Overview
The February 2021 coup in Myanmar has presented overseas investors, who flooded into the country as it moved towards democracy, with a series of difficult legal, commercial and ethical considerations.
Prominent among the first of these is the issue of sanctions. Each of the US, EU and UK has sanctions in place in relation to Myanmar. The US, EU and the UK have updated these to reflect recent developments. Further restrictions may come in the weeks and months ahead.
While the international reach and enforcement of US policies means that US sanctions are often at the forefront of investors' minds, EU and UK sanctions may also be directly relevant.
This briefing looks at some of the practical questions investors should consider.
1. Which sanctions apply to investors?
The first question in a sanctions analysis is usually which sanctions apply as a matter of law. To the extent relevant, the EU sanctions on Myanmar apply within the EU's territory to any natural person inside or outside the territory of the EU who is an EU national, to any legal entity incorporated or constituted under the law of an EU member state, and to any legal entity in respect of any business done in whole or in part within the EU.
UK sanctions apply both within the UK and to conduct by UK persons outside the UK. The UK has published guidance as to what constitutes a "UK nexus", giving an indication of the circumstances in which the UK financial sanctions authority (OFSI) considers UK sanctions will apply.
2. Don't forget contractual provisions in relation to sanctions
It is not uncommon for parties who would not have to comply with EU or UK sanctions as a matter of law, to agree – at least to some extent – to comply with these restrictions in loan agreements or commercial contracts.
Investors should review these provisions carefully. These may be (a) limited to undertakings not to use funds derived from dealings in Myanmar which would be in breach of sanctions to repay loans, or to use the proceeds of loans for activities which would be in breach of sanctions, or (b) of more general application. Failing to comply with these restrictions could lead to a contractual breach or event of default.
3. Designated persons: understanding who you're dealing with
Both the EU and the UK have designated certain natural persons as targets of sanctions measures. This means that persons within the jurisdiction of EU or UK sanctions must (a) freeze the assets of those designated persons, and (b) not provide those persons with funds (which is very broadly defined and includes things such as shares, bonds and certain contractual rights) or economic resources.
Although licences may in certain circumstances be available permitting the use of frozen assets, these must be applied for and will generally not assist dealings with, or for the benefit of, designated persons.
Investors should carefully screen both new and existing counterparties to ensure they are not on sanctions lists.
4. The obligation doesn't end there: the issue of ownership and control
Both the EU and the UK sanctions extend asset freezes and prohibition on the provision of funds and economic resources to entities owned or controlled by designated persons.
In the EU, guidance states that the criterion for assessing ownership is whether a designated person owns 50 per cent or more of the proprietary rights of an entity, or has a majority interest in it. Control is determined by reference to a series of criteria, including the right to appoint a majority of a Board or supervisory body, the right to control a majority of shareholders' rights or the ability to exercise dominant influence over an entity. In each case, actual ownership or control may be refuted on a case-by-case basis.
In the UK, an entity is owned or controlled directly or indirectly by a designated person if either (or both) of the following conditions is met:
a) the designated person holds either (directly or indirectly) more than 50 per cent of the shares in the entity and/or 50 per cent of the voting rights in the entity and/or the right directly or indirectly to appoint or remove a majority of the board of directors of the entity; and
b) it is reasonable, having regard to all the circumstances, to expect that the designated person would (if he/she chose to) be able, in most cases or in significant respects, by whatever means, and whether directly or indirectly, to achieve the result that the affairs of the entity are conducted in accordance with his/her wishes.
These ownership and control provisions are largely consistent across each of the EU and UK sanctions regimes. However, the challenge is particularly acute in relation to Myanmar where there is a close interrelationship between members of the ruling military elite (who have been targeted by UK and EU sanctions) and major industrial conglomerates, owned by the military, who have investments in a wide range of commercial sectors. Overseas investors may be in joint ventures or have commercial relationships with these conglomerates − Myanmar Economic Corporation (MEC) and Myanmar Economic Holdings Limited (MEHL). Investors will therefore have to consider the extent to which their counterparties may be owned or controlled by Myanmar military figures targeted by sanctions, and so fall within the ambit of EU or UK sanctions.
On 25 March 2021, the UK listed MEHL as a designated person in its own right, making it subject to an asset freeze and prohibition on the provision of funds and economic resources resources. As part of the listing, the UK identified 41 subsidiaries of MEHL, operating across a range of industry sectors. On 1 April 2021, the UK listed MEC as a designated person, identifying a large number of its subsidiaries.
