Sanctions Risk: Drafting Contracts To Avoid ‘Double Jeopardy'

In the recent case of Lamesa Investments Ltd v Cynergy Bank Ltd [2019] EWHC 1877 (Comm), the High Court upheld the bank's attempt to avoid a common banking dilemma: the 'double jeopardy' of being contractually liable to make a payment in one jurisdiction that risks the imposition of criminal or regulatory liability in another. In this case, if the bank had paid interest under a loan, it risked the imposition of U.S. 'secondary sanctions.'

Following soon after National Bank of Kazakhstan v. Bank of New York Mellon [2018] EWCA Civ 1390, Lamesa re-confirms that the English Court will enforce clearly drafted contractual provisions aimed at avoiding 'double jeopardy' liability.

The High Court's judgment also provides reassurance to non-U.S. financial institutions seeking to manage, contractually, their exposure to the global reach of U.S. sanctions. And it serves as a reminder of the need for those institutions to consider carefully the implications of U.S. sanctions.

Background

Lamesa was a company registered in Cyprus. It was wholly owned by a BVI company, which in turn was wholly owned by Mr. Viktor Vekselberg. Cynergy was a U.K. registered company carrying on business in England as a retail bank.

Lamesa advanced a £30 million loan to Cynergy, with interest payments due every 6 months. Cynergy subsequently withheld £3.6 million in interest on the basis of an exclusion clause in the loan agreement that provided:

[Cynergy] shall not be in default if…such sums were not paid in order to comply with any mandatory provision of law, regulation or order of any court of competent jurisdiction.

On 6 April 2018, Mr. Vekselberg was placed on a list of “Specially Designated Nationals” (SDN) by the U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC). Consequently, Lamesa became a “blocked person.”

This meant that any U.S. person anywhere in the world, any person dealing with property subject to U.S. jurisdiction or any person operating in the U.S. is potentially subject to 'primary sanctions' if they deal with Mr. Vekselberg, as a SDN, or Lamesa, as a blocked person.

However, non-U.S. persons with no property or operational connection to the U.S. can also be subject to sanctions—known as 'secondary sanctions'—in relation to a SDN or blocked person. In particular, under the U.S. Ukraine Freedom Support Act 2014 (part of the suite of sanctions legislation targeting Russian interests) the U.S. President is required to impose secondary sanctions on foreign financial institutions that knowingly facilitate “significant” financial transactions on behalf of a blocked person, unless the President determines that it is not in the U.S.'s interest to do so.

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