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November 6, 2019 By: John McKendrick QC* and Alex Haines**

The Nicaragua Human Rights and Anticorruption Act of 2018(NHRACA) seeks to hold violators of human rights and corrupt actors in Nicaragua accountable. It also instructs the U.S. president to impose individual sanctions on members of the Nicaraguan government deemed responsible for human rights violations against the post-April 2018 protesters, as well as current and former Nicaraguan government officials involved in significant acts of corruption. Sanctions could take the form of visa removals, the blocking of US assets, and prohibitions on transactions between those sanctioned and U.S. citizens.

From U.S. occupation between the World Wars to its aversion to the Sandinistas’ leftist politics and concerns about a Nicaraguan Canal as an alternative to the canal in Panama, the U.S. and Nicaragua have had a long and checkered history.

The U.S.’ main concern today – as expressed on the Department of State’s website – is with what it describes as the “deeply flawed electoral processes” that have concentrated power in the hands of President Ortega and his wife, Vice President Murillo.

The Global Fight Against Corruption

U.S. sanctions are usually imposed by Executive Orders of the President. The legislature may, however, choose to supplement or limit existing powers, for example by passing a separate statute that deals specifically with a particular situation or country.  In 2012, Congress passed the Sergei Magnitsky Rule of Law and Accountability Act 2012 which originally targeted 18 Russian government officials linked to the imprisonment and subsequent death in custody of Russian lawyer Sergei Magnitsky.

Following the Magnitsky Act, the Global Magnitsky Act was passed in 2016, which targets individuals responsible for human rights violations or acts of significant corruption around the world.

Other countries have also followed suit, with the UK’s Sanctions and Anti-Money Laundering Act 2018 (SAMLA) – the first piece of Brexit-related legislation to be passed by the British parliament – containing a ‘Magnitsky amendment’ relating to human rights abuses. Similarly, Canada passed the Justice for Victims of Corrupt Foreign Officials Act (Sergei Magnitsky Law) in October 2017.

The Nexus of the Nica Act

The Nicaraguan protests began on 18 April 2018, when demonstrators in several Nicaraguan cities demonstrated against the social security reforms decreed by President Ortega that increased taxes and decreased benefits. Despite President Ortega cancelling the reforms, the protests became one of the largest in the country’s history resulting in more than 300 civilians being killed by the end of 2018.

On 5 July 2018, pursuant to the Global Magnitsky Act, the U.S. sanctioned three Nicaraguan individuals who were involved in serious human rights abuses or engaged in corruption.

On 27 November 2018, the U.S. President signed Executive Order 13851 which established the Nicaragua sanctions program by blocking property of certain persons found to be contributing to the situation in Nicaragua.

On 11 December 2018, the U.S. House of Representative overwhelmingly approved the Nicaragua Investment Conditionality Act (referred to as the NICA Act), a bipartisan bill that would condition U.S. support for multilateral lending to Nicaragua on the Nicaraguan government’s adherence to democratic norms. On 20 December 2018, the U.S. President signed the Nicaragua Human Rights and Anticorruption Act of 2018 (NHRACA) –eight months after the beginning of the Nicaraguan protests – that would allow the U.S. Treasury Department to sanction any non-U.S. person implicated in egregious human rights abuses and corruption in Nicaragua.

The Effect of the NICA Act

Under section 5(b) of the Act, the U.S. Treasury Department has the power to sanction “any foreign person, including any current or former official of the Government of Nicaragua or any person acting on behalf of that Government” in relations to:

  • (i) acts of violence/abuse human rights – related to the 18 April 2018 protests;
  • (ii) significant actions or policies that undermine democratic processes or institutions;
  • (iii) acts of corruption by or on behalf of Nicaraguan Government including expropriation; or
  • (iv) the arrest or prosecution of persons related to freedom of speech.

The two specific sanctions described in section 5(c) of the NICA Act are:

  • (i) asset blocking(“[t]he exercise of all powers granted to the President by the International Emergency Economic Powers Act […] to the extent necessary to block and prohibit all transactions in all property and interests in property of a person determined by the President to be subject to [the activities described at 5(b) above] if such property and interests in property are in the [U.S.] come within the [U.S.], or are or come within the possession or control of a [U.S.] person”; and
  • (ii)exclusion from the U.S. and revocation of visa (“[i]n the case of an alien determined by the President to be subject to [the activities described at 5(b) above], denial of a visa to, and exclusion from the [U.S.] of, the alien, and revocation in accordance with section 221(i) of the Immigration and Nationality Act […] of any visa or other documentation of that alien”).

This means that a person who violates the provisions set out in the NICA Act is subject to the penalties set forth in the International Emergency Economic Powers Act, which provides for both civil and criminal penalties. This can translate to millions of dollars in fines and/or up to 20 years in prison.

