Between a rock and a hard place: How to ensure sanction compliance when operating a facility in a sanctions-targeted country

The recently reported resignation of cement manufacturer LafargeHolcim’s CEO has thrown a spotlight on the risks of operating commercial activities in countries targeted by economic sanctions.[1] Without drawing any conclusions on the legal qualification of LafargeHolcim’s conduct in the specific circumstances, the following provides an overview of the principal issues at stake in this case. Background In June 2016 the French newspaper Le Monde published allegations against French cement manufacturer Lafarge SA, now part of the merged Franco-Swiss entity LafargeHolcim, concerning its alleged involvement in indirectly financing terrorist groups, chief among them the jihadist so-called ‘Islamic State’ (‘ISIS’) in Syria from 2011 to 2014. Lafarge had acquired Egyptian cement company Orascom in 2007 and, as a consequence, became involved in the operation of several factories in the Middle East. Its Syrian subsidiary’s (Lafarge Cement Syria – LCS) factory reopened only a year before violent protest, escalating into civil war, erupted in Syria in 2011. LCS’s headquarters were located in Damascus, and the factory in question in the Northern district of Raqqa, which in 2012 came under the control of armed groups and thereafter under the control of ISIS. As the armed groups and rebel forces within the region became increasingly radicalised, it is reported that weekly crisis meetings, of which Lafarge’s Parisian headquarters were apparently kept informed, became daily crisis meetings. While expatriate employees had been evacuated by 2013, most Syrian employees remained at the factory until it was finally closed at the end of 2014. LCS faced a total of four cases of employees being kidnapped –who were eventually released upon ransom payments. Investigation by the French Authorities The Ministry of Economics and Finance confirmed with French media outlets that, in September 2016, it filed a complaint with the Parisian public prosecutor (“le parquet de Paris”). The factor giving rise to the complaint apparently concerned the purchase of petroleum by LCS from sanctioned parties, prohibited by EU sanctions issued in 2012. Press reports also mention arrangements allegedly made with ISIS for employee and Lafarge product passes through checkpoints across the front. As a result, a preliminary investigation has reportedly been launched by the French authorities. These criminal proceedings are conducted in accordance with strict confidentiality and non-disclosure rules. Currently, neither Lafarge SA nor any of its affiliates have apparently been made party to the proceedings. Media reports also refer to civil claims brought against Lafarge in connection with its past conduct in Syria. Comments Beyond the facts of the individual case, the issues surrounding LafargeHolcim provide an impression of the hard choices companies may have to make under such circumstances if they wish to ensure compliance with sanction rules. In particular, the case highlights the importance of effective ‘ring-fencing’ mechanisms in order to ensure EU nationals or EU legal entities are not seen as involved in decision-making of a foreign subsidiary potentially engaged in sanctionable activities. It should be pointed out, however, that generally speaking non-EU subsidiaries of EU companies will not be subject to EU sanctions restrictions. If one adopts a strict approach, such measures should probably have been put in place by Lafarge in such a way as to be in effect from the beginning, including as part of the acquisition process that brought the Syrian operations into Lafarge’s ownership. Even though ISIS-related designations ‘only’ came into effect in 2014, such ‘ring-fencing’ measures should, at the latest, have been implemented once Syria-related designations and more specific petroleum-related sanctions were made by the EU in 2011 and 2012. Conducting an ‘after the event’ analysis can result in significant legal and reputational risks. Official investigations have the potential to ‘drag out’ the period of scrutiny and reputational risk for a considerably long time, and may harbour unexpected and unpleasant surprises along the way. One can nonetheless well imagine the dilemma facing the EU parent company unwilling to leave a subsidiary in a hostile country to its own devices and feeling responsible for protecting its employees’ safety and the value of its investment. The company’s own general conclusion was that it had stayed in Syria for far too long, in breach of its own “red lines” and its internal Code of Conduct. It reasoned that “those responsible for the Syria operations “seriously misjudge[d] the situation” and “neglect[ed] to focus sufficiently on the legal and reputational implications of their conduct”. Regarding Lafarge’s conduct at the time, the company concluded that its compliance programme may have been deficient, in particular in terms of (i) “insufficient independence of the Internal Control function from line operations”, (ii) the subsidiary in question being able to circumvent internal certification procedures, and (iii) Lafarge’s inability to conduct a field audit given the security situation at the factory. An internal investigation by LafargeHolcim illustrates the multiple compliance risks an EU parent company of a subsidiary in a sanctioned country may be facing under such circumstances[2]:

• the compliance system should be adequate and prevent any improper payments through the subsidiary’s security and supply chain;
• line management must preserve its ability to detect and escalate any improper conduct or payments;
• there must be adequate controls deployed over individual expenses, discounts, and financial disbursements by the subsidiary;
• and finally, there must also be an adequate review and oversight of joint venture partners and other third parties the subsidiary may engage with.

The criminal investigation that has been initiated by the French authorities also indicates that authorities will scrutinise a breach of sanctions where – as in the case of LCR – this was merely to maintain factory operations and ensure employees’ safety. Given the wording of Article 6 of Council Regulation (EU) No 36/2012 of 18 January 2012 -- concerning restrictive measures in view of the situation in Syria -- the authority had little choice in this regard. This Article prohibits, amongst other things,

• the purchase or transport of “crude oil or petroleum products which are located in or which originated in Syria”,

• direct or indirect provision to sanctioned persons or entities of “financing or financial assistance, including financial derivatives, as well as insurance and re-insurances” and

 

• knowing and intentional participation “in activities whose object or effect is, directly or indirectly, to circumvent the [above] prohibitions”.

Whether a breach of this provision will actually result in criminal penalties, to the extent that such a breach may be found, is a different matter and will ultimately depend on the specific circumstances and the national rules giving effect to EU sanctions regulations. National law may also leave room for a more nuanced assessment of the dilemma facing a European company not wishing to leave a subsidiary that operates in a hostile environment to its fate. [1]       It should be noted that LafargeHolcim’s internal investigation into the events in Syria (see below) rejected the allegations that CEO Eric Olsen had been directly involved in or had knowledge of any of the above. The company’s ‘Syria Review’ has not identified any wrongdoing on his part. [2]       For more information, see “LafargeHolcim concludes independent investigation into legacy Syria operations and issues summary of investigation findings”, available at <http://www.lafargeholcim.com/summary-syria-investigation-findings> (last accessed on 25 April 2017).