $8.9 bn fine on BNP Paribas for Iran

payments )

• Denial of export privileges (e.g. licences withdrawn or not renewed)

• Forfeiture of goods

• Debarment from government contracting

• Listing in the US as a restricted party (e.g. for association with terrorist or

WMD proliferator)

• Reputational harm and CSR concerns (e.g NSN in Iran)

• Management time\legal expenses

• Enforcement is on the rise!

Sanctions


EU and US Sanctions Targets

4

Afghanistan

Lebanon

Burma

DR Congo

Egypt

Tunisia

Libya

EritreaSomalia

Guinea and

Guinea-Bissau

Sudan and

South Sudan

Iraq

Ivory Coast

Iran

Liberia

Belarus

North Korea

Syria

Zimbabwe

China

SFRYArmenia and

Azerbaijan

Cuba

USA (EU/Cuba

Blocking

Measures)

Cyprus*

Fiji*

Haiti*

Sri Lanka*

Venezuela

Vietnam*

Saudi Arabia

Central African

Republic

Russia

Ukraine

UAE

Kuwait

Yemen

Crimea

& Sevastopol

EU and US

EU only

US only (*arms embargo only)

US Anti-Boycott only


Sanctions Toolbox

Comprehensive

Anti-circumvention / Facilitation / Causing violations

Individuals / Entities Goods / Technology Services Investment

Asset freeze /

Blocked property

Making available /

Dealing

Funds transfer

Arms / Dual-use

Sanctioned country

origin

Other

Finance

Insurance

Brokering

Sectors

5


EU Sanctions – Legal Basis

• EU looks to follow so-called “smart” sanctions policy

• Mostly follow UN multilateral regime

• Some unilateral regimes that go beyond UN measures in whole

(e.g., Syria, Zimbabwe) or in part (e.g., Iran)

• EU sanctions regulations directly applicable in all 28 EU

Member States

• Licensing, penalties and enforcement left to each Member

State

• Sanctions apply independently of (albeit often overlap with)

export controls


Designated Persons Programmes and TI Rankings

7

Country UN EU US

TI 2014 CPI Ranking

(total 175 countries)

Afghanistan ■ ■ ■ 172

Belarus ■ ■ =119

Myanmar/Burma ■ =156

DR Congo ■ ■ ■ =154

Central African Republic ■ ■ ■ =150

Cuba ■ 63

Egypt ■ =94

Eritrea ■ ■ =166

Republic of Guinea ■ =145

Guinea-Bissau ■ ■ =161

Iran ■ ■ ■ =136

Iraq ■ ■ ■ 170

Ivory Coast ■ ■ ■ =115

Lebanon ■ ■ ■ =136

Liberia ■ ■ ■ =94

Libya ■ ■ ■ =166

North Korea ■ ■ ■ =174

Russia ■ ■ =136

Somalia ■ ■ ■ =174

South Sudan ■ ■ ■ 171

Sudan ■ ■ ■ 173

Syria ■ ■ =159

Tunisia ■ 79

Ukraine (incl. Crimea and Sevastopol) ■ ■ =142

Venezuela ■ =161

Yemen ■ ■ ■ =161

Zimbabwe ■ ■ =156

Balkans and ICT of Yugoslavia ■ N/A

Al-Qaida and Terrorists ■ ■ ■ N/A


Country Arms Embargo Additional restrictions

Armenia X (OSCE)

Azerbaijan X (OSCE)

Belarus X Internal repression

Burma/Myanmar X Internal repression

Central African

Republic

X

China X (Partial)

Crimea &

Sevastopol

~ Import ban and related services; investment ban; goods and technology for use in transport, telecommunications,

energy and the prospection, exploration and production of oil, gas and mineral resources in Crimea and Sevastopol

and related services; services related to tourism activities

DR Congo X

Eritrea X

Iran X Nuclear; dual-use; internal repression; oil/gas equipment; petrochemical equipment; graphite and metals; naval and

shipbuilding equipment and services; ERP software; bank notes/coinage; insurance

Iraq X Cultural property

Ivory Coast X Internal repression

Lebanon X

Liberia X

Libya X Internal repression; restrictions regarding crude oil illicitly exported from Libya and vessels involved

