20 Essex Street's Sara Masters and Penelope Nevill describe the complex use of global sanctions and how they affect business

Sanctions are an increasing presence on the legal landscape. The UK Treasury website currently lists 22 sanctions regimes affecting 20 countries. Sanctions cut across various practice areas, from commercial law to human rights, and are a permanent fixture on regulatory compliance checklists across a wide range of industries. Judges and industry operators alike regularly find themselves asking whether their day-to-day activities, such as releasing a vessel from arrest or completing a sales contract, will put them in breach of a sanctions regime.

Historical context

Trade embargoes and sanctions regimes are traditional tools of foreign policy, but have grown in significance since the use of force as a tool of self-help was prohibited in international law. Under the international collective security framework established in the 1945 United Nations (UN) charter, the UN Security Council (UNSC) is responsible for responding to threats to international peace and security.

To that end, it can authorise collective military action and impose binding sanctions. But before the Cold War ended, the UNSC was effectively out of action because of the US and the Soviet vetoes. Nonetheless, 91 national sanctions regimes were established between 1945 and 1990, mostly by the US.

When Iraq invaded Kuwait in 1990, the UNSC for the first time authorised states to use force to repel the Iraqis, imposed a general embargo on Iraqi exports and froze all funds and assets of the Iraqi Government and any commercial, industrial or public utility undertaking. It was soon apparent the blanket sanctions regime had a devastating impact on Iraq's population.

This led to the targeted sanctions we are familiar with today, directed at a particular sector, eg, the material necessary to develop nuclear weapons, the diamonds and timber sold to fund regional or civil wars, or the assets and travel of the individuals responsible for the violations.

The growth in sanctions since 1990 has been phenomenal. According to a recent study, in the period 1990-2005, 74 UN arms embargoes were introduced and, as of mid-2009, 1,186 individuals were listed under UN and European Union sanctions regimes. In 2006, HSBC estimated there were 6,000 individuals, companies and other entities on US, UN and EU lists.

Sanction complexity

Sanctions are complex because of six inter-related factors.

A wider range of events may lead to sanctions being imposed – It is now accepted that how states treat their populations is a matter of international law and that murderous oppression or failure to control serious violence are threats to international peace and security and entail the breach obligations owed to the international community as a whole. Obligations under international law now extend to non-state actors such as terrorists and war criminals.

Sanctions regimes may be imposed by UNSC resolution, EU legislation or national legislation, or a combination of all three – The UN has no independent means of implementing and enforcing its sanctions regimes, but depends on its member states to do so. It is left to states to come up with the detail of how they will implement UN sanctions. How each state does so will be governed by the law and practice of that state, as will the interpretation of UN measures by its government and courts.

It is now common for the EU to implement UN sanctions on an EU-wide basis. Like the UN, the EU relies on national legal systems to enforce EU measures, and its regulations usually require additional national legislation. The UK implements UN and EU sanctions through statutory instrument or order in council under various acts.

Thus, sanctions regimes often involve overlapping legislative measures at the international, EU and national levels. Those involved in advising clients on sanctions regimes require an understanding of both where to locate the primary source material and also the law governing the inter-relationship of sources from different legal systems.

UN sanctions are expressed in broad language – The main UNSC Iran Resolution 1929 (2010), for example, requires states to "prohibit [] investment in any commercial activity" and to "prevent the direct or indirect supply" of various goods and services.

States may impose their own sanctions in addition to UN or EU measures – States may enforce obligations under international law by their own sanctions measures or add to UN resolutions with measures of their own. Good examples are the EU's sanctions regime against Syria in the absence of agreement in the UNSC and decision 2012/35/CFSP of 23 January 2012 imposing an oil embargo on Iran which goes beyond existing UN measures.

New sanctions regimes or amendments can be brought into force without warning – Targeted sanctions depend for their effect on the elements of speed and surprise. Just how fast sanctions can come into force is illustrated by the UK's regulations implementing EU Regulation No 36/2012 (Syria) of 18 January 2012: it came into force on 19 January on publication in the Official Journal of the European Union; the UK Syria (European Union Financial Sanctions) Regulations 2012 implementing the regulation and creating criminal penalties for breach were made at 11am on 19 January 2012, laid before Parliament at 2:30pm and came into force at 3pm. Familiarity with the main government websites publishing sanctions legislation and signing up for email alerts where possible is essential.

The scope of states' extraterritorial legislative jurisdiction under international law is potentially very wide, overlaps and is contested – The US has traditionally asserted extensive extraterritorial jurisdiction. EU sanctions regulations usually extend to any "legal person, entity or body in respect of any business done in whole or in part within the Union" (although the UK's implementing statutory instrument does not go so far).

While other states may protest against assumptions of excessive jurisdiction and pass blocking legislation in response, that may mean little in practical terms if part of the business or the transaction passes through the US or EU. Whether states, including EU states, assert jurisdiction or enforce sanctions measures depends on their resources and their enthusiasm. Surveys suggest some states are more proactive than others, with the UK being particularly active.

The proliferation of sanctions at international, regional and national levels, the reliance on implementation through secondary legislation, and the need to draft regimes broad enough to ensure their objectives cannot be circumvented have led to messy and ambiguous legislation, which has raised serious concerns as to their interference with fundamental rights. Moreover, the drafting of sanctions legislation is frequently insensitive to the ways in which the industries the sanctions target actually work.

What can you do?

While options for reviewing sanctions measures at the UN level are limited, there are now a growing number of cases at EU and national level where sanctions regimes have been successfully challenged.

The sanctions legislation itself may also provide a remedy: EU regulations include a standard provision that a person shall not be liable for breach by making "funds or economic resources available if they did not know, and had no reasonable cause to suspect, that their actions would infringe the prohibition in question".

Aside from the judicial route, careful due diligence, business planning and contract drafting can go a long way to anticipate common problems such as the vessel en route, the incomplete sales transaction or uncertainty as to whether performance is now illegal. Some of the standard form sanctions clauses we have come across in practice were drafted to meet different expediencies (eg, the bespoke Baltic and International Maritime Council or Intertanko sanctions clauses in charterparties) and do not fully anticipate the situations that might arise. They would benefit from review and amendment.

Industry bodies and interest groups should also consider working with governments or the EU to assist in drafting legislation that better meets their operating needs or taking test cases by way of judicial review or under Article 263 of the Treaty on the Functioning of the European Union.

When diplomacy fails, sanctions are the only enforcement tool international law has, aside from the use of military force through the UNSC, to enforce the non-proliferation of weapons of mass destruction and stop serious violations of international humanitarian and human rights law, crimes against humanity and military conflicts.

Given these vital objectives, we can expect the continued use of sanctions by the UN and by states acting unilaterally, particularly EU member states and the US. Sanctions measures will continue to throw up new difficulties and novel legal questions for some time yet. Having said that, with some careful forethought, sanctions regimes do not have to be an insurmountable barrier to trade and commerce.

Sara Masters (pictured first) and Penelope Nevill (pictured second) are barristers at 20 Essex Street, chambers of Iain Milligan QC.

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