21/04/2016

Sanctions in the wake of the Panama Papers: Diplomacy with teeth?

As the repercussions of the Panama Papers – the unprecedented leak of files from the database of the world’s fourth biggest offshore law firm, Mossack Fonseca – continue to unfold, the week closed with the announcement by Angel Gurria, Secretary General of the Organization for Economic Cooperation and Development (OECD) that Panama agreed to adopt global tax reporting standards.  This came about after the EU made it public that it was considering imposing sanctions on Panama over the Panama papers.

Has the imposition of sanctions become a sort of diplomacy with teeth?   The following is a snapshot on sanctions in the wake of the Panama Papers.

The Panama Papers raise interesting issues of public international law and its interaction with national legal systems across jurisdictions. At a jurisdictional level (understood in its public international law concept) we see: (i) acts taking place in one jurisdiction (Panama), breaching international law (sanctions under the European Union and UN) having implications in other jurisdictions (UK, and the entire world); (ii) such countries, asserting their jurisdictions in their own right, when investigations/inquests are opened, parallel to the one taking place in Panama; and (iii) on the other side of the coin, we see, various international fora (UN, EU) enlarging, adopting, sanctions with applicability in the entire world; such public measures affecting private matters (contracts, trade).

This last point brings us to a second type of interaction which operates at the substantive level: public international law resolutions affecting obligations and rights in the private sphere otherwise governed solely by private law (e.g. commercial law); such measures therefore becoming relevant for those practising private, commercial law.

More interestingly, at the level of remedies, the remedy on the part of companies and individuals listed, to be de-listed, is before an international court (European Court of Justice) which can also be parallel to going to local courts, seeking to challenge such international public law measures.

Syria, North Korea and Zimbabwe: Bypassing sanctions?

Sanctions became a topic in the context of the Panama Papers scandal first as it emerged that the firm at the centre of the affair, “had clients who were subject to international sanctions.”   Reports that the Syrian government under President al-Assad had been able “to get round the sanctions and finance its war machine thanks to smokescreen companies based in the Seychelles” and that three Syrian companies had allegedly provided fuel for military aircraft to his government circumventing the sanctions against Syria, were followed by further reports concerning North Korea and Zimbabwe.

The EU, Syria’s biggest trading partner, has sanctions (or “restrictive measures”) in force against Syrian individuals and entities.

By 2015, it had imposed travel bans and asset freezes on more than 200 individuals and 70 entities. These included President Assad and most of his close family, the Syrian Central Bank and senior officials (including some ministers).   In May 2015, the EU extended the existing sanctions including the ban on crude oil imports from Syria, the block on trade in gold, precious metals and diamonds with the government of Syria, and the restrictions on certain investments (inter alia in the oil and natural gas industries, in construction of power plants for electricity production) until 1 June 2016.   Likewise North Korea and Zimbabwe are currently targeted with sanctions by the EU. The EU expanded sanctions against North Korea last 31 March. In the case of Zimbabwe the EU recently renewed its remaining sanctions until 20 February 2017.  This includes the imposition of asset freeze and travel ban against President Robert Mugabe and other listed individuals. The EU sanctions in force as of 15 January 2016 can be seen here.

Since 2006, North Korea has also been subject to UN Security Council sanctions for continuing to develop its nuclear weapons programme, the latest of which was adopted in March this year.

The allegations in the wake of the Panama Papers scandal state that listed individuals under the Zimbabwe sanctions were able to continue running their business affairs through offshore companies set up thanks to Mossack Fonseca, whilst allegedly the firm also assisted a listed company with links to North Korea’s nuclear weapons programme.

Sanction regimes are complex.   It remains to be seen what may emerge from legal investigations and formal inquiries into such allegations (on a case by case basis) and what the consequences -if sanctions indeed were circumvented- may turn out to be.    Whilst Panama’s Public Prosecution (Ministerio Público) announced on the 4 of April the opening of a formal investigation into the Panama Papers, countries around the world have set up their own inquiries and investigations.

But beyond the Panama Papers, unilateral sanctions have also been in the news. Just last week, France announced that it was to impose unilateral sanctions on North Korea.

The Russian Sanctions

In addition, after extending its unilateral sanctions against Russia for one year early last March, the US announced -in the midst of the Panama Papers scandal- that it may expand the Russia sanctions upon examining documents leaked in the Panama Papers to gather information on individuals who may be helping Russia to bypass sanctions.

For its part, the EU is to decide in June whether its economic sanctions on Russia in place until the 31 July 2016 are to be extended or not.

Sanctions were imposed on Russia in response to the annexation of Crimea, as part of the EU’s non-recognition policy of the annexation of Crimea and Sevastopol.

The leaked files would allegedly show that at least $2 billion in transactions involved people and companies that had ties to President Putin, subject to sanctions.

Diplomacy by other means

But if the EU threat to impose sanctions on Panama which triggered Panama’s decision to adopt global tax reporting standards is a good example of how effective sanctions can be as a form of diplomacy by other means, the increasing amount of sanction regimes also has its downside.

The proliferation of unilateral, UN and EU sanctions have created a complex maze of trade regulations, sometimes hard to navigate. Challenging sanctions designations on the other hand, has become a growing area of law. Companies and individuals listed in a EU restrictive measure have only two months to challenge their designation in the European Court in Luxembourg. Parties challenging their designations under EU (and member State law) may well be a reminder that imposition of sanctions should also respect fair procedure. As of recently, estimates indicated that there are more than one hundred cases currently pending in Luxembourg.