North Korea X Nuclear; dual-use; luxury goods

Russia

X

Dual-use for military use/end-user; goods and technologies for the oil industry (for use in oil exploration and

production in waters deeper than 150 metres, oil exploration and production in the offshore area north of the Arctic

Circle, or projects that have the potential to produce oil from resources located in share formations by way of

hydraulic fracturing) in Russia, its Exclusive Economic Zone and Continental Shelf) and related services; access to

capital markets

Somalia X Power to inspect vessels in certain circumstances

South Sudan X

Sudan X

Syria ~ Oil/gas items; jet fuel and additives; telecommunications/information security items; electricity sector; insurance

services; internal repression; luxury goods; gold, diamonds and precious metals

Zimbabwe X Internal repression

EU Embargoes, Product and Sector-Specific

Controls

8

Jurisdiction


Who Must Comply with EU Sanctions?

• EU sanctions measures typically apply to:

• Any entity incorporated in an EU Member State and its EU and non-EU

branches

• Any entity incorporated outside the EU, but only in respect of any business

conducted in the EU

• Any directors, officers, employees, agents, etc. located in the EU

(irrespective of nationality)

• Any directors, officers, employees, agents, etc. that are nationals of an EU

Member State (even if located outside the EU)


Who Must Comply with U.S. Sanctions?

• U.S. Sanctions

• Apply to “U.S. Persons”

• Entities organized under U.S. laws and their non-U.S. branches

• Employees (regardless of nationality) of above entities

• Individuals and entities in the United State

• U.S. citizens and permanent resident aliens (“Green Card” holders) wherever located or employed

• Non-U.S. Persons may be subject to U.S. jurisdiction if they cause prohibited transactions to occur in whole or in part in the United States or anywhere by U.S. Persons

• Separately incorporated foreign subsidiaries of U.S. companies are NOT U.S. Persons


Consider…EU/US nationals

working in

Russia for a

Russian Corp?

Transaction

denominated in

USD?

Designated Parties


DP / SDN Controls

• EU and U.S. list-based sanctions programmes: EU Designated Parties (“DPs”) and U.S. Specially

Designated Nationals (“SDNs”)

• EU sanctions on DPs:

• Prohibition on “making available” “funds” or “economic resources”, directly or indirectly, to or for

the benefit of DPs

• Freeze on funds and economic resources belonging to, owned, held or controlled by DPs

• Administered and enforced by each EU Member State

• U.S. sanctions on SDNs:

• Prohibition on U.S.-Person dealings with SDNs, directly or indirectly, and any entity 50% or more

owned by one or more SDNs, or “facilitation” of such dealings

• Requirement to block SDN property and interests in property

• Administered and enforced by Office of Foreign Assets Control (“OFAC”)

• Prohibition under EU and U.S. sanctions in relation to acts of circumvention/facilitation

• Non-U.S. Persons may also have liability for causing a U.S. Person to violate sanctions (e.g., U.S.

dollar payments, ordering goods from United States for supply to SDNs)


Dealings with Affiliates of DPs / SDNs

• EU: Assess whether counterparty is majority owned or controlled by one or

more DPs; test is complex and subject to EU Member State interpretation

• U.S.: Assess whether counterparty is 50% or more owned by SDNs

• Screening of counterparty’s name only would not address risk of dealing with

non-designated entity that is owned/controlled by DP/SDN

• Other forms of indirect dealings may be caught (e.g., distributor relationship)

Customer

Company

Non-DP ShareholderDP Shareholder

60% 40%


Making sense of screening

• US, EU and Member State laws do not contain specific obligations on how to

screen

• However, EU law does contain defence of “did not know nor had reasonable

cause to suspect” that you were dealing with DP

• Best practice is

• a risk-based approach

• screen at least directors, shareholders and managers of direct

counterparty, and check for management agreement

• check all available resources, but do ask counterparty

• if this raises any “red flags”, need to discharge those “red flags”

• if no “red flags”, no obligation to push to next level, but apply risk analysis

(e.g. most important JV or business deal? Leave no stone unturned)

• record and keep screening DD to prove that you did it


Practical application

DP?

