Ten points to consider about EU and UK sanctions on Myanmar

Ten points to consider about EU and UK sanctions on Myanmar

Overview

The February 2021 coup in Myanmar has raised a number of complex legal, economic, and ethical issues to foreign investors who flocked to the country as it pushed toward democracy.

The problem of sanctions is one of the most critical of these. Sanctions against Myanmar have been levied by the United Nations, the European Union, and the United Kingdom. These have been revised to address new changes by the United States, the European Union, and the United Kingdom. More limits could be imposed in the coming weeks and months.

Though US sanctions are often at the forefront of investors' minds due to their international scope and compliance, EU and UK sanctions can also be directly applicable.

This briefing examines some of the substantive issues that investors should think about.

1. Are there any sanctions that extend to investors?

In most sanctions analyses, the first issue is generally which sanctions exist as a matter of law. To the extent applicable, the EU sanctions on Myanmar extend within the EU's jurisdiction to any natural individual who is an EU citizen, any legal entity formed or established under the law of an EU member state, and any legal entity in respect of any company conducted entirely or partially within the EU.

Sanctions levied by the United Kingdom extend both within the United Kingdom and to actions by UK residents outside the United Kingdom. The United Kingdom has issued guidelines on what constitutes a "UK nexus," outlining the situations under which the UK Financial Sanctions Authority (OFSI) believes UK sanctions would apply.

2. Don't forget the contractual sanctions clauses.

It is not unusual for parties that would not otherwise be required to comply with EU or UK sanctions to consent – at least to some degree – to do so in loan arrangements or commercial contracts.

These clauses should be closely examined by investors. This could be (a) confined to undertakings not to use funds obtained from Myanmar transactions that would be in violation of sanctions to repay loans, or to use loan proceeds for activities that would be in violation of sanctions, or (b) of broader scope. Failure to follow these guidelines could result in a contract violation or case of default.

3. Assigned individuals: be mindful of who you're working with.

Certain natural persons have been identified as sanctions targets by both the EU and the UK. This ensures that anyone subject to EU or UK sanctions must (a) freeze the assets of certain named entities and (b) refrain from providing them with funds (which is a vague term that includes items like stocks, bonds, and some contractual rights) or economic capital. While licenses authorizing the use of frozen properties can be applicable under some cases, they must be applied for and may usually not aid transactions with, or for the benefit of, designated individuals.

Both new and former counterparties should be thoroughly screened to ensure they are not on any sanctions lists.

4. The responsibility should not stop there: there is still the question of possession and management to consider.

Asset freezes and prohibitions on the supply of funds and economic services to companies owned or operated by identified individuals are extended by both the EU and the UK sanctions. According to EU guidelines, the criteria for determining ownership is whether a specified individual holds 50% or more of the entity's exclusive rights or has a controlling stake in it. The power to select a majority to a Board or supervisory body, the right to manage a plurality of shareholders' interests, or the ability to exert superior leverage over an individual are all requirements used to establish ownership. Real possession or influence should be refuted in any case on a case-by-case basis.

If one (or both) of the following requirements are met in the UK, an individual is owned or managed directly or indirectly by a specified person:

1. The appointed individual owns (directly or indirectly) more than 50% of the entity's shares, 50% of its voting rights, and/or the power to name or withdraw a majority of the entity's board of directors; and
2. Under all the conditions, it is rational to assume that the chosen individual will (if he/she chose to) be able to obtain the outcome that the entity's relations are handled in compliance with his/her wishes, in certain situations or in substantial ways, by whatever means, and whether directly or indirectly.

Both of the EU and UK sanctions regimes has ownership and control rules that are broadly consistent. The problem is especially acute in Myanmar, where there is a strong association between members of the ruling military elite (who have been targeted by UK and EU sanctions and could be targeted further) and large military-owned industrial conglomerates with interests in a wide variety of commercial sectors. These conglomerates, Myanmar Economic Corporation (MEC) and Myanmar Economic Holdings Limited, may have joint ventures or trading partnerships with foreign investors (MEHL). As a result, investors will need to consider whether their counterparties are owned or operated by Myanmar military leaders who are subject to sanctions, and therefore come under the scope of EU or UK sanctions.

