Member Article

International trade sanctions are becoming an increasingly high profile issue for both practitioners and clients in Australia. Major reforms to Australia's sanctions system will have implications for global companies with any Australian connections.

Starting with an overview of Australia's existing sanctions regime, this article will discuss the upcoming reforms and the impacts that can be expected for practitioners and industry, focusing on the energy and resources, banking and finance, and military/defence related sectors.

Australia's Multilateral & Autonomous Sanctions Regime: Background

Australia's sanctions laws can broadly be divided into two groups: those implementing resolutions of the United Nations Security Council (UNSC), or unilateral autonomous sanctions imposed by the Australian Government, which may either supplement United Nations-based sanctions or address situations Australia independently views as requiring action.

Sanctions Implementing UNSC Resolutions

The Federal Charter of the United Nations Act 1945 provides for the creation of regulations which give effect to decisions of the UNSC. Pursuant to UNSC resolutions, regulations have been imposed against countries such as Iran, Iraq, Lebanon, and Somalia, and commonly include restrictions on the supply of weapons or military equipment, assets of certain listed entities, items which may be applied to nuclear or ballistic weapons programs, and technical assistance or military.

Unique restrictions are imposed in certain regulations, such on the conduct of business with Iranian entities, the importation of rough diamonds from the Côte d'Ivoire, and the supply of luxury goods to North Korea (sales figures released by Hennessey indicated that Kim Jong-Il was once purported to be the world's single largest consumer of Hennessy cognac, and defectors have reported Kim Jong-Il spends an estimate 20% of North Korea's budget on luxury goods for himself and his supporters). 

Autonomous Sanctions

Autonomous sanctions under current Australian law generally take the form of visa and travel restrictions, the suspension of government links, and prohibitions on engaging in foreign currency transactions with sanctioned entities. At present, these are imposed against individuals and entities in countries such as Fiji, Burma, and Zimbabwe.

The Government's ability to impose autonomous sanctions is currently limited to a range of specific measures. However, upcoming reform under the Autonomous Sanctions Bill 2010 (Cth) will soon allow the adoption of a uniform approach by permitting the creation of autonomous measures mirroring those currently imposed under the multilateral sanctions regime, without the requirement of a UNSC resolution to base it on.

The Autonomous Sanctions Bill 2010 (Cth)

In line with the increasing use of autonomous sanctions as part of Australian foreign policy in recent years, the Australian Government has identified the need for more effective measures which go beyond the scope of those currently available. With this purpose in mind, as well as the need to participate in concerted international action involving other "like minded" countries, the Autonomous Sanctions Bill 2010 (Cth) was introduced into Parliament last year.

As with the Charter of the UN Act on which it has been modelled, rather than imposing any sanctions itself the Autonomous Sanctions Bill establishes a framework for the creation of regulations which impose sanctions against governments, individuals, or entities.  With bi-partisan support, (especially important for Australia's current minority Government), it is expected to pass sometime around June-July this year

Importantly, the Bill will allow for the  creation of regulations with an extra-territorial effect. DFAT has indicated that these regulations will apply to any Australian anywhere in the world, and any person using an Australian-registered vessel or aircraft to conduct activities. As an example, an Australian employed by an English or American company operating in Iran may soon be subject to an increased range of compliance obligations.

Furthermore, Australian nationals and bodies corporate may also be made liable for sanctions breaches of foreign corporations that they own or control. This means subsidiaries of Australian companies, or those of multinationals operating through Australian corporate bodies will also need to be aware of how these changes may affect them.

Effective compliance strategies will become increasingly important as the Autonomous Sanctions Bill provides a defence of 'reasonable precautions and due diligence' where measures are taken to avoid sanctions infractions. Subject to this defence, corporations who violate an autonomous sanctions law can expect fines up to the greater of three times the value of any transaction made in breach of the regulations, or A$1.1 million.

Industries Likely to be Impacted & Permit Applications Issues

These upcoming reforms are likely to be felt across a diverse range of industries, although in this section we will focus on what impacts can be expected in the energy and resources, banking and finance, and defence related industries.

