Sanctions: brainteasers with serious consequences
Failure to comply with financial sanctions carries serious penalties, most notably in the US, where banks have collectively paid billions of dollars in fines.
Even in the UK, a failure to comply with sanctions carries the potential for unlimited fines and/or imprisonment. Yet financial sanctions are often difficult to grapple with, not only because the targets may change quickly and abruptly, but also because it may not be obvious how the legislation applies. Even judges, who have the benefit of full argument by leading barristers, can get it wrong. A case in point was the decision last week of the Court of Appeal in Libyan Investment Authority v Glenn Maud  EWCA Civ 788, which disagreed entirely with the first instance judge's interpretation of the relevant sanctions.
In April 2008, Glenn Maud guaranteed a loan made to his company Propinvest Group Ltd by the Libyan Investment Authority (LIA). Propinvest Ltd defaulted and by February 2014, Mr Maud owed the LIA £17.6m. As a precursor to bankruptcy proceedings, the LIA then made a statutory demand for the money owed. Mr Maud applied (albeit rather late) for the statutory demand to be set aside under the Insolvency Rules, on the grounds that payment under the guarantee would contravene EU sanctions on Libya (Regulation (EU) No 204/2011, implemented in the UK by the Libya (Asset-Freezing) Regulations 2011).
Although there was also detailed consideration as to whether a statutory demand amounted, for the purposes of the sanctions, to a "claim" (which the LIA could not bring) and whether Mr Maud should have sought a licence from HM Treasury to pay under the guarantee, the crux of the case was the effect of Article 5 of Regulation (EU) No 204/211 which reads:
4. All funds and economic resources belonging to, or owned, held or controlled by the following on 16th September 2011:
(a) Libyan Investment Authority…
and located outside Libya on that date shall remain frozen."
The judge in the first instance had found that the guarantee represented "funds", and payment of the guarantee would involve dealing with it in a way that would result in a change of character of the guarantee and enable the LIA to use the funds, in contravention of Article 5(4). Mr Maud could not, therefore, pay under the guarantee without a breach of sanctions and the judge set aside the statutory demand.
The Court of Appeal disagreed. Its view was that the Regulation should be read to give effect to the underlying Security Council resolutions. Those resolutions, after some relaxation of sanctions following the overthrow of Colonel Gaddafi, were intended to allow the LIA to deal with assets outside Libya acquired after 16 September 2011 and to allow it to obtain new assets free of sanctions. It found that the payment of debts arising under a guarantee was to be characterised as making new funds available rather than dealing with existing, frozen, assets. That was permissible under the sanctions. Accordingly, the statutory demand was reinstated.
Pity the poor compliance officer trying to work out whether a given transaction breaches sanctions or not!