BY: Lista M. Cannon, David M. Harris, Nicola Kelly and Stephen M. McNabb
The increasing number of sanctions imposed on Libya have resulted in
further difficulties for companies conducting business in the embattled
country. Companies currently and prospectively conducting business in or
in connection with Libya should continue to review the provisions of the new
sanctions carefully and analyse the effect they may have on their business
activities (including international companies with subsidiaries and operations
in the EU and UK).
Recently strengthened sanctions
provisions on Libya have resulted in the following:
This briefing, which follows our
article entitled "Companies and Individuals Face New Sanctions on
Libya" dated 8 March 2011 highlights recent developments in Libya and
the practical effect of the sanctions regime over the last few months.
Extension of Restrictions
In response to increased volatility
in Libya, financial sanctions have been extended to apply to additional persons
and entities. These sanctions are imposed on designated persons and
The restrictions now target the Libyan
oil industry, which is viewed as an attempt to cut off Gaddafi's source of
funds for his regime's war efforts. In addition, the UN has passed a
further resolution enforcing the 'no-fly zone' and 'necessary military
By way of guidance, a list of
certain of the existing sanctions and additional sanctions and amendments
imposed since our last briefing are set out in the endnote to this briefing
(although it is not intended to be an exhaustive list and we note that the
legislative framework is constantly evolving).
Practical Effect of the Sanctions:
Targeting the Oil Industry
Enhanced restrictions now target the
Libyan oil industry including the National Oil Corporation
("NOC"). The principal aim of including NOC and five of its
subsidiaries within the scope of the financial sanctions is to cut off the
source of funds available to Gaddafi's regime. The NOC reportedly accounts
for half of the country's output. Around 85% of the oil produced by Libya was
being exported into Europe. However, the impact of these wider measures is
potentially limited as Libya's oil industry has already been brought to a near
standstill by the heavy fighting.
While entities in Libya are free to
sell and purchase oil and refined oil products as long as the companies
involved are not included on the UN or EU sanctions lists and none of the
'blacklisted' Libyan individuals benefit from such trades, in practice, traders
are wary of purchasing any Libyan oil due to fears that rebel shipments might
somehow be linked to the NOC or other designated individuals. Further, the
uncertainty in the region has inevitably led to an increase in oil prices.
Practical Effect of the Sanctions:
Requirement for Enhanced Due Diligence
Companies and financial institutions,
in particular, are under increased pressure to ensure that their due diligence
procedures are adequate and effectively implemented due to Gaddafi's control
over the Libyan state and its enterprises. For example, in effect, companies
are required to know intricate details of the parties to any transaction which
may be of a concern, by whom the relevant entities are ultimately owned, by
whom they are controlled, who else may be involved and who else may benefit
from the transaction (for example the spouse of an individual listed).
Companies should be particularly
vigilant. It is often not sufficient to rely on checks carried out by financial
institutions that may control the funds of the company involved in the
transaction. The responsibility for establishing the initial source or final
destination of funds rests with the relevant EU or UK company or individual
involved in the transaction.
The importance of due diligence is
particularly significant given the apparent increase in the use by Libyan
entities and individuals of front companies to avoid sanctions. Any EU or
UK companies or individuals doing business with a Libyan entity or with those
connected to the Libyan market should consider carefully the corporate
structure and carry out necessary compliance checks.
As mentioned above, the use of front
companies in order to avoid sanctions has become more prevalent as designated
entities and individuals seek to continue trading with the international
community. Robust compliance procedures are essential to reduce the risks that
arise from dealing with such companies.
Regulation (EU) No. 296/2011:
Dealings with Businesses Controlled by Designated Entities
On 25 March 2011, the EU passed
Regulation (EU) No 296/2011 ("Regulation 296") in response to concerns
about the practical impact of the scope of EU Council Regulation 204/2011,
which appeared to prevent a non-designated entity in which a designated entity
holds a stake from carrying on business.
