The financial state sanctions are one of the most popular agendas recently. They have established some rules effecting the international payment and guarantee methods deeply with the regulations especially on money laundering, blocking funds for terrorism, exchange control through some of the economic and politic purposes, account-freezing, blockage currencies.
This review provides a perspective for you on the legal issues which can arise if you are subjected to such mandatory rules in a 3rd country, not whether the rules applied directly are legitimate or whether they are applicable.
For instance, let’s suppose that the USA imposes some sanctions for some specific individuals or organizations. And you are expecting a contractual payment in USD from The UK, Germany or Czech Republic. Then you learn through a notification from an English/German/Czech Bank that you are subjected to a secondary sanction since your relation with an organization which USA impose sanctions in Turkey and that the bank refused to make the relevant payment. In this case, is it possible for you to have a right to demand within the scope of the international trade law and the English/German/Czech Laws? I tried to provide some explanations for the questions such as the consequences of those demands to the best of my knowledge and studies.
First of all, I want to make it clear that a widely-known opinion is not correct on this issue. The USA and EU renounced to impose an old-fashioned sanction for all kinds of individuals and institutions from other countries. As a matter of fact, they determined that the sanctions are not humanitarian, the sanctions go beyond their purposes and they strengthen the potential of the administrations subjected to them. Instead, they started to impose new sanctions named as “smart sanctions” for specific institutions and organizations. In other words, issues on financial sanctions are the rules targeting the natural and legal entities especially the executive public officials of the relevant state and aiming to harm the financial benefits of them intentionally, forbidding the commercial relationships with the target states or individuals and blocking their assets while the sanctions are effective. Within the scope of those smart sanctions, some secondary sanctions are imposed for other individuals and organizations which are in a relationship with the individuals and organizations subjected to the sanctions. Those secondary sanctions are called as “mandatory rules”.
How does the USA have a right to stop the financial transactions through those mandatory rules?
During the international banking transactions, some other transactions which we are not aware of are carried out through some correspondent/intermediary banks or the accounts of the correspondent/intermediary banks in order to complete the transactions, record the accounts and commitments properly and make the payments in terms the banks. Especially for the transactions where the USD is used, an American bank or a correspondent account established in USA is definitely included in the payment transaction. At this point, the USA deems it has a right to intervene to the transactions where the USD is used in the correspondent/intermediary accounts which were established there and it enables the banks/financial institutions comply with the sanctions automatically by threatening to freeze the correspondent/intermediary accounts of the banks and financial institutions continuing the transactions in relation to the individuals and organizations in the list of sanctioned individuals and organizations even if it does not intervene directly.
In this respect; you can frequently see cases where the financial products such as EFT, credit/interest transactions, letters of guarantee, letters of credit, payment against documents cannot be utilized or utilized inefficiently.
When the question I asked at the beginning is considered, there are some cases determining that the relevant rules can be effective under specific circumstances in addition to the cases which are not effective for the rules applied directly for the 3rd countries by the judicial organs if we are subjected to such cases in a 3rd country. I would like to give two example decision made by the British Courts related to this issue:
Firstly, the High Court of Justice (England) generally adopts an attitude not to apply the intervening rules outside of the country by emphasizing the territoriality of those rules. In other words, it indicates that the courts do not take kindly to make the intervening rules of the 3rd countries effective generally. For instance, this attitude can be explicitly observed through the case of Libyan Arab Foreign Bank v. Bankers Trust Co. (1989) QB728. The British Courts has not make the legal decision freezing the Libyan assets which are under control of the US President, US Banks and their branches outside of the USA effective and has decided that this Presidency Legal Decision is not a justified reason for the London branch of the US Bank not making a payment to its customer within the scope of the contract subjected to the British Laws.
However, the decision of the High Court of Justice made in October 2019 on Lamesa Investments Limited v Cynergy Bank Limited  EWHC 1877 (Comm) has removed the effect within the scope of the foregoing decision and brough it to the attention of all of our international tradespeople. Let’s review this decision:
The owner of the Complainant Lamesa Investments Ltd. is Victor Vekselberg and the company was established in Southern Cyprus Greek Region. It made a “Service Agreement” with the Defendant British Company, Cynergy Bank on December 19th 2017. In accordance with this agreement, Cynergy Bank borrowed 30 Million € from Lamesa Investments Ltd. Against this debt, on June 21st and December 21st of each year, an interest payment will be made by Lamesa Investments Ltd.
According to the Article 9.1. of the agreement; it was stated that if Cynergy Bank does not make the necessary payments, they will not become overdue/it will not breach the agreement as required by the applicable laws for the agreement and in accordance with the intervening rules, regulations and the court order. The agreement was subjected to the British Laws.
On April 6th 2018, Mr. Vekselberg was added to the list of “Specially Designated Nationals” (“SDNs”) by OFAC which is the US institution authorized for sanctions and became a “blocked person” within the scope of the sanctions imposed to Russia due to Ukraine. A great amount of transactions of Cynergy Bank was operated within the scope of the correspondent accounts in JP Morgan through USD, and it provides services for its retailer clients. Within this frame, it detected the risks for secondary sanctions for its activities and stopped to pay interest in accordance with the Article 9.1. of the agreement.
Even though Lamesa Investments Ltd. insisted on receiving payments, Cynergy Bank avoid making them in order not to be subjected to the secondary sanctions of the USA. The case was brought to trial.
In accordance with the decision, the Court dismissed the case by deciding that the parties were aware of the fact that they have a risk to be subjected to some sanctions when preparing the agreement and that the sanctions are mandatory rules preventing the payments of the interests by considering different discussions on the Article 9.1. of the service agreement and after emphasizing that the contractual obligations cannot be breached by basing the British Laws on a laws of a foreign country.
Whether the abovementioned court decisions are fair is a different issue. However, my suggestion for you, my dear readers, in order to be ready for unexpected cases is that you should consider the conditions and records related to the sanction on the financial instruments you utilize and the financial agreements you made. This is because, decisions of the High Court of Justice (England) are legal precedents referred by the courts of other countries and arbitral committees.
Secondly, the judges can deem the transactions made by the Banks and Financial institutions legally acceptable due to the sanctions by considering the conditions of the tangible disputes related to the 3rd country in a relation with the country imposing sanctions.
My Suggestions and Conclusion:
- You should not enter into a commercial activity with the individuals, groups, businesses and organizations subjected to the sanctions imposed by both USA and EU.
- You should be aware of the conditions of the agreement you signed with the financial institutions related to the international mode of payment.
- It is almost impossible for the state banks to make payments to the target state or intermediaries and carry out the transactions for the benefit of them since it is binding in terms of the banks related to the individuals and organizations included by the list of SDNs and subjected to the sanction decisions. In order not to get into this position, you should definitely carry out the necessary investigation and research on the financial sanctions related to your client.
- You should research on the attitudes of the courts of the 3rd state which you have a commercial relationship with through your legal consultants.
- In case your agreement becomes illegal with the rule applied directly after the execution, you should review the clauses related to unexpected cases/force majeure and be ready to apply it.
Personally, I believe that legal accuracy and predictability is crucial for international banking and finance fields. In this sense, I think the rules of the third countries directly applied should have fairly limited effects in terms of contractual disputes for the relevant fields. However, we are in a process where the actions and transactions contrary to my opinions are dominant. Our duty in this process is to work harder and make more politic decisions by collaborating more.