Russian Co B Finnish Co

Cypriot Nominee Co Cypriot Nominee CoCypriot Nominee Co Russian non-DPs

Russian Counterparty C

100%

25%

50%

25% 25%

25%

C L I E N T S U P P L I E R

Russian Co A

50%


Practical application

• Client asks Russian counterparty who owns it

• told 4 Cypriot Nominee companies and various non-DP Russians

• no other “red flags” ( and can’t see “above the line)

• no “reasonable cause to suspect” dealing with a DP?

• Client does own DD, but doesn’t ask Russian counterparty who owns

it, and stops with 4 Cypriot Nominee companies

• Is that proper DD?

• Client told DP in fact still owns Russian counterparty and thinks above

and below the line are part of the same group


How to optimize sanctions position

• Ensure foreign operating companies are locally incorporated

• What about incorporation of all relevant parties in the EU or US?

• Consider having variable decision making routes (to avoid EU or US

persons being a block)

• Have an effective risk-based screening system, based around client

intake

• Consider keeping “back office” structures out of the US (and if possible

the EU)

• Consider finance structures, have non-US banks and non-USD

capabilities in reserve

• Make sure all contracts anticipate sanctions. Force majeure wording

usually not enough. Have detailed provision that anticipates sanctions,

and works through position during their pendency

Baker & McKenzie LLP is a member firm of Baker & McKenzie International, a Swiss Verein with member law firms around the world. In accordance with the common

terminology used in professional service organisations, reference to a "partner" means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an

"office" means an office of any such law firm.

© 2015 Baker & McKenzie LLPAn

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Part III: Russia and Iran

Russia in Focus


22

Includes:

EU, US, Japan, Canada, New Zealand, Australia, Iceland, Moldova, Georgia, Norway, Switzerland,

Liechtenstein, Albania, Montenegro and Ukraine.

Geographic Reach | Not just a US and EU issue…


Triggers and Escalation

Escalation from a designated person regime to significant sectoral measures

over a very short time period

Early Feb 2014: Ukraine Revolution

Late Feb 2014: Military intervention in Crimea Early March 2014: Limited DP

Controls/SDNs; US BIS/DDTC stop issuing licences to Russia

Feb 2014: Limited US travel bans

and EU MS agree on limited

suspension of licences to Ukraine

March 2014: Crimean referendum; Putin signs a bill to annex Crimea

April 2014: Beginning of protests in eastern Ukraine

Late March 2014: Additional EU DPs and SDNs

July 2014: MH17 shot downJuly 2014: EU and US introduce

sectoral sanctions and product controls

April/May 2014: Significant new EU DPs and SDNs

23


EU Restrictions | Russia/ Ukraine

24

• Designated Party controls: 166 individuals and 37 entities

• Financial controls:

• Dealings in certain financial instruments issued by, and provision of new debt/credit of >30

days maturity to, certain listed financial, oil and military parties (and related entities)

• Energy sector:

• Prior licensing requirement for certain oil and gas items (Annex II); cannot be granted for

deepwater, Arctic, shale oil projects

• Also captures related services: technical assistance, brokering, financial

assistance/financing

• Prohibition on provision of drilling, well testing, logging and completion services, and

supply of specialised floating vessels, regarding deepwater, Arctic, shale oil projects

• Export-related controls:

