Whilst sanction regimes were brought in with the intention of protecting businesses from the damaging effects of criminal activities conducted by others, they are increasingly stifling international trade – albeit inadvertently.
UK companies use distributors and agents as a way of trading abroad, to (a) avoid incurring the cost of setting up a permanent establishment in that country and (b) benefit from the local knowledge that the distributor or agent will have. But in doing so they are dealing with a third party in a foreign country. The third party might have sanctions imposed upon it, either by the UK or elsewhere, of which you were not aware and did not have the means to find out.
Breach of a sanction regime can have serious (generally criminal) consequences – so you need to know whether any sanctions apply when dealing with third parties and what the regime is to ensure you comply with them. Ignorance is not a good defence.
Be aware of UK sanctions
In the UK, we have trade sanctions and financial sanctions.
Trade sanctions: these are restrictions on trading in particular goods and services.
Financial sanctions: these are far more complex. Essentially, it is a criminal offence to:
- deal with funds or resources belonging to certain named individuals or entities; or
- make such funds available to or for the benefit of such persons or entities,
unless prior authorisation is obtained from HM Treasury.
Your new distributor or agent might be on HM Treasury’s sanction list. Or, the end customer with whom the distributor or agent proposes to trade on your behalf might be listed. If so, you need to follow the regime put in place by HM Treasury in order to be able to trade without concern.
How best to ensure you are not caught out
The obvious suggestion is avoid dealing with third parties that have sanctions attached to them. But sometimes, the commercial reality is that it is unavoidable.
Have proper procedures and processes in place to enable you to comply with sanction regimes. This requires knowledge of what sanction regimes are in place and in which countries they might apply.
Your policy needs to enable you to conduct due diligence on your prospective third party distributor, agent, or end customer to identify any sanctions and what steps need to be taken to ensure no breaches of those sanctions occur.
Your policy should also contain an ongoing monitoring system, to keep an eye on any developments with respect to the sanctions of which you need to be aware.
Its not just the third parties’ actions you want to keep an eye on, make sure your own actions, even simple ones like payments of commission to agents, or receiving monies from distributors, are all done in accordance with the relevant sanction regime.
Unless, of course, you have a desire to spend time answering official questions, face your bank account being frozen, and expose yourself to UK and third countries’ criminal penalties!
This article was written by James Carlton, a business crime and regulatory partner and Stephen Sidkin, a partner in the agentlaw team