To date, approximately 45 individuals have been sanctioned in the region, including in Nicaragua, Guatemala, Mexico, Peru and the Dominican Republic.

U.S.Long-Arm Law and Pressure on International Organizations

Unusually, section 4 of the NICA Act instructs U.S. representatives (specifically the U.S. Executive Director) at the World Bank Group, Inter-American Development Bank Group,as well as the International Monetary Fund – all based in Washington D.C. –to oppose loans and financial assistance to Nicaragua except where linked to basic human rights or to promote democracy. The World Bank and Inter-American Development Bank, both Multilateral Development Banks, provide financing and professional advice for the purpose of development. Their memberships include both developed donor countries and developing borrower countries and they finance projects in the form of preferential rates and grants. The International Monetary Fund provides policy advice and finances its members in order to foster global growth and economic stability.

U.S. enforcement agencies already use any credible connection to U.S. persons, corporations, territory or the U.S. financial system in order to assert jurisdiction when it comes to sanctions violations.  For example, in July 2017, CSE Global Limited and its subsidiary CSE TransTel, both companies based in Singapore, reached a 12 million US$ settlement with OFAC for ‘causing’ financial institutions in the U.S. to engage in the unauthorised exportation or re-exportation of financial services from the U.S. to Iran. In other words, the sanctions violations relating to wire transfers from Singapore to Iran went through the U.S. financial system.

It is not, however, always the case that there must be some connection with the U.S. The U.S. has courted controversy for expanding its sanctions regime beyond conventional jurisdictional boundaries in certain situations.

There are four instances where conduct may give rise to extra-territorial liability under particular U.S. sanctions programs:

  • (i) re-exportation of U.S.-origin goods;
  • (ii) majority-owned subsidiaries;
  • (iii) causing a violation in the U.S.; and
  • (iv) secondary sanctions.

Secondary sanctions are the most controversial of the extra-territorial measures, as they involve the complete absence of any U.S. nexus. Secondary sanctions are aimed at preventing non-U.S. persons from accessing U.S. financial and commercial markets in certain circumstances. Most secondary sanctions to date have been imposed in relation to the Iranian sanctions program and their rationale is to deter certain conduct, usually dealing with certain parties or countries. Nevertheless, their use is growing and now affects Nicaragua as well as Venezuela. By way of illustration, through the U.S. Department of Justice’s jurisdiction to investigate and prosecute criminal infringements – which include the wilful violation of US sanctions law – in 2015, Schlumberger Oilfield Holdings pleaded guilty and paid 237 million US$ for violating US sanctions by facilitating trade with Iran and Sudan.

Through section 4 of the NICA Act, the U.S.hasfurther increased its influence on the global stage. Section 4 ensures that the U.S. Director at each relevant Multilateral Development Bank or International Financial Institution opposes the extension of any loan or financial or technical assistance to the Nicaraguan Government thereby strengthening the impact of the sanctions. The World Bank Group alone comprises the International Bank for Reconstruction and Development, the International Development Agency, the International Finance Corporation and the Multilateral Investment Guarantee Agency and, given the history of multilateral support in the region, the effect of U.S. foreign policy through this sanctions regime will most assuredly be felt, whether or not it has the desired result of coercing the Nicaraguan government into changing its behavior.

Compliance Takeaways

In light of these far-reaching sanctions, it is important that compliance programs are tailored to this new regime, regardless of your placement in the world. Compliance professionals should look out for the following red flags:

  • The use of multiple structures in order to circumvent financial sanctions;
  • Structures used in multiple jurisdictions;
  • Structures based in one jurisdiction that carry out their activities in another jurisdiction;
  • The use of nominee directors and nominee shareholders;
  • Bearer shares; and
  • The use of trusts and foundations.

Compliance professionals ought to also ensure proper due diligence of clients and third parties, including through the use of software in order to check account names against sanctions lists and third party transaction screening.

Given the U.S.’ aggressive approach to enforcement which extends to non-U.S. businesses, compliance professionals should secure legal advice regarding any obligations they may have to report suspect accounts to national authorities. Each compliance team ought to:

  • (i) have a specific policy on sanctions enforcement;
  • (ii) offer regular training to staff;
  • (iii) identify a lead sanctions enforcement person; and
  • (iv) establish and maintain policies, controls and procedures to mitigate against sanctions breaches.

* John McKendrick QC, former Caribbean Attorney General, practices internationally from Outer Temple Chambers in London, England.
**Alex Haines is a Barrister at Outer Temple Chambers in London, England, specializing in international organizations law. He is an active member of the ACSS Editorial Task Force.