Lista M. Cannon, David M. Harris and Nicola Kelly
March 8, 2011
This client briefing highlights the new sanctions which will affect UK and other EU companies and individuals doing business in or in connection with Libya. International companies with subsidiaries and operations in the UK and EU will also be impacted. The new financial sanctions are focused on designated persons, while the export and import restrictions relate to certain goods and the provision of technical assistance, financing or financial assistance and brokering services. The situation in Libya is constantly evolving, and the EU and UK are reacting quickly to developments through the implementation of sanctions. Companies currently and prospectively conducting business in or in connection with Libya should review the provisions of the new sanctions carefully and analyse the effects it may have on their business activities.
As explained in more detail below, while the restrictive measures set out in the EU sanctions are directly applicable in all Member States, it remains to be seen how the relevant authorities will monitor and enforce the sanctions. The new financial sanctions place a heavy burden on both companies and individuals to report any connections with the designated persons. As a result, it will ultimately be up to financial institutions to establish ownership of accounts and funds as part of their existing internal control procedures and “know-your-client” obligations.
The following is an overview of recent developments in Libya and a summary of certain of the specific sanctions. Given the length and complexity of the EU and the UK legislation, certain prohibitions and exceptions are not covered in this briefing, and it is not an exhaustive analysis of the restrictive measures. Companies and individuals should seek immediate advice if they have any concerns.
I. THE FRAMEWORK AND RECENT DEVELOPMENTS
The obligations for EU companies and individuals came into effect on 3 March 2011 when EU Council Regulation 204/2011 introduced restrictive measures against Libya (the “Regulation”). The Regulation follows the recent United Nations Sanctions on Libya issued on 26 February 2011 by UN Security Council Resolution 1970 (the “UN Resolution”) and an EU Decision 2011/137/CFSP on 28 February 2011. In response to the UN Resolution, the UK implemented: (i) the Libya (Financial Sanctions) Order 2011 on 27 February 2011, which gave effect to certain provisions of the UN Resolution, and (ii) the Libya (Asset-Freezing) Regulation 2011 on 3 March 2011, which sets out provisions relating to the enforcement of the Regulation (collectively referred to as the “UK Statutory Instruments”). On 25 February 2011, the U.S. also issued an Executive Order to introduce new U.S. economic sanctions on targeted Libyan individuals and entities.
On Tuesday 1 March, the UN General Assembly suspended Libya from the Human Rights Council. In connection with the suspension, William Hague, the UK Foreign Secretary, stated: “Libya’s suspension from the Council is unprecedented. But it is absolutely right that a regime that has failed so shamefully in its responsibility to its people and that has been referred to the Prosecutor of the International Criminal Court should not be allowed to continue to enjoy the rights of membership.” In addition, the High Representative for Foreign Affairs and Security Policy/Vice-President of the European Commission, Catherine Ashton, has convened an extraordinary informal Foreign Affairs Council meeting on Thursday, 10 March. The purpose of the meeting is to assess the ongoing developments in Libya and the wider region and prepare for the extraordinary European Council meeting on the Southern Neighbourhood and Libya on 11 March.
It has been reported in the press that as at last Friday, around GBP £2 billion of assets belonging to Libyan interests are believed to have been frozen in the UK so far pursuant to the financial sanctions against the Libyan government.
II. IMPLEMENTATION IN THE UK OF THE REGULATION AND UN SANCTIONS
Although the restrictive measures in the Regulation are directly applicable, Member States are still required to implement legislation detailing the rules on penalties applicable for infringements of the provisions of the Regulation and they are required to take all measures necessary to ensure that they are implemented. The UK has implemented secondary legislation in the form of UK Statutory Instruments in relation to the financial sanctions, but it still needs to implement legislation in relation to the export and import restrictions (explained in more detail below).The UK Foreign & Commonwealth Office has confirmed that following the announcement of the UN arms embargo, all existing UK export licences for goods and technology that could be used for internal repression have been revoked. In considering export licences in the future, the UK will follow the terms of the UN arms embargo.