Article 6a of Regulation 296 allows
a non-designated entity to continue trading legitimately where a designated
entity holds a stake in it, provided that the business does not involve making
funds or economic resources available to a designated person, entity or body
and provided that the non-designated entity can demonstrate that no funds or
economic resources will be provided to a designated person or entity.
In effect, Article 6a provides that
the prohibitions in the Regulation do not automatically apply to the funds and
economic resources of non-designated entities that are owned or controlled by a
designated person or entity simply by virtue of that ownership stake. It
would not be the same if there were grounds to conclude or suspect that
transacting with such an entity would result in funds or economic resources
being made available to a designated person or entity. As a practical measure,
HM Treasury issued a General Licence which permits dealings with financial
institutions incorporated outside of Libya that may be owned or controlled by
the Libyan government.
In addition, the EU has previously
issued guidance which provides that funds and economic resources of a
non-designated entity having a separate legal personality from a designated
person or entity, are not covered by the asset freeze, unless the assets are
held or controlled by the designated entity. Further guidance can be
sought from the relevant authorities in each Member State.
What is next for Libya...?
On 7 June 2011, the EU imposed further
sanctions on the Libyan government (Council Decision 2011/322/CFSP). The
port authorities of Tripoli, Khoms, Brega, Ras Lanuf, Zawia and Zuwara are now
included in Annex IV of the Council Decision, as entities to which it is
prohibited to make funds or financial assets or economic resources
available. This shall not prevent the execution, until 15 July 2011, of
contracts concluded before the date of entry into force of this decision,
except for contracts relating to oil, gas and refined products.
On 27 June 2011, the International
Criminal Court ("ICC") issued an arrest warrant for Gaddafi, his son
Saif al-Islam and intelligence chief, Abdullah al-Sanussi. The arrest warrants
refer to the early weeks of the uprising, from 15 February until at least 28
February 2011. The ICC stated that there were "reasonable grounds to
believe" that the three men were "criminally responsible" for
the murder and persecution of civilians. It is alleged that Gaddafi
introduced a state policy " aimed at deterring and quelling by any means,
including by the use of force, the demonstrations of civilians against the
regime". Although Saif al-Islam Gaddafi holds no official position in
Libya, the ICC stated that he is "the most influential person" in Gaddafi's
inner circle. The warrant should make it difficult for Gaddafi to live in
exile, as all UN Member States would be obliged to arrest him on entry to their
territory. However, a number of nations have in the past refused to recognise
international arrest warrants. For example, despite an international arrest
warrant, three countries allowed Sudanese ex-President Omar al-Bashir to visit
The questions currently being posed
at an international level cover the effectiveness of the sanctions on
Libya. The three-pronged approach which has been adopted by the UN,
involving a no-fly zone, aerial patrols and bombardment, and a wide-ranging
asset freeze, has not as yet yielded any apparent abatement of the situation on
the ground for civilians. A war of attrition appears likely, unless the
balance of military power shifts in a significant manner, or the Gaddafi regime
capitulates. Recently, NATO agreed to extend its air operations over Libya
for a further 90 days, as it increased the scope and intensity of its campaign
to protect civilians. The Libyan government has announced a number of
ceasefires in its offensive against rebels. However, the Gaddafi regime has not
honoured the ceasefires, and it remains to be seen whether the restrictions
placed on his regime will force a solution.
This briefing was prepared by Lista M.
Cannon, Partner (firstname.lastname@example.org or +44 020 7832 3601), David Harris,
Senior Associate (email@example.com or +44 0 20 7832 3637) and Nicola Kelly,
or +44 0 20 7832 3630) of Fulbright & Jaworski International LLP in London.
Lista, David and Nicola are lawyers in Fulbright & Jaworski L.L.P.'s International
Trade Practice Group. Fulbright's International Trade Practice
Group, chaired by Stephen McNabb, Partner (firstname.lastname@example.org
or +1 202 662 4528), advises clients worldwide in the areas of economic
sanctions, export controls, munitions exports and other areas of international
 Libya: Existing and Additional
Sanctions / Amendments (Not Exhaustive):
 EU Council Regulation
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