• Any dual-use items to military end-user/end-use or to certain listed entities

• Arms embargo

• Related services

• Circumvention


EU Restrictions | Crimea and Sevastopol

25

• Restrictions on investment in property/entities in Crimea or Sevastopol

• Restrictions on certain services in infrastructure in the following sectors:

energy; prospection, exploration and production of oil/gas/mineral resources;

transport; telecoms

• Prohibition on export/sale/transfer/supply to entity/for use in

Crimea/Sevastopol of certain listed items related to these sectors (another

Annex II, very broad) and related services

• No prohibition if “no reasonable grounds to determine” for use in Crimea

• Due diligence paramount

• Consider contractual wording (beware position within Russia)

• Prohibition on import into the EU of “goods originating” in Crimea/Sevastopol

(and related services)

• Ban on services relating to tourism activities

• Circumvention


Further EU and US Russia Sanctions Developments

26

Aug 2014 Sep 2014 Dec 2014 Jun 2015 Jul 2015 Aug 2015 Sep 2015

US impose significant new export controls in relation to Russia

EU and US significantly increase Russian sectoral sanctions and export controls

• EU significantly increases Crimea sanctions and issues amendments to clarify Regulation 833/2014 on Russia sanctions

• US imposes comprehensive sanctions against Crimea and US Congress passes Ukraine Freedom Support Act

EU extends Russia sanctions under Regulation 833/2014 to 21 January 2015 and EU

• US BIS Announces Addition of Parties to Entity List

• EU extends asset freezes under Regulation 269/2014 to 15 March 2016

US impose significant new export controls in relation to Russia

US BIS adds Yuzhno Kirinskoye Field to Entity List


EU and US | A Coordinated Approach

27

Restricted party

controls

Sectoral Sanctions

Export/product

Controls

• US SDNs: blocked

• EU DPs: broad restrictions

• Not blocked; more targeted restrictions

• Finance: dealings in new debt/new equity

• Energy, Defence

• Russian Entity List parties; Russian Oil Industry End-uses

/ key equipment (EU Annex II)

• Military end-user/end-use and heightened dual-use

controls; “High technology” items

Crimea• US: complete embargo

• EU: extensive restrictions


EU and US | some key differences

28

Restricted party

controls

Sectoral Sanctions

Export/product

Controls

• US listings have a larger impact

• Ownership/control test (EU) vs. entity 50% or more owned

by one or more SDNs (US)

• Similar targets/restrictions but notable exceptions

(Gazprom, Lukoil, Novatek, only targeted specifically by US)

• US controls cover specific fields

• EU controls related services

• EU introduced limited grand-fathering provisions

• US export controls apply extraterritorially

• Licensing requirements are stricter in the EU

Controls regarding

Crimea

• EU has not introduced comprehensive sanctions albeit

restrictions are significant

• US introduced a comprehensive embargo


Russia/Ukraine Sanctions Challenges | 1

29

• But we don’t have a country field for “Crimea”!

• Is my customer Crimean? Ukrainian? Russian?

• Clean counterparty with a bad bank

• Opaque ownership structures

• Holding companies

• Resistance to providing ownership information

• Knowledge standards – “unable to determine” / “no

reasonable cause to suspect” / “no grounds to determine”

• How reliable are end-use certificates?

• How much is enough? De-risking or risk mitigation?

• Negotiating appropriate contractual protection


Russia/Ukraine Sanctions Challenges | 2

30

• Lack of clarity in EU legislation:

• Technical terminology, broad restrictions with limited

definitions and guidance

• NB: Rosneft challenges

• Differences in scope – e.g. trade financing

• Downstream distributors’/resellers’ payment terms on resale

• Late payments

• Differences in approach between EU Member States

• Questions as to EU licensing jurisdiction

• Managing risk with sanctions outlook unclear


Upcoming Sanctions-Related Milestones

31

31 December

2015

1 January

2016

31 January

2016

6 March

2016

15 March

2016

23 June

2016

Minsk II implementation deadline (currently)