The UK Statutory Instruments give effect to financial sanctions implemented by the UN and the EU. HM Treasury has explained that the effect of the asset freeze in the UK is not limited to assets held in the name of the individuals listed in the Annexes to the Regulation. It also extends to any funds, other financial assets or economic resources owned or controlled by them, including a state institution or company. HM Treasury warns that the financial sector and other persons should bear in mind that Muammar Qadhafi and his family have considerable control over the Libyan state and its enterprises when deciding how to conduct proper due diligence over transactions involving Libyan state assets. Interestingly, HM Treasury believes that most financial service providers would be able to establish ownership as part of their due diligence. Financial institutions and other bodies and persons in the UK are required to check whether they maintain any accounts or otherwise hold any funds for the individuals identified in the Annexes to the Regulation and, if so, they should provide information to HM Treasury of all funds, other financial assets or economic resources that they have frozen in accordance with the UK Statutory Instruments.
HM Treasury has stated that relevant institutions should bear in mind that there are many variations to the name Qadhafi when conducting their screening and customer due diligence procedures (even though, at the time of writing, these variations are not specifically listed by the UN or EU). The variations include Al Gaddafi, Al-Gaddafi, Al Qadhafi, Al-Qadhafi, Gadafy, Ghaddafi, Gheddafi, Kadhafi, Khadafy, Khaddafi, Al-Gathafi, Al Qadhahafi, and Gadhafi.
The EU Decision provides that, subject to certain exemptions, Member States shall take the necessary measures to prevent the entry into, or transit through, their territories of: (i) persons listed in Annex I to the UN Resolution, and additional persons designated by the Security Council or by the Committee in accordance with paragraph 22 of the UN Resolution as listed in Annex I of the EU Decision; and (ii) persons not covered by Annex I involved in or complicit in ordering, controlling, or otherwise directing, the commission of serious human rights abuses against persons in Libya as listed in Annex II of the EU Decision. The UK has introduced the Immigration (Designation of Travel Bans) (Amendment) Order 2011, which implements the travel bans in the UK.
III. SUMMARY OF THE EU REGULATION
Territorial Scope of the Regulation
The Regulation applies:
- within the territory of the European Union, including its airspace;
- on board any aircraft or any vessel under the jurisdiction of a Member State;
- to any person inside or outside the territory of the European Union who is a national of a Member State;
- to any legal person, entity or body which is incorporated or constituted under the law of a Member State; and
- to any legal person, entity or body in respect of any business done in whole or in part within the European Union.
Summary of Selected Provisions of the Regulation
Export and Import Restrictions
The Regulation, subject to certain exemptions, prohibits the sale, supply, transfer or export, directly or indirectly, of equipment which might be used for internal repression as listed in Annex I of the Regulation, whether or not originating in the European Union, to any person, entity or body in Libya or for use in Libya. It is also prohibited to participate, knowingly and intentionally, in activities the object or effect of which is to circumvent this prohibition. However, the competent authorities in the Member States have the power to authorise the sale, supply, transfer or export of equipment which may be used for internal repression if they determine that such equipment is intended solely for humanitarian or protective use.
It is prohibited to purchase, import or transport from Libya equipment, which might be used for internal repression as listed in Annex 1, whether or not the item concerned originates in Libya.
It is also prohibited, subject to certain exemptions, to provide to any person, entity or body in Libya or for use in Libya:
- directly or indirectly, technical assistance related to the goods and technology listed on the Common Military List of the European Union or related to the provision, manufacture, maintenance and use of goods included in that list;
- directly or indirectly, technical assistance or brokering services related to the equipment listed in Annex I of the Regulation; and
- directly or indirectly, financing or financial assistance related to the goods and technology listed in the Common Military List or in Annex I, including in particular grants, loans and export credit insurance, for any sale, supply, transfer or export of such items, of for any provision of related technical assistance to any person, entity or body in Libya or for use in Libya.
It is prohibited to participate, knowingly and intentionally, in activities the object or effect of which is to circumvent the prohibitions referred to above.
The competent authorities in Member States may authorise the provision of technical assistance, financing and financial assistance related to equipment which might be used for internal repression if they determine that such equipment is intended solely for humanitarian or protective use.
