EU’s Instex will never trump US Sanctions

The European Union’s latest salvo in defiance of US Extra-Territoriality, after numerous failed EU Blocking Statutes since 1996, is the Instex barter mechanism.

To date, Fenergo reported that between 2008-2018, US monetary penalties of $23.52bn represented 91% of all global KYC (due diligence), AML (Money Laundering) and Sanctions-related fines. Sanctions-related fines amounted to a whopping 56% of the global total as well.

$23.52bn. With European firms hit many more times than their US counterparts. A “mere” $1.7bn levied by the EU, and $609m in fines issued in Asia. From a risk determination perspective – an absolute no-brainer, surely?

The clear and present threat remains the US. A quick look at the level of trouble facing those who attempt to circumvent US Sanctions – and fail – makes for a pretty unwelcome outcome. Fines are not all that can be imposed by the US, and the bar to burden of proof for sanctions violations is not high.

In terms of penalties, the end-result is potentially very stark indeed. The US has the power to pass a Section 311, Fifth Special Measure of the USA PATRIOT Act, which can cut off entire jurisdictions, entities and even transaction types from US dollar, US market access. Typically ruinous economic isolation for jurisdictions (North Korea in 2016 and Iran in 2011 under President Obama are but two examples. Financial institutions caught under a Section 311 tend to close after this measure is imposed.

The EU’s Instex attempts to circumvent US Sanctions via barter transactions. The EU’s attitude to US Sanctions here is not dissimilar to its approach to the failed “Iran Nuclear Deal” – which the US pulled out of in May 2018, fully re-imposing sanctions in November 2018. Time and again, the EU has recklessly attempted to ignore the extra-territorial reach of US Sanctions, only for countless EU entities to be caught in the crossfire when US enforcement strikes.

Just as a reminder, the US significantly ramped up and integrated its economic sanctions, anti-money laundering and counter-terror financing regime in the aftermath of 9/11. In announcing the “War on Terror”, then-President Bush invoked – and received support for, from US allies – a coordinated response to further unprovoked attacks on US or Allied domestic soil. Importantly, the US made use of meaningful United Nations Security Council Resolutions to take support future actions in this vein.

Interestingly, a few months previously, the EU’s UK Commissioner, Chris Patten, had been engaged in a standoff with the US government where the EU had shown little tolerance for US extra-territorial, or cross-border, imposition of its own sanctions in the event of a breach overseas – with Sudan being one of the targeted nations at the time.

The results of the enhanced US Sanctions program have been extraordinarily acute. The use of Deferred Prosecution Agreements, a push for settlements and the threat of a lower (US) burden of proof for corporate criminal liability have enabled the US to apply extraordinarily powerful levels of suasion and, using its pre-eminent US Dollar currency as leverage, the very real threat of being cut off entirely from US Dollar and US markets.

In a world where some fully 62% of global assets are held in US Dollars as allocated reserves, some 90% out of a total of 200% (on a pair currency basis, the nominal calculation is out of 200%) of all global foreign exchange transactions. If these do not immediately seem to be overwhelmingly high numbers, spare a thought for the beleaguered Euro with some 20% of global share of allocated reserves, and representing some 30% of the total 200% of pair currency forex transactions on a global basis.

With the Chinese Yuan/Renminbi not even floated on the global markets, there is no challenger nor hedge to the US Dollar, which is also the de facto currency for the major commodities markets (oil & gas, precious metals, raw materials etc). Moreover, the US Dollar has its own domestic and foreign protection agency in the form of the US Treasury, which not only prints the US Dollar, but also protects US interests via FinCen (domestically) and OFAC (externally), alongside the US State Department and many other departments (Justice, Intelligence etc) who habitually cooperate in major global and domestic investigations.

Whilst one could conceivably see some trade finance options between governments, it is hard to see how listed and unlisted entities, non-profit organisations save for those few activities which fall under those exempted under US Sanctions. In global terms, non-US entities need to take particular care not to get involved in “US Sanctions-toxic” transactions which might well be permissible under EU or non-US laws, but which do not apply to entities with a global presence who should be mindful of their dependence on US Dollars, the US market – should they wish to expand their global exposure.

The EU seems keen to claim that US Sanctions can somehow, magically, be ignored – and that entities can credibly be expected to operate in a very narrow sphere of global activity indeed. With non-US entities already caught up in US Sanctions breaches, numerous financial institutions, closed after facing major US penalties such as Section 311, Fifth Special Measure of the USA PATRIOT Act. Financial institutions, jurisdictions and even transaction types have faced exclusion from US Dollars and US markets.