Energy & Resources

Significant changes in the sanctions imposed on governments and entities operating in the Middle East and North Africa should be expected in light of the ongoing regional tensions and instability. In Iran, the potential connection between revenues derived from its energy sector and proliferation activities has been recognised by the UNSC, resulting in sanctions prohibiting the 'conduct of business' with specified Iranian entities. Whilst this unsurprisingly includes entities directly involved in the development of ballistic missiles or proliferation-sensitive nuclear activities, entities involved in Iran's energy, finance, and transport sector are also identified for their potential to contribute to such sanctioned activities, including via the generation of revenue.

As oil is a major export (and thus source of government revenue) in places such as Libya and Syria, companies involved in the energy and resources sector where unrest and crackdowns continue to draw condemnation from Australian authorities can anticipate having to make changes in how they operate. 

Banking & Financial Sector

An expansion of the scope of restrictions against conducting business with entities across the Middle East and elsewhere also underscore changes in relation to dealing with the 'assets' of certain entities. The broad definition of 'asset' under the Charter of the UN Act is included in the Autonomous Sanctions Bill, and includes tangible and intangible property or assets, and legal documents or instruments in any form. A diverse range of instruments such as IP licences, bank credits, bonds, debt instruments, cheques, money orders, shares, or contractual rights potentially fall within this definition, triggering obligations where businesses deal with such assets and sanctioned entities.

Restrictions on dealing with assets can be expected to impact on the banking and financial sector, as will wider changes to Australia's system of targeted financial sanctions generally. Measures are currently imposed under ill-suited banking regulations originally designed for the protection of Australia's currency reserves. The new framework will give the Government more flexibility in how it responds to rapidly changing international developments, which is likely include restrictions on financial transactions to prevent access to money by sanctioned entities or individuals.

Defence & Military Industries

Businesses involved in the manufacture and supply of arms and defence-related goods and matériel  will continue to be bound by strict rules when dealing with sanctioned entities. However, the autonomous sanctions reform will allow the application of such rules to a much wider range of countries and entities.

In his speech introducing the Autonomous Sanctions Bill, the Minister noted autonomous arms embargos are currently imposed under Customs regulations, which means they only apply to tangible goods exported from Australia. As a consequence, intangibles such as software or military services like training are not covered. Although there are also implications for such exports under expected reforms to Australia's export controls and dual-use goods regime, obligations may arise in the meantime under autonomous sanctions.

Applying for Permits or Authorisations to Engage in Sanctioned Conduct

Of particular relevance to practitioners and affected industries will be the new application system for permits and authorisations to engage in sanctioned activity. Under Australia's UNSC-based regulations, the Minister for Foreign Affairs may permit sanctioned activities in a variety of situations, such as for the purposes of authorised operations, and to assist humanitarian programs or for protective purposes.

It can be expected the new system for the authorisation of autonomously sanctioned conduct will mirror the current arrangements under Australia's UNSC-based regime. Whilst the grounds and exceptions on which permits can be issued are found in the UNSC resolutions on which the regulations are based, there is no reason to expect different grounds will be found in any future autonomous sanctions regulations. The Government has made it clear that one of the purposes of these reforms is to harmonise the administration of autonomous and multilateral sanctions, and to simplify the compliance obligations for entities whose business requires regular engagement with these laws.

However, despite the advantages in the simplification of compliance obligations, the desire for a uniform approach also indicates the conservative and cautious approach presently adopted by the Department of Foreign Affairs & Trade (DFAT) to the authorisation of sanctioned activities under UN-based regulations can be expected to remain unchanged.

 

For further information, contact:

Max Petro

LAWYER

E: [email protected]

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[i] This is an edited version of an article that first appeared in the World Export Control Review. Maxwell Petro is a lawyer with Minter Ellison's corporate and international trade practice.  He specialises in advising on sanctions compliance issues and export control regulations.