The Regulation states that all funds and economic resources belonging to, owned, held or controlled by the natural or legal persons, entities and bodies listed in Annexes II and III shall be frozen. In addition, no funds or economic resources shall be made available, directly or indirectly, to or for the benefit of the natural or legal persons, entities or bodies listed in Annexes II and III of the Regulation. It is prohibited to participate, knowingly and intentionally, in activities the object or effect of which is, directly or indirectly, to circumvent the financial sanctions referred to above.
The terms “Funds” and “Economic Resources” have been interpreted broadly in the Regulation. “Funds” is defined as financial assets and benefits of every kind, including but not limited to:
- cash, cheques, claims on money, drafts, money orders and other payment instruments;
- deposits with financial institutions or other entities, balances on accounts, debt and debt obligations;
- publicly and privately traded securities and debt instruments, including stocks and shares, certificates representing securities, bonds, notes, warrants, debentures and derivative contracts;
- interest, dividends or other income on or value accruing from or generated by assets;
- credit, right of set off, guarantees, performance bonds or other financial commitments;
- letters of credit, bills of lading, bills of sale; and
- documents evidencing an interest in funds or financial resources.
“Economic Resources” is defined as assets of every kind, whether tangible or intangible, movable or immovable, which are not funds but may be used to obtain funds, goods or services.
There are various derogations and exceptions to the financial sanctions, including but not limited to the following:
- the prohibition on making funds or economic resources available to or for the benefit of the natural or legal persons, entities and bodies listed in Annexes II and III shall not apply to the addition to frozen accounts of: (i) interest or other earnings on those accounts; or (ii) payments due under contracts, agreements or obligations that were concluded or arose before the date on which the natural or legal person, entity or body subject to the financial sanctions has been designated by the Sanctions Committee, the Security Council or by the Council, provided that any such interest, other earnings and payments are frozen in accordance with the Regulation;
- the prohibition on making funds or economic resources available to or for the benefit of the natural or legal persons, entities and bodies listed in Annexes II and III will not prevent financial or credit institutions in the European Union from crediting frozen accounts where they receive funds transferred to the account of a listed natural or legal person, entity or body, provided that any additions to such accounts will also be frozen. The financial or credit institution shall inform the relevant competent authority about any such transactions without delay; and
- the competent authorities in Member States may authorise the release of certain frozen funds or economic resources, or the making available of certain funds or economic resources if, for example, they have determined that the funds or economic resources are necessary to satisfy the basic needs of persons listed in Annex II or III of the Regulation and their dependent family members, including payments for foodstuffs, rent or mortgage, medicines and medical treatment, taxes, insurance premiums and public utility charges or if it is intended exclusively for the payment of reasonable professional fees or the reimbursement of incurred expenses associated with the provision of legal services.
The Regulation states that without prejudice to the applicable rules concerning reporting, confidentiality and professional secrecy, natural and legal persons, entities and bodies shall: (i) supply immediately any information which would facilitate compliance with this Regulation, such as accounts and amounts frozen, to the competent authority in Member State where they are resident or located and shall transmit such information, either directly or through Member States, to the Commission; and (ii) cooperate with that competent authority in any verification of this information.
This article was prepared by Lista M. Cannon (Partner, email@example.com or +44 0 20 7832 3601), David Harris (Senior Associate, firstname.lastname@example.org or +44 0 20 7832 3637) and Nicola Kelly (Associate, email@example.com or +44 0 20 7832 3630) of Fulbright & Jaworski International LLP in London. Lista, David and Nicola are lawyers in Fulbright & Jaworski L.L.P.'s International Trade Practice Group which advises clients worldwide in the areas of economic sanctions, export controls and international trade regulation.
 The Libya (Financial Sanctions) Order 2011 does not apply to any transaction or other act which is prohibited by Regulations 3 to 7 of the Libya (Asset Freezing) Regulations 2011 or which would be prohibited if regulation 8 or 9 of the Libya (Asset Freezing) Regulations 2011 did not apply.
 See Fulbright briefing, “New Libya Sanctions Introduced, Effective Immediately” dated 1 March 2011: http://www.fulbright.com/index.cfm?fuseaction=publications.detail&pub_id=4804&site_id=494&detail=yes
Lista M. Cannon
David M. Harris