Key Takeaways for Senior Management and Compliance Personnel from the Dan Bunkering Verdict

The verdict against Dan Bunkering, Bunker Holding, as well as the chairman of Dan Bunkering and CEO of Bunker Holding, is monumental not only because it is a rare example of a criminal conviction for EU sanctions compliance failures, but because it confirms the scope and expectations for what it means to comply with EU sanctions. 

In particular, the verdict confirms: 1) the benchmark for sanctions compliance, 2) that senior management have personal liability for their decisions on sanctions compliance and 3) there are real costs for failing to comply. 

The most important lesson from this verdict though is that the situation was entirely preventable. If your company is looking for help establishing an appropriate sanctions compliance program to effectively and efficiently manage your company’s sanctions risk to prevent facing similar circumstances contact us at inquiries@sanctionsadvisory.dk

The Benchmark of Sanctions Compliance: Known or “Should have Known” 

The court affirmed that failing to take reasonable action to ensure compliance with sanctions is at best negligence and at worst an intentional violation of sanctions.  The verdict makes clear that the responsibility for complying with sanctions does not end with just the direct parties of a transaction but extends to companies taking reasonable steps to ensure that the ultimate end use and user of the products won’t be in violation of sanctions.

In other words, the benchmark for compliance is that companies should know their activity will not violate EU sanctions or at least make every reasonable effort to ensure they tried to know, and therefore can demonstrate that it was unreasonable that they should have known the activity would violate EU sanctions.  For this case, the verdict makes clear that the court found all the defendants failed the benchmark of should have known. The red flags of the transactions were easily identifiable and that ignoring them to proceed with the transactions was an intentional violation of EU sanctions. 

As the verdict makes clear, the red flags evidencing that the defendants should have known the activity would violate EU sanctions were a new customer which is an agent for the Russian military wanting to acquire jet fuel by ship-to-ship transfer in the eastern Mediterranean after and the imposition of EU sanctions specifically targeting jet fuel destined for Syria in December 2014 and it was widely reported that the Russian military had started performing air raids in Syria in September 2015. 

“The majority of the judges found that T1 [Dan Bunkering] for all 33 trades must have realized that it was overwhelmingly probable that the jet fuel would be used by the Russian military in Syria. The majority thus found that T1 [Dan Bunkering] for all 33 trades committed an intentional violation of EU sanctions, emphasizing, among other things, that the trades were entered into by Russian employees at T1 [Dan Bunkering]’s branch office in Kaliningrad, where one must have been aware of the Russian intervention in Syria. It was also emphasized that the two Russian companies had not purchased jet fuel from T1 [Dan Bunkering] prior to October 2015, the amount of jet fuel delivered, and T1 [Dan Bunkering]’s knowledge that the two companies were general agents of the Russian fleet, which is why the jet fuel would be used by the Russian military.”

The court also affirmed that the decision by senior management of the group to not take immediate action to stop the trades after Dan Bunkering was approached by the Danish government is negligent. Even though Bunker Holding and it’s CEO were not conducting the day-to-day operations for these trades, as the head of the Group they made approvals for the deals and had the clear ability and capability to stop the trades based on their senior position in the group. 

In other words, the verdict makes clear that when senior management have the ability to take action and choose not to do anything is negligent because they knew activity was being conducted in violation of EU sanctions.

“The Court of Appeal unanimously found that both T2 [Bunker Holding] and T3 [Chairman/CEO] for the last 8 trades that took place in February to May 2017, had contributed to a negligent violation of EU sanctions, as following the Danish Business Authority’s inquiry to T1 [Dan Bunkering] in December 2016 and the subsequent internal investigation into the group’s activities, T2 [Bunker Holding] and T3 [Chairman/CEO] should have realized that the Russian company was supplying jet fuel for use in Syria in violation of EU sanctions, and that T2 [Bunker Holding] and T3 [Chairman/CEO] could and should have stopped trading.”

Senior Managers have Personal Liability for Sanctions Compliance

Throughout the case the defense attempted to argue that a holding company nor its management should be held responsible for the activities of its subsidiaries, the court however rejected this argument. This verdict makes clear that senior managers are directly liable and responsible for the sanctions compliance of the entire group, including subsidiaries, and risk prison time for not stopping violations of EU sanctions because they knew or should have known of the activity of the businesses that they control. 

“T3 [Chairman/CEO] has been sentenced to 4 months in prison, which has been made conditional. The court has hereby emphasized, among other things, that T3 [Chairman/CEO] is punished for a negligent violation of the sanctions, as well as the decision processing time [between the notice of inquiry by the Danish Business Authority and stopping the supplies].” 

Failure to Comply has Real Costs

The verdict confirms once again that prevention is always the cheaper option. The forfeiture of profit from the transactions and a fine of double the profit of the transactions for a total of 3 times the initial business profit demonstrates the real cost of failure to comply. By spending only a fraction of the profit forfeiture and direct fine, and much less when considering the legal and reputational costs the defendants have incurred, it would have been possible to prevent this entire episode by having a proper sanctions compliance program in place. 