Typically, the burden of proof, or bar, is far from taxing for US authorities to take action. Numerous multi-million, multi-billion US Dollar settlements citing “Apparent Violations” as sufficient for US authorities to impose major monetary penalties should be more than sufficient evidence for entities not to wish to incur, deliberately or otherwise, the full force of US enforcement.

For Boards perusing major investment opportunities, Relationship Managers contemplating onboarding highly lucrative business with new clients, customers – the message is stark. Running the risk of breaching US Sanctions on the substance (not the geography, or currency) of the offence may well be a risk not worth taking. For the EU to be confusing the matter further by purporting to offer a barter-type arrangement via Instex (which, for the vast majority of transactions with the likes of US-designated Iran, and all the US-designated actors there – looks highly unconvincing) seems downright irresponsible.

BNP Paribas, then the 5th largest bank in the world, was caught up in US Sanctions breaches involving primarily Sudan and Iran – and, despite EU Blocking Statutes purporting to disregard US Extra-Territorial reach – still ended up paying the highest Sanctions fine ever – a whopping $8.9bn in 2014, as well as an admission of corporate guilt.

From an “EU” perspective, BNP Paribas’ contention was that it had broken no EU nor French laws in its activities in Sudan and Iran. The US uncovered some $190bn of alleged suspicious transactions, and fined the bank anyway, disregarding this contention entirely.

In reality, the spectre of the BNP Paribas fine – which sadly seems to have escaped the entire Nordic market in the Baltics – should be more than enough of a deterrent to most sensible CROs, CFOs, COOs and CEOs on Boards of any competence.

The major share price hits to the Nordic banks Danske Bank, Swedbank, SEB, Nordea over Baltic money laundering issues with reputational contagion also hitting DNB and even Sweden’s Handelsbanken, which is not present in the Baltics, is a measure of the damage that can arise if ignorance of US Sanctions breaches becomes prevalent. Did those in the Nordics seriously pretend that no-one was looking? Or was the collective ignorance just a measure of an entire region asleep at the wheel?? Whatever – international scrutiny will not be a kind master, judge and jury for these tiny markets.

Astonishingly, there are still those in the Nordics who deny that US Sanctions are an issue for Nordic banks in the Baltic region. Despite ongoing US investigations outside the US on Nordic banks (making US Sanctions issues a certainty) and the numerous US-designated parties involved, and highly relevant US Sanctions issues, such as Magnitsky. Never mind the unending, serious conflicts of interest with such a finite group of senior leaders, families, major corporations in a tiny, somewhat inward-looking region. Nordic Boards remain inconceivably Nordic-centric, and introspective. Accusations of collusion are inevitable, and will be highly damaging to the region.

With massive stakeholder and shareholder class action lawsuits the inevitable end-result for publicly listed companies, the reputational risk that US Sanctions breaches incur, the massive ongoing drain of legal and compliance resources that lengthy ongoing investigations cause, it is little surprise that so many EU companies have already elected to remove Iran from the list of potential market opportunities.

The EU may not like this, but they are not the ones protecting stakeholder, shareholder interests. Unlike Boards who are recompensed on their performance, the EU has seldom been overly focused on accountability and reliance on past performance for future survival. The EU Member State governmental handouts come around regularly with the passing of the

From a corporate perspective, you would be hard pressed to convince serious risk professionals that the likes of US-Designated Iran (an exasperated President Obama, not Trump – passed a Section 311 on Iran in 2011 having lost all patience with his own attempts at meaningful, diplomatic resolution) represents the best option for entering into a new market. With so little evidence that the EU will offer any meaningful support when inevitable US Sanctions breaches via “Apparent Violations” lead to eye-watering monetary penalties – or, worse – total exclusion from US Dollar, US markets entirely.

From a risk/reward perspective, Instex seems like a complete non-starter for serious risk professionals. With the US, EU and Iran – things look set to get worse before they get better…

The only solution for the EU is very simple – make the Euro a far more credible and powerful currency. This would involve giving it a proper, fiscal basis – driven by tax revenue generation via the EU Member States. The US Dollar represents some 62% of global reserves (Euro: c. 20%), and has a massive 90% out of a 200% total of forex transactions on a pair currency basis.(Euro: c. 31%).

For Sanctions policy to work, you need a strong currency. Until the EU comes up with a credible alternative to the US Dollar – it will not be able to compete in global Sanctions terms.