By: Davina Given*
Failure to comply with financial sanctions carries serious penalties, most notably in the US, where banks have collectively paid billions of dollars in fines. Even in the UK, a failure to comply with sanctions carries the potential for unlimited criminal and regulatory fines and/or imprisonment. Yet financial sanctions are often difficult for most businesses to grapple with, particularly if they do not have the resources of the very largest businesses. Political imperatives may lead to the imposition of financial sanctions in respect of existing, longstanding business. Individual targets may change quickly and abruptly, with little fanfare. Different countries involved in a transaction may apply slightly different financial sanctions, so that the transaction may be legal in one country but illegal in another. Yet on top of those issues, there is a further legal difficulty: what does any particular financial sanction actually prevent?
Financial sanctions are often drafted very widely, with the legislative intent to cover as many situations as possible. Yet once applied to specific facts, it may be less clear whether financial sanctions apply. This can put businesses, and their legal and compliance officers, in a difficult situation. Clearly, if sanctions apply, the transaction would be a criminal offence and cannot proceed – but if a business wrongly believes that sanctions apply, a commercial opportunity may be lost or liability may be incurred to third party whose financial position is affected by the business’s incorrect decision. More often than not, these kinds of decisions need to be made quickly by the business’ advisers. Yet even judges, who have the benefit of full argument by leading advocates and no commercial time pressure, can get it wrong.
A case in point was the recent decision of the English Court of Appeal in Libyan Investment Authority v Glenn Maud  EWCA Civ 788, which disagreed entirely with the first instance judge’s interpretation of the relevant sanctions.
In April 2008, Glenn Maud guaranteed a loan made to his company Propinvest Group Ltd by the Libyan Investment Authority (LIA). Propinvest Ltd defaulted and by February 2014, Mr Maud owed the LIA £17.6m under the guarantee. As a precursor to bankruptcy proceedings, the LIA then made a statutory demand for the money owed. Mr Maud applied (albeit rather late) for the statutory demand to be set aside under the Insolvency Rules, on the grounds that payment under the guarantee would contravene EU sanctions on Libya (Regulation (EU) No 204/2011 (the EU Regulation), implemented in the UK by the Libya (Asset-Freezing) Regulations 2011).
Although there was also detailed consideration as to whether a statutory demand amounted, for the purposes of the sanctions, to a “claim” (which the LIA could not bring) and whether Mr Maud should have sought a licence from HM Treasury to pay under the guarantee without a breach of sanctions, the crux of the case was the effect of Article 5 of the EU Regulation which (at the relevant time) read:
- All funds and economic resources belonging to, or owned, held or controlled by the following on 16th September 2011:
(a) Libyan Investment Authority…
and located outside Libya on that date shall remain frozen.”
The judge in the first instance found that the guarantee represented “funds”, and payment under the guarantee would involve dealing with the guarantee in a way that would result in a change of character of the guarantee and enable the LIA to use the funds, in contravention of Article 5(4). Mr Maud could not, therefore, pay under the guarantee without a breach of sanctions and the judge set aside the statutory demand.
The Court of Appeal disagreed. Its view was that the Regulation should be read to give effect to the underlying Security Council resolutions. Those resolutions, after some relaxation of sanctions following the overthrow of Colonel Gaddafi, were intended to allow the LIA to deal with assets outside Libya acquired after 16 September 2011 and to allow it to obtain new assets free of sanctions. It found that the payment of debts arising under a guarantee was to be characterised as making new funds available rather than dealing with existing, frozen, assets. That was permissible under the sanctions. Accordingly, the statutory demand was reinstated.
The outcome in this case was, perhaps, unsurprising. There appears to have been no doubt that Mr Maud owed the sums claimed and, particularly following the relaxation of Libyan sanctions, the Court was unlikely to sympathise with Mr Maud in his attempt to avoid payment. Yet the case also demonstrates how difficult it is to be sure how sanctions apply. In some countries such as the US, the government may be willing to give guidance as to whether a relevant activity is caught by sanctions. Yet in others, including England, no such guidance is available and businesses and their advisers must simply do their best. It is unsurprising that most err on the side of caution.
*Davina Given is Partner at RPC in London. Mrs. Given advises corporates and financial institutions on disputes and regulatory and criminal investigations in relation to money laundering, sanctions and other compliance issues. She can be reached at Davina.Given@rpc.co.uk