EU-Ukraine DCFTA to enter into force

EU sanctions under Reg 833/2014 to expire*

EU DP controls regarding Ukraine territorial integrity to expire*

EU DP controls regarding misappropriated Ukrainian state funds to expire*

EU sanctions targeting Crimea and Sevastopol to expire*

* unanimity needed to extend; has been extended each time to-date

* US sanctions - continue unless and until revoked


Possible Scenarios Going Forward

32

Escalation – increased

sanctions

Divergence between EU

and US

Continuation of status

quo

De-escalation – sanctions

rollback

Iran De-escalation

Baker & McKenzie LLP is a member firm of Baker & McKenzie International, a Swiss Verein with member law firms around the world. In accordance with the common

terminology used in professional service organisations, reference to a "partner" means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an

"office" means an office of any such law firm.

© 2015 Baker & McKenzie LLPAn

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Iran and the JCPOA

Alison Stafford Powell

Of Counsel | Palo Alto

Ross Denton

Partner | London

Sven Bates

Senior Associate | London


JCPOA | Background

35

14 July 2015: EU/E3+3 (China, France, Germany, Russia, the

UK, the US, and the EU) and Iran announce agreement on a Joint

Comprehensive Plan of Action (“JCPOA”)

Two years of negotiations on:

• Which sanctions to be removed

• Sanctions roll back timeframe

• Iranian commitments

• Inspections, monitoring and verification

• Repeal of measures at UN level


JCPOA | Overview of Sanctions Relief

36

• Comprehensive lifting of all nuclear-related UNSC

sanctions and multilateral and EU/US national

sanctions

• Sanctions relief only commences once IAEA verifies

Iran has implemented its commitments under the

JCPOA (2016)

• Various stages of sanctions relief over course of next

8 years

• If Iran violates the JCPOA, there is a 65-day process

under which UN, EU and US sanctions could “snap

back”

• Pre-existing JPOA Temporary Sanctions Relief still

applicable


JCPOA | Timeline for Sanctions Relief

October 2015

September 2015

July 2015

14 July 2015

19 July 2015

20 July 2015

17 September 2015

29 September 2015

9 October 2015

18 October 2015

2016

October 2023

October 2025

US

State

Department

sends JCPOA

to Congress

19 July 2015

Day 1 of 60-day

congressional

review period

20 July 2015

Day 60 of 60-day

congressional review

period

17 September 2015

12-day deadline for

President Obama to

veto resolution (in

the event Congress

disapproves

JCPOA)

29 September 2015 10-day deadline for

Congress to override

President Obama's veto

9 October 2015

EU

EU endorses

JCPOA

20 July 2015

EU/

E3+3

JCPOA

announced

14 July 2015

UNSC endorse

JCPOA

20 July 2015

Adoption day – October 18 2015 (90 days after UNSC passes resolution to endorse JCPOA)

Implementation Day – 2016

Transition Day – October 2023 (8 years after Adoption Day or earlier subject to IAEA determination)

Termination Day - October 2025 (10 years after Adoption Day)

EU to adopt

regulation to

terminate relevant

Iran sanctions

Date unknown

President to issue

sanctions waivers

Date unknown

EU passes first

legal acts to

implement JCPOA

31 July 2015


UN Sanctions Relief | Overview

38

1. Lifting of all UNSC resolutions relating to Iran’s nuclear

programme

2. UN sanctions relief will principally relate to:

• Removal of all UN nuclear-related sanctions

• E.g., prohibition on supply of nuclear-related materials

and technology; prohibition of related financial services

• Delisting of certain parties related to Iran’s nuclear

programme

3. UNSC resolution maintains restrictions in relation to:

• Sale of arms to or from Iran (5 years)

• Development of ballistic missile technologies (8 years)


EU Sanctions Relief | Key Points

39

1. Adoption Day 18 October – 90 Days after UNSC endorsement

of JCPOA

2. Main EU sanctions relief will not take effect until

Implementation Day in 2016

3. This applies for oil/gas, petrochemical, shipping and financial

services sectors

4. Some sanctions to remain in force until Transition Day in 2023

in arms, nuclear and metals sectors

5. Existing JPOA sanctions relief remains applicable

6. Whole deal subject to satisfactory IAEA inspections being

completed


EU Sanctions Relief | Jurisdiction

40

• Who is subject to EU sanctions?

