COLUMN – U.S. Libya sanctions: vendors beware — and beware of your vendors
By Richard J Cellini, Esq, CEO Briefcast analytics. The views expressed are his own.
NEW YORK, March 18 (Complinet) – New Libya sanction rules will have the biggest impact on suppliers and distributors of large U.S. companies. It’s official: the U.S. government has adopted unprecedented emergency regulations blocking property and prohibiting certain transactions connected with Libya and high-ranking Libyan officials. The new rules took effect on February 25, 2011.
These sanctions impose serious and far-reaching legal, financial and operational constraints on a broad range of US-based companies, business executives, investors and private individuals. And that’s the easy part.
Here’s where the going gets tough: The new rules are not limited in their application to US individuals and companies. The rules will also apply to the affiliates and business partners of US companies, including:
— non-US branches, offices, subsidiaries, and other affiliates; and
— vendors, suppliers, distributors and other business partners, US and non-US.
In a nutshell, it’s not enough to enforce compliance within the four walls of your own U.S. operations. As a practical business matter, you must also police the activities and transactions of everyone in your corporate family tree, global business network, supply chains, and distribution channels – both in the United States and abroad.
Using the past as a guide, few major US companies will violate the Libyan sanctions directly. Most violations will be committed by much smaller subsidiaries, vendors, suppliers and other partners acting on behalf of major US companies. Many of these third parties will act unintentionally, or at least out of ignorance. And a few will act out of a genuine but misguided desire to help their US colleagues, customers and partners out of a difficult situation.
Here are just a few hypothetical violations that will become all too real for many US companies in the weeks and months ahead:
— Third-party shipping agents (acting on behalf of US clients) making payments to Libyan officials to speed up the removal of valuable assets out of Libyan territory.
— Third-party distributors continuing to conduct business in Libya on behalf of US business partners.
— Joint-venture partners and overseas branches honoring contracts made with Libyan agencies and officials prior to the adoption of US sanctions against Libya.
This last category (well-meaning third parties) is the truly dangerous one. If you can only do one thing to put your business on the right side of the Libyan sanction regulations, do this: Get the message out to your vendors, suppliers, distributors, and business partners. Make sure they don’t try to do you any favors in Libya.
For now, there are three main pillars in the hastily-constructed regulatory edifice governing Libya-related property and transactions. All three have important implications not only for US companies, but for their US and non-US suppliers, vendors and distributors as well.
(1) Presidential Executive Order 13566
Executive Order 13566 issued by President Barack Obama on February 25, 2011, describes the current situation in Libya as “an unusual and extraordinary threat to the national security and foreign policy of the United States” and declares “a national emergency to deal with that threat.” Specifically, the Executive Order targets Libyan property “in the United States…or…within the possession of control of any United States person,” and:
— Blocks this property, a0nd prohibits any attempt to transfer, pay, export, or otherwise deal in it
— Prohibits the delivery of funds, goods or services to certain Libyan agencies and officials, regardless of whether the transaction is covered by a preexisting contract.
— Prohibits the acceptance of funds, goods, or services from these same Libyan agencies and officials (again, regardless of preexisting contract).
— Prohibits attempts to avoid or evade any of the prohibitions listed above.
— Exempts transactions relating to the official business of the US government or its employees and contractors.
These prohibitions apply to “any United States person or person within the United States”– a very broad category indeed. Specifically, the Executive Order:
— defines “person” to include any individual or entity (including overseas branches); and
— defines “entity” to include not just corporations, but also partnerships, joint ventures, associations, groups and sub-groups.
As a practical matter, many companies will take the view that the President’s Executive Order applies not just to their US-based entities and personnel, but to their entire global business network — including non-US branches, overseas offices, joint ventures and other affiliates. In many instances, this will include suppliers, vendors, distributors and business partners acting on behalf of US-based companies.
(2) General licenses of the US Treasury Department’s Office of Foreign Assets Control
OFAC has issued two general licenses relating to property and transactions involving Libya:
— General License No. 1A (March 4, 2011) authorizes all transactions involving banks that are owned or controlled by the Government of Libya and organized under the laws of a country other than Libya, provided the transactions do not otherwise involve the Government of Libya or any person whose property and interests in property are blocked.
— General License No. 2 (March 1, 2011) authorizes delivery of, and payment for, goods and services in the United States to the Libyan diplomatic missions to the United States and the United Nations, and the employees of these diplomatic missions.
(3) Advisory of the US Treasury Department’s Financial Crimes Enforcement Network
On February 24, 2011, FinCEN issued an advisory reminding US financial institutions of their legal obligation to apply enhanced scrutiny to private banking accounts held by or on behalf of senior Libyan political figures. Specifically, FinCEN expressed concern about transactions relating to diverted state assets, money laundering, bribery and other forms of public corruption. If a US financial institution knows or suspects that a transaction with a senior Libyan political figure involves one of these types of illicit activity, the financial institution is required to report the suspicious activity.
US financial institutions are already well aware of the monitoring and reporting requirements highlighted in FinCEN’s reminder. The FinCEN advisory was almost certainly issued to alert operating companies, executives, investors, and individuals all over the world that US financial institutions will be monitoring their payments to senior Libyan political figures.
Put plainly, corporate bribes to Libyan officials will be detected by US banks, and reported to the US government. Historically, such bribes have only rarely been paid to foreign officials directly by US companies or their employees. Those most at risk for violating US anti-bribery laws typically include suppliers, vendors, consultants and other third parties acting on behalf of US companies. When the violations are detected, severe penalties are imposed not only upon the third-party wrongdoer, but also the company for whose benefit it acted.
PROTECTING THE COMPANY
As we have seen, rare indeed will be the US-based company, executive, investor, or individual who directly flouts regulations governing Libyan-related property and transactions. Most violations will involve US entities and persons attempting to enlist third-party vendors and suppliers as the agents of their wrongdoing. Another significant percentage will involve vendors and suppliers acting on their own initiative to help US customers and business partners in a tight spot, bringing down tragic consequences not only upon themselves, but also the very companies they were trying to assist.
US companies are advised to take the following steps immediately to decrease the likelihood of being dragged into non-compliance by the actions of third-party business partners:
— Send plain-language advisories to all vendors, suppliers, distributors, and business partners (both US and non-US).
— Require written confirmation that such advisories have been received and understood.
— Identify vendors and suppliers with a previous history of bribery, money-laundering, and other forms of illicit activity.
— Target suspicious and non-compliant vendors for enhanced scrutiny or, where appropriate, immediate termination.
Despite the seriousness of the underlying situation, the US Libya sanctions present just another compliance challenge to US companies already well-equipped to meet such challenges. Many if not most of the same rules, methods, and techniques will apply. And when it comes to compliance, the most important rules are these: (1) trying really counts; and (2) an ounce of prevention is worth a pound of cure.
(Richard J Cellini, Esq. is the chief executive officer of Briefcase Analytics Inc. Based in Cambridge, Mass., Briefcase helps leading companies reduce supply chain risk. Briefcase products and services help procurement, supply chain, and compliance professionals identify high-risk vendors, evaluate low-risk alternatives, and satisfy global compliance requirements. For more information about Briefcase Analytics, please visit www.briefcasedata.com.)
(This article was first published in Complinet (www.complinet.com). Complinet, part of ThomsonReuters, is a leading provider of connected risk and compliance information and on-line solutions to the global financial services community.)