5. Economic embargoes in addition to financial controls

While asset freezes and named entities receive the most coverage in EU and UK sanctions, trade bans are also important and may influence commercial parties.

Combat products and technology, dual-use goods and technology, goods and technology that may be used for domestic repression, and goods and services related to surveillance and interception of telecommunications in Myanmar are all prohibited under EU and UK sanctions. Significantly, providing technical assistance, armed personnel, financial services or funds, or associated brokering services to or for the benefit of the Tatmadaw (the Myanmar army) (or persons acting on its behalf or under its direction) where such provision relates to military activities, or otherwise enables or facilitates the conduct of armed hostilities, is prohibited in Myanmar. Because of the broad scope of this clause, it may include operations that aren't normally associated with Myanmar's military.

It's likely that new trade limits will be introduced. In previous sanctions regimes, both the EU and the US threatened particular sectors important to Myanmar, such as steel, wood, and precious and semi-precious stones.

6. Sanctions change fast, but reports and risk evaluations can be updated on a regular basis.

Geopolitics, as well as states' diplomatic and defense policies, affect the content of sanctions. Sanctions can shift rapidly, particularly in fast-paced situations. Sanctions may be extended to designated individuals, and limits may be tightened.

Investors should keep their evaluations and risk assessments up to date at all times, and be aware that identified persons subject to sanctions can transfer assets to avoid the scope of EU and UK sanctions. This risk can be mitigated by doing a rigorous ethics due diligence exercise.

7. What happens if sanctions ban contract-required activities?

Contractual responsibilities and penalties invariably have a complex relationship. Sanctioned parties can depend on statutory force majeure clauses, particular contract provisions dealing with sanctions' implications, or the general legal situation, such as force majeure or supervening impediment articles in Civil Codes. A main concern is whether the party seeking contractual redress is behaving under a moral or substantive duty not to bargain with its counterparty, or simply whether it does not want to deal for financial or reputational purposes. To decide if contractual relief is possible, a thorough examination of the contractual or legal clause relied upon to suspend performance is required. While force majeure is often the first port of call for investors, those protections do not work as well as investors have hoped in the case of sanctions. The situation in Myanmar serves as a timely warning that when negotiating acquisitions in highly risky jurisdictions, investors should consider including "exit plans" in contracts.

8. What happens if a side wants to comply with prohibitions but is sued by its counterparty for breaching them?

According to EU sanctions on Myanmar, "the freezing of funds and economic resources, or the refusal to make funds or economic resources accessible, carried out in good faith on the basis that such action is in accordance with EU law, shall not give rise to any liability of any kind on the part of the person implementing them, or its directors or employees, until it is shown that the funds and economic resources are frozen in accordance with EU law, shall not give rise to any liability of any kind on the part of the person implementing them, or Similarly, the UK's Sanctions and Anti-Money Laundering Act 2018 (under which the Myanmar sanctions were imposed) states that an individual is not liable to civil action for actions committed (or not done) in the fair expectation that they are compliant with UK sanctions regulations.

Of note, these safeguards are only useful if a commercial dispute is taken to a court or tribunal that finds itself bound by EU or UK statute (as applicable). Attempting to rely on the provisions of a Myanmar court, for example, might not be effective.

9. Will banks and financial institutions place limitations on current loan arrangements in relation to Myanmar?

Nothing prevents banks and financial institutions from agreeing to Myanmar-related conditions in loan agreements retroactively. However, once creditors consent, banks are unlikely to be able to enforce those limits unilaterally. Dealings with countries subject to so-called comprehensive or country-wide sanctions are often restricted in loan agreements. However, at the moment, Myanmar is not included on this list (which includes Iran, North Korea, Cuba, Syria, and Crimea/Sevastopol – countries threatened by the US for especially broad restrictions), but this may change.

10. Investment Pact Protections: Beyond Sanctions

Apart from tariffs, foreign investors may want to look at another area of international law: investment treaties. Myanmar has a host of investment deals in place with Korea, Japan, Thailand, and China, among others. In addition, it is a signatory to the ASEAN Comprehensive Investment Agreement.

Expropriation, unequal or unjust treatment, or a refusal by government officials to protect and maintain investors' assets may all be covered by investment treaties. International securities arbitration tribunals will be able to hear award cases if treaties allow it.