• Who will benefit from the EU Iran sanctions relief?

EU Entities

(and foreign

branches)

EU

Nationals EU Territory

Business

conducted

in EU


EU Iran Sanctions Background | Rules on Iran

41

• Controls on designated persons

• Separate (extensive) controls generally applicable to dealings

with “Iranian persons, entities or bodies”, defined broadly to

include:

• Iranian state and public bodies

• Any person in, or resident in, Iran

• Iranian registered entities

• Non-Iranian companies that are “owned or controlled directly

or indirectly” by Iranian parties

• Controls also cover exports/imports to, from or for use in Iran

(regardless of whether the counterparty is Iranian)


EU Iran Sanctions Background | Iran Controls (1)

42

• Extensive product controls:

• Dual-use items

• Military items

• Key oil and gas and petrochemicals items

• Internal repression items

• Proliferation-sensitive items

• Naval equipment and technology (and wider shipping controls)

• Graphite and raw or semi-processed metals such as aluminium and steel

• ERP software specifically designed for use in certain sectors

• Bank notes/coinage, precious metals, gold and diamonds – applicable to

dealings with Government/CBI controlled persons

• Controls on related services (technical, financial, brokering)

• Import bans into the EU (oil, gas, petrochemicals-related)


EU Iran Sanctions Background | Iran Controls (2)

43

Iran financial controls

• Ban on transfers and relationships between EU and Iranian banks

• Funds transfer controls (from €10,000)

• Investment controls

• Restrictions on provision of insurance and reinsurance

• Restrictions on sale/purchase of public bonds

Designated party controls

• Extensive lists of designated parties

• Wide range of individuals, entities, and bodies targeted

• Almost all Iranian banks are designated (including the Central

Bank of Iran)


EU Sanctions Relief | JPOA

44

• JPOA temporary sanctions relief extended through to 14

January 2016

• Relief from sanctions on:

• Import, transport, and insurance of petrochemicals from Iran

• Raising of thresholds under funds transfer controls

• Trade in precious metals


EU Sanctions Relief |

Product Controls and Financial Services

45

• From Implementation Day, JCPOA contemplates

sanctions relief for:

• Finance, banking, and insurance measures

• including funds transfer controls

• Oil, gas, and petrochemical sectors

• Shipping, shipbuilding, and transport sectors

• Banknotes and coinage

• Software

• Human rights-related sanctions are expected to

remain in place

• Arms restrictions / missile proliferation sanctions

remain in place until Transition Day

• Same for raw and processed metals restrictions


EU Sanctions Relief | Delisting of DPs

46

From Implementation Day (2016):

Attachment 1 to Annex II of JCPOA sets out delisting of:

• Persons, entities, and bodies designated due to their

involvement in the Iranian oil and gas, financial, and shipping

sectors

• Delisting includes Iranian banks and financial institutions, and

the Central Bank of Iran

From Transition Day (2023):

Other parties designated due to nuclear activities or human rights

violations will not be delisted until Transition Day

Compliance Tips


Due diligence / screening on counterparties

• Clearly documented standardized process for screening against sanctions lists

• At least screen against information in your possession and in public domain

• Risk-based assessment of counterparties, shareholders and other third parties to screen

Determine which future exports/reexports may require licenses

How can you comply?


How can you comply?

Contractual protections

• Obtain certifications/representations/warranties from counterparties

• Require screening by distributors and agents

• Review option to terminate or suspend contracts

Stay up-to-date on sanctions developments

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