5. Beyond financial sanctions: trade prohibitions
Although asset freezes and designated persons attract the most attention in EU and UK sanctions, there are also significant trade prohibitions which can affect commercial parties.
Both EU and UK sanctions contain similar restrictions on provision of military goods and technology, dual use goods and technology, goods and technology which may be used for internal repression, and goods and services relating to monitoring and interception of telecommunications in Myanmar. Significantly, there are also restrictions on providing technical assistance, armed personnel, financial services or funds or associated brokering services to or for the benefit of the Tatmadaw (the Myanmar army) (or persons acting on its behalf or under its direction) where such provision relates to military activities, or otherwise enables or facilitates the conduct of armed hostilities, in Myanmar. The breadth of this provision means that it may capture activities which would not ordinarily be thought to relate to military activities in Myanmar.
Future trade prohibitions may follow. Both the EU and the US have targeted specific industries prominent in Myanmar such as metals, timber, and precious and semi-precious stones in previous sanctions regimes.
6. Sanctions evolve quickly: analyses and risk assessments should be constantly reviewed
The content of sanctions is driven by geopolitics and the foreign and security strategies of states. Particularly in fast-moving situations, sanctions can change quickly. Designated persons may be added to sanctions lists, and restrictions may be enhanced.
Investors should keep their analyses and risk assessments constantly updated, and be alive to the fact that designated persons targeted by sanctions may move assets so as to seek to keep them beyond the reach of EU and UK sanctions. A thorough integrity due diligence exercise will assist in managing this risk.
7. What happens if sanctions prohibit activities required under contracts?
The relationship between contractual obligations and sanctions is invariably complicated. Parties affected by sanctions sometimes rely on contractual force majeure provisions, specific provisions in contracts dealing with the consequences of sanctions, or the general position at law, for instance force majeure or supervening impediment articles in Civil Codes.
A key question is often to what extent the party claiming relief from contractual obligations is acting pursuant to a legal, or practical, obligation not to deal with its counterparty, or merely that it wishes not to deal for commercial or reputational reasons. Close analysis of the contractual or legal provision relied upon to suspend performance is necessary to determine whether contractual relief is available. Although force majeure is often the first place that investors look, such provisions may not operate as investors had hoped in connection with the imposition of sanctions.
The situation in Myanmar is a salutary reminder that investors should think about building "exit plans" into contracts when negotiating investments in potentially challenging jurisdictions.
8. What happens if a party seeks to comply with sanctions but is sued for breach by its counterparty?
EU sanctions on Myanmar state that the freezing of funds and economic resources, or the refusal to make funds or economic resources available, carried out in good faith on the basis that such action is in accordance with EU law, shall not give rise to liability of any kind on the part of the person implementing them, or its directors or employees, unless it is proved that the funds and economic resources were frozen or withheld as a result of negligence.
Similarly the UK's Sanctions and Anti-Money Laundering Act 2018 (under which the Myanmar sanctions have been imposed) states that a person is not liable to any civil proceedings in respect of acts which it has done (or not done) in the reasonable belief that such acts are in compliance with UK sanctions regulations.
These protections of course are only of value if a contractual claim is brought before a court or tribunal which considers itself bound to follow EU or UK law (as applicable). An attempt to rely on the protections in, say, a Myanmar court, may be less successful.
9. Can banks and financial institutions impose restrictions, in relation to dealing with Myanmar, on existing loan agreements?
There is nothing to stop banks and financial institutions seeking retrospectively to agree Myanmar-related restrictions in loan agreements. However, unless borrowers agree to this, the banks are unlikely to be able unilaterally to impose such restrictions. Loan agreements often do contain restrictions concerning dealings with countries subject to so-called comprehensive or country-wide sanctions. However, at present, Myanmar would not fall within this list (which is generally understood to comprise Iran, North Korea, Cuba, Syria and Crimea/Sevastopol – countries targeted by the US for particularly wide-ranging restrictions), although this could change.
10. Beyond sanctions: investment treaty protections
Beyond sanctions, overseas investors may also wish to consider another branch of international law: investment treaties. Myanmar has a number of investment treaties in force with countries including Korea, Japan, Thailand and China. It is also a party to the ASEAN Comprehensive Investment Agreement.
Investment treaties can provide protections to investors faced with expropriation, unfair or discriminatory treatment, or a failure by government authorities to protect and secure investors' investments. Treaties may permit claims for compensation to be brought before international investment arbitration tribunals.
Authors: Tom Cummins, Ross Denton, Sophie Law, Louise Youngman.
