Robson Lee: Guard against consequences of doing business with sanctioned entities

Increasingly, Singapore companies have more reasons to be vigilant about the international businesses and individuals they deal with. The companies risk running afoul of anti-corruption and anti-money laundering laws of the US and other countries, which are being applied vigorously against those who have dealings -- even unknowingly - with criminals.

"These are very important considerations in global markets because Europe, the US and other countries are committed to rooting money laundering, terrorism financing, and corruption," says Robson Lee, a partner at Gibson, Dunn & Crutcher LLP. 

The US exerts its powers through its Office of Foreign Assets Control (OFAC) which has seen significant growth in its sanctions.

Robson Lee is a partner at Gibson, Dunn & Crutcher LLP, which has 1,200 lawyers in 19 offices in the US, Europe, South America, the Middle East and Asia. NextInsight photo

"Over the years, it has gone after countries such as North Korea and Myanmar, some of whose citizens have become Specially Designated Nationals (SDN). So the growth of sanctions has become part of the risks that corporations have to manage and mitigate when doing business," says Mr Lee, in a recent interview with NextInsight.

Risks lurk in unexpected places, sometimes.

"Countries which are sanctioned and individuals who are on the sanctions list have set up entities all over the world. Singapore is home to 41 entities currently sanctioned by OFAC. And that is something that is unknown to many people."

The UK has its version of OFAC in the OFSI (Office of Financial Sanctions Implementation). 

Then there is the Paris-based FATF (Financial Action Task Force) which made headlines in Singapore recently, when it said that Singapore can do more to combat money laundering and financing of terrorism on trans-national basis.

Following that, the government announced that there would be amendments to the Companies Act and the Limited Liability Partnership (LLP) Act to enable regulators and enforcement agencies to enquire, and owners of companies and LLPs must disclose, the beneficial owners behind companies set up in Singapore. 

One of the most feared penalties or consequence of dealing with sanctioned party is the fact that you can be blacklisted. When you are blacklisted by the US government, you are barred from access to their jurisdictions. Consequences of blacklisting are very severe. Your assets can be frozen. Access to the US market, retail investments, insurance, re-insurance, stocks, bonds, corresponding, banking, everything is prohibited. That has happened in 1MDB’s case.

China will in, due course, have its own rules for international businesses that want to engage with any Chinese entity. As a further example of countries getting tough, Indonesia is cracking down on evasion of income tax. It has granted an amnesty which will expire in March next year. 

Dealing with, for example, a US-sanctioned party can result in huge consequences for a business.

"Your assets can be frozen. Access to the US market, retail investments, insurance, re-insurance, stocks, bonds, banking, everything is prohibited. That has happened in 1MDB’s case. If you look at Jho Low, his huge mansions and real estate have all been frozen.  And it’s not just hard assets -- your liquid assets and other assets such as cash, investments, stocks…anything that you invest in NASDAQ or New York Stock Exchange, any bonds or any insurance policies that you have bought -- can be frozen," says Mr Lee.

"The next thing that can happen to you is penalties. The authorities can fine you billions of dollars and require you to divest stakes in companies, or require US companies, anybody who invests in you, to divest their stakes immediately. And they will suspend all your licenses for doing business in the US."

You wouldn't even be able to enjoy the freedom of movement as you could be extradited to the US for investigations.

"If you remember, certain Singapore entities or persons who have dealt with countries that were under sanctions…Singapore has cooperated with all the extradition requests. And in the case of one guy who Singapore had not extradited to US, he went over to Batam, he was caught, and he was flown on the next plane to the US."

The fallout from being blacklisted or extradited or simply being investigated is what Mr Lee calls "de-risking" action by people around you.

"They totally cut off, they back off, back out of deals. Suddenly, you can’t even open a bank account. Everyone who has signed contracts will not perform their contracts with you. Let’s say you do a letter of credit or some performance bond guarantee. Suddenly everybody just says, sorry, tomorrow we will not honour our letter of credit or performance bond anymore.

"De-risking is a form of self-protection every entity takes on its own. And I’ve seen a client from another country, he goes around to all the law firms. No law firm wants to deal with him. So de-risking is so overwhelming and scary that even if you are a huge conglomerate, tomorrow you can be reduced to rubble." 

♦ What to do?

It is very important that the people who are working with you or your risk management team, if you are a very big corporation, that you must have training and compliance resources to ensure that every one of these risk management, due diligence people or your global counsel, they call it general counsel, are very well trained and educated on the risk awareness, sensitivity to risks. Your risk sensitivity has to be very high.   -- Robson Lee (NextInsight photo) What must Singapore companies do to avert such consequences? What are the compliance best practices to be adopted? "Your due diligence has to be very comprehensive to determine who is the beneficial owner of the counterparty," says Mr Lee. "Your diligence people or your global counsel have to be well trained and educated on the risks. Because if you look at today’s papers. Keppel now has come out and say that, well, there are transactions carried out by our agents in Brazil that look suspicious. It’s on the front page." And don't overlook even a single violation which the counterparty might dismiss as being insignificant. "Anyone who has been fined by the US authorities, the minute Uncle Sam has stepped in, you have to be more careful about him. If need be, engage a US law firm in that particular state to give you a more comprehensive due diligence." Red flags might surface in the course of business, and make you revisit your due diligence efforts. "For example, you have a transaction broken in three or four parts, although it makes more logical sense to have it in one part. Instead of getting payment from the entity that you dealt with in that particular country, they tell you the payment will be wired in from another country." Don't be selective in where you decide to be a good guy. "You are well advised to adhere by the Singapore standards of zero tolerance towards corruption, money laundering and financing of terrorism, and carry this mindset to every country that you do business in. "Because today a regime may be tolerant or indulgent but tomorrow, in a wave of political euphoria after winning elections, the new regime might scrutinise transactions contracted previously. When Thaksin's government in Thailand was overthrown, the new government started to scrutinise transactions that certain Singapore companies had with Thai entities."