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Libyan Sanctions Update: European Union and the United States Expand Economic Sanctions against Libya

April 22, 2011

 

Since our most recent report, the European Union and the United States have adopted several new economic sanctions measures targeting Libya. [Click here to read O’Melveny’s March 15, 2011 alert] Responding to a new United Nations Security Council Resolution, as well as on-going developments in the Libyan conflict, the new measures extend the sanctions regime to a number of additional persons and entities and clarify the impact of the sanctions on entities in which sanctioned persons or entities have a stake.

The new measures are:

UN SECURITY RESOLUTION

Building on UNSCR 1970, UNSCR 1973 widened the scope of and extended the asset freeze imposed under the previous UN Security Council Resolution beyond Muammar Qadhafi and five members of his immediate family to the following entities: (1) the Central Bank of Libya, (2) the Libyan Investment Authority, (3) the Libyan Foreign Bank, (4) the Libyan African Investment Portfolio, and (5) the Libyan National Oil Corporation.

UNSCR 1973 requires States to ensure that their nationals or entities within their territories do not make available any funds, financial assets or economic resources to or for the benefit of these sanction targets. In addition, States are required to ensure that persons or entities within their jurisdiction exercise vigilance when dealing with Libyan entities or entities controlled or owned by Libyan entities.

DEVELOPMENTS IN THE EU SANCTIONS REGIME

The recent measures introduced by the EU make changes in four keys aspects of the EU sanctions regime.

1. ASSET FREEZE EXTENSION

The EU Regulations of March 21, March 23, March 25 and April 12, 2011 extended the lists of designated persons and entities for which an asset freeze is mandated. The April 12, 2011 Regulation contains the comprehensive list to date. Notably, the EU’s sanctions list now specifically includes the Libyan National Oil Corporation and many of its affiliates (e.g., Azzawia (Azawiya) Refining, Ras Lanuf Oil and Gas Processing Company, Sirte Oil Company, Waha Oil Company, Zuietina Oil Company, Harounge Oil Operations, North Africa Geophysical Exploration Company and others). Some entities are not located in Libya; for example, Mediterranean Oil Services GMBH (Germany) and Tekxel Limited (United Kingdom). Notably, Arabian Gulf Oil Company (AGOCO) is not on the list. AGOCO is headquartered in Benghazi, Libya, and news media have reported that the Interim National Council, representing the insurgents, have effectively taken control of AGOCO’s management.

The April 12, 2011 Regulation also removed one individual --Moussa Koussa, the former Libyan foreign minister -- from the list after Mr. Koussa defected to the United Kingdom. The United States also promptly removed Mr. Koussa from the named persons on the U.S. sanctions list, in an explicitly positive response intended to encourage others to abandon the Qadhafi regime.

2. ENTITIES IN WHICH SANCTIONED PERSONS OR ENTITIES HAVE A STAKE

New Article 6a of the March 2, 2011 Regulation (inserted by the amending provisions of the March 25, 2011 Regulation), confirm that non-designated entities in which designated persons or entities have a stake shall not be prevented from continuing to conduct legitimate business in so far as this business "does not involve making available any funds or economic resources to a designated person, entity or body." The purpose apparently is to make clear that the mere presence of an investor stake held by a designated person does not mean the invested enterprise itself is subject to an asset freeze, but that transactions with such an enterprise may not be used to funnel funds or other economic resources to designated persons. An easy example would be that an enterprise could not pay cash dividends to a shareholder who is a designated person (such as one of the several Libyan government investment funds on the sanctions list).

In addition, new Article 6a of Council Decision 2011/137/CFSP of February 28, 2011 (inserted by amending provisions in Council Decision 2011/178/CFSP of March 23, 2011) obligates Member States to require persons and entities subject to their jurisdiction "to exercise vigilance" when doing business with Libyan entities (including those not covered by the asset freeze).

This new emphasis on legitimacy and vigilance indicates that the heightened level of diligence required by those subject to the broad reach of the EU sanctions regime in doing business in Libya.