“By the court’s judgment, T1 [Dan Bunkering] has been fined DKK 30 million, and T2 [Bunker Holding] has been fined DKK 4 million. Both fines are measured on the basis of the companies’ profits from the trades, so that the fine for T1’s [Dan Bunkering] intentional violation of the rules is measured at approximately double the profit, while the fine for T2’s [Bunker Holding] negligent infringement is measured so that it roughly corresponds to the profit of the last 8 trades.”

“T1 [Dan Bunkering] has the dividends confiscated from the traders, which have been calculated by the court to be approximately DKK 15.65 million.”

All quotes below are translated from Danish to English by the author.  The original judgement in Danish can be found here Dom i straffesag om levering af jetbrændstof i strid med EU’s sanktioner 

How should Nordic Banks and Companies React to the new US Russia Sanctions?

On April 15, 2021 the Biden administration announced a broad set of measures to combat malaign activities of the Rusisan government against the United States.  Some of these measures are very targeted and others create a broad structure for future sanctions that could have harsh consequences for us in the Nordics.  

While they complicate the environment, these measures won’t be the last actions taken by the US. President Biden has already forecasted the potential for future sanctions against Russia during the announcement when he stated “I was clear with President Putin that we could have gone further, but I chose not to do so, to be — I chose to be proportionate.” 

So what should banks and businesses do to mitigate the current and future risk of these sanctions?

First Step: Assess and Mitigate

The first action in addressing any new sanctions is to assess your exposure to the parties designated and the activities highlighted. The Biden administration has gone to great lengths in this announcement to make available identifiable information on the targets and their funding sources.  This information should be used to determine if your bank or business has any exposure to the actors and their nefarious activities of politically guided misinformation, election interference, or sanctions evasion as highlighted by the Department of the Treasury’s press release “Treasury Escalates Sanctions Against the Russian Government’s Attempts to Influence U.S. Elections”. If exposure is found it is best to devise a specific plan to orderly mitigate the sanctions risk as quickly as possible.

Specifically for banks, an assessment should also be conducted for exposure under the prohibitions of Directive 1 of the new Executive Order (E.O) “Blocking Property with Respect to Specified Harmful Foreign Activities of the Government of the Russian Federation.”  The directive prohibits US participation in the issuance of bonds by and lending to the Central Bank of Russia, the National Wealth Fund and the Ministry of Finance. It is important to note that the restrictions of Directive 1 are limited to the specified entities themselves and not to entities that they majority own, as clarified by FAQ 891. While these restrictions are currently very limited, as we have seen in other sanctions programs, there is always the potential for the administration to add secondary sanctions penalties in the future. Therefore it is strongly recommended that institutions understand their exposure and devise a mitigation strategy before there are potential consequences of restricted access to the US financial system.

Second Step: Plan for the future

As the designated parties and actors are outside of the Nordics and engaged in unusual business activities, the greatest impact of the new sanctions is likely to come from the broad authorizations of the new E.O. Several of the authorizations in the E.O. are similar to existing US sanctions, especially related to Ukraine and Human Rights, but this E.O. creates a new framework for more sweeping sanctions to target the Russian government in the future. As such, it is important to understand your bank or businesses exposure to parties engaged in activity that could be designated under the new E.O. and devise a plan to proactively address the risk of potential future designations. 

The new E.O sets out three new “buckets” of activity for which the US can now designate actors, which are appropriately categorized corresponding to the sections of the E.O. as: 

a) Supporting or engaged in conduct supporting the Russian government, 

b) Supporting designated governments via Russia, and 

c) Restricting energy exports to Russia’s neighbors

The restrictions under section a) have the most overlap to existing sanctions that have been applied to Russia. The important change is that now the criteria for designation has been expanded such that just being tied to the Russian government meets the criteria for designation. For example, under section a (iv) the US can designate an entity for acting as an “instrumentality” of the Russian government, which could be broadly applied to cover parties well beyond those that are owned and controlled by the Russian government. 

Section b) is clearly aimed at efforts to use Russia’s territory and economic infrastructure to circumvent US sanctions against designated governments such as Syria and Venezuela. This section does not change the sanctions that are imposed on the likes of Syria or Venezuela but, as with section a), broadens the criteria for sanctions to allow the US to designate Russian actors that even just provide goods or services to US designated governments.

Section c) is clearly aimed at creating the authority for the US to react to a potential bypassing of Eastern Europe with a completed and operational Nordstream 2 pipeline. Historically, Russia has restricted the flow of gas and energy to neighboring countries for political purposes and this measure is broad enough to enable sanctions in response to restrictions on the supply of electricity and other energy sources as well. 

Conclusion
Overall the new sanctions mark a broad expanse in the US architecture to target the Russian government, one which will only grow more complicated over time. As the sanctions challenges continue to expand, Sanctions Advisory is always here to help you solve any sanctions advice, risk management, training, and program development needs you have so please feel free to contact us via inquiries@sanctionsadvisory.dk.

All materials are intended as a general overview and a discussion of the subjects dealt with, and does not create a  relationship between any reader and Sanctions Advisory ApS. These materials are not intended to be, and should not be used as, a substitute for taking advice, including potential legal advice, in any specific situation. Sanctions Advisory ApS will accept no responsibility for any actions taken or not taken on the basis of this material. 

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