3. NO FLY ZONE

Articles 4a and 4b of the March 25, 2011 Regulation impose a no-fly zone on Libya for aircraft originating from both Libya and the EU, save for such flights that are for purely humanitarian purposes or that have been authorized by the UN.

4. ARMS EMBARGO EXTENSION

The March 25, 2011 Regulation prohibits the provision of technical assistance, financing or financial assistance, and transport services that facilitate the provision of prohibited items to mercenary personnel in Libya or for use in Libya. However, certain derogations are carved out; for example, services related to non-lethal military equipment or equipment intended solely for humanitarian purposes are exempt from this prohibition.

DEVELOPMENTS IN U.S. SANCTIONS

The Treasury Department’s Office of Foreign Assets Control (“OFAC”) has issued additional guidance and licensing to permit certain transactions without OFAC’s specific authorization. On April 8, 2011 OFAC issued General Licence No. 4 with respect to investment funds in which there is a Blocked Non-Controlling, Minority Interest of the Government of Libya. General License No. 4 authorises U.S. persons to be involved in the "normal operations" of an "investment fund" that is organised, located, managed, or administered in the U.S. in which a designated person has "both a non-controlling and a minority interest."

This approach is consistent with that set forth in Article 6a of the EU Regulation, described above, though it is more specific in its scope: General License No. 4 explicitly does not encompass minority stakes that are “controlling.” OFAC has long taken the position that an entity having an investment stake of 50% or more held by a sanctioned person is itself a blocked entity. Regarding minority stakes, "U.S. persons are advised to act with caution when considering a transaction with a non-blocked entity in which a blocked person has a significant ownership interest that is less than 50% or which a blocked person may control by means other than a majority ownership interest." Whether a minority stake is "controlling" is determined on a fact-specific basis; there is no bright line test.

Accordingly, the key importance of General License No. 4 is the clarity that an investment fund may operate normally despite the fact that it may have received funds from a government of Libya entity, such as the Libyan Investment Authority, so long as such an investment does not provide a measure of control of the fund. The safe harbor of the license is subject to several conditions and requirements, however, including a prohibition against making funds available to the blocked investor, and monthly reporting requirements concerning the blocked investment funds.

COMPARISON OF EU AND U.S. SANCTIONS LISTS

The EU sanctions list has continued to expand and, consequently, the EU and U.S. sanctions list increasingly cover the same ground. Nevertheless, the difference in approach taken by the two jurisdictions results in lists that are not completely aligned.

The scope of the U.S. list of blocked persons, is, in some respects, broader, deriving both from defined categories and specific named parties. The Executive Order defines the categories and authorizes the Secretary of the Treasury to designate specific individuals and entities from among them. These are (i) senior officials of the Government of Libya; (ii) Qadhafi’s other children; (iii) those responsible for or complicit in human rights abuses in Libya; (iv) those who have materially assisted or sponsored human rights abuses in Libya; (v) any individual or entity owned or controlled by any person whose assets are blocked; and (vi) spouses or dependents of any person whose assets are blocked. Generally, one should proceed on the assumption that an entity or individual described by any of these categories is covered regardless of whether the entity or individual is specifically designated by name. Thus, as an initial matter, any entity or individual on the EU list should be considered as likewise covered on the U.S. list, even if the entity or individual is not specifically designated on the U.S. list.

OBSERVATIONS

Corporations doing business with Libyan individuals or entities need to be aware of the impact of the dynamic situation with respect to the EU and U.S. sanctions regimes. Businesses need to recognize that EU and U.S. sanctions against Libya are not coordinated in every respect and so, crucially, compliance with one set of sanctions does not necessarily safeguard against liability under the other.

The situation in Libya is fluid and uncertain. As the EU itself has stated, there remains "a serious risk that conditions will deteriorate further."

O’Melveny & Myers has significant depth of experience in the economic sanctions and export controls areas. Its lawyers are actively engaged in conducting internal investigations and transactional due diligence; responding to criminal and regulatory enforcement inquiries and proceedings; evaluating and implementing compliance programs; and providing prospective advice about economic sanctions and export control issues in international business transactions. Our clients include U.S. and international companies, among them Fortune 100 companies, the world’s largest financial institutions, and diversified U.S. and offshore companies.