The boycott prohibition in German foreign trade law – a potential source of conflict for banks and companies
GUEST CONTRIBUTION BY DR. KURT DITTRICH
"Creating a Shared Future in a Fractured World" was the theme of the World Economic Forum Annual Meeting in Davos this year. Naturally, banks and companies involved in foreign trade and finance are feeling the impact of this “fracturing”.
The number of sanctions threats, sanctions resolutions and embargo decisions has increased significantly in recent years. For this reason, foreign counterparties, especially those from the USA, are increasingly demanding compliance with the embargo provisions of their countries. Such demands might at first glance seem unremarkable, but can in fact lead to a violation of German foreign trade law. Declarations made in a foreign trade context by which a person domiciled in Germany (Inländer) participates in a boycott against another state are prohibited, pursuant to section 7 of the Foreign Trade and Payments Regulation (AWV), unless Germany also boycotts that state.
The German government introduced the anti-boycott provision in 1992 as a reaction to the boycott against Israel by the Arab League. One goal of the provision was to prevent German suppliers from agreeing not to trade with Israel in contracts with Arab trading partners. In the first drafts of the regulation, a reference to this specific situation was made, but this reference was omitted in the course of the further law-making process. The wording of the provision ended up being general, not limited to the relationship with Israel, but rather with a wide scope that, for example, extends far beyond that of the "EU Blocking Regulation", which seeks to achieve a similar outcome.
Where section 7 AWV applies, deals can fail. The underlying conflict of legal systems, primarily relevant in international trade relations, has been playing an increasingly vital role in international financings for several years. The primary reason for this is the far-reaching nature of American sanctions rules enforced by the US Office of Foreign Assets Control (OFAC), the violation of which can have severe consequences. In light of these rules, US banks or banks with relevant connections to the US want to ensure as far as possible that they do not engage in finance transactions with countries or persons subject to those US boycott provisions. Therefore, such banks usually demand extensive representations from the borrower confirming that the US sanctions provisions are being complied with. These representations often refer not only to the situation at the time of signing, but extend to the entire lifetime of the finance agreement. Clauses of this type, however, put both German borrowers and German lenders into conflict with the German anti-boycott provision. The situation is particularly delicate for German banks and companies which fall under both legal regimes, i.e. those bound by the sanctions regime of the US on the one hand and the German anti-boycott provision on the other hand. Due to the wide scope of the US sanctions regime (including provisions which allow to extend sanctions to persons without a relevant connection to the US - so-called secondary sanctions - even where the relevant sanction is introduced after signing of the finance agreement), this is a relevant scenario for German banks and companies who are acting internationally. Those who are affected are in a regulatory dilemma. This dilemma increases the desire for a reform of the German anti-boycott regime.
AlongsideGerman trading companies, other internationally acting German market participants are affected; particularly banks (as mentioned), insurers and reinsurers. Export credit agencies sometimes wonder whether they should, or indeed have to, limit their commitments in certain cases – which can lead to significant uncertainties about their commitments of cover. This article will focus on German banks acting as lenders in international financings, where the documentation provides for the borrower to comply with US sanctions provisions.
Where German borrowers commit themselves in finance agreements to comply with all US sanctions provisions, and these go beyond sanctions applicable in Germany, it seems obvious that this may constitute an inadmissible boycott declaration.
But the signing of such an agreement may also be considered a violation of section 7 AWV for the financing German banks: Countersigning an agreement which binds other parties to inadmissible boycott declarations may be regarded as an own legal declaration made by the banks by which they themselves participate in the boycott.
A legal risk exists for the German banks even if only foreign borrowers are involved in the finance agreement. Given that the banks fall within the definition of a "domestic" entity, their signature may be regarded as the declaration of a domestic entity that is participating in the boycott of the other contracting parties (even if the other parties themselves are not subject to the restrictions). This can also be applied to German banks which are acceding to the finance agreement later by way of syndication: by signing the accession or transfer documentation, the banks are making a declaration by which they accept the representations made by the borrower in relation to compliance with the US sanctions provisions.
In addition, in the German law of misdemeanors (Ordnungswidrigkeitenrecht), the concept of participating in a legal offence is so wide that, under these rules also, German banks may be regarded as committing a legal offence simply by accepting the inadmissible declarations made by borrowers.
By way ofgeneral background, section 7 AWV prohibits the participation in a boycott by way of declarations (Erklärungen). Inadmissible in this context are not only express boycott declarations referring to a particular country, boycott or blacklist, but also less explicit declarations where the intention to comply with a boycott can only be inferred. A declaration to the effect that all boycott laws of the relevant country will be observed is therefore also inadmissible. According to the interpretation by the Federal Ministry of Economic Affairs, this means that any unrestricted contractual assurances or obligations to the effect that all sanctions provisions of another country will be complied with are not permitted.
This prohibition does not apply to declarations which relate to boycotts or embargos that Germany itself enacts or enforces, or in which it participates. In practice, this means embargos which are based on UN resolutions or EU law and are or have become part of German law. There is therefore no conflict if the sanctions provisions to which the German parties undertake to adhere correspond to sanctions provisions that also apply in Germany. This fact can alleviate the situation in a number of cases.
In the finance practice, however, this aspect does not often help. Apart from the fact that it is not always easy for the parties to large international group financings to know to what extent the sanctions provisions of all relevant jurisdictions involved are congruent or not at any given time, there are usually always cases where the embargo policies of the US and the EU differ (Cuba, Iran or Russia, for example). Especially in times where foreign relationships are difficult, different sanctions regimes may emerge or existing sanctions regimes may drift apart during the lifetime of the financing.
An inadmissible boycott declaration constitutes a misdemeanor (Ordnungswidrigkeit) which may be punished with a fine of up to EUR 500,000. A higher fine for profit-skimming or an order for a confiscation (Verfall)are also possible. These measures as well as an aggregation of sums for several individual cases, can theoretically allow for monetary sanctions in the order of millions of euros. In addition, regulatory measures against credit institutions are possible.
From the perspective of the agreement, an inadmissible boycott declaration will generally be null and void. Although this nullifying effect will often be limited to the relevant sanctions provisions, wider reaching effects on the agreement are not excluded, especially if the contract would not have been concluded without the non-permitted sanctions provisions.
In addition, if a finance arrangement is affected or goes into a crisis due to unilateral US sanctions (even if not foreseeable at the time of entering into the arrangement), the banks live with the uncertainty of whether their losses will be covered by the German export credit agency. If the export credit agency does not provide cover to an arrangement in light of section 7 AWV, the banks will bear the risk of a (possibly total) default.
The current anti-boycott provision is a considerable challenge for German banks and companies, and gives rise to risk and uncertainty. One reason lies in the wide scope of section 7 AWV. It is difficult for market participations to determine where the line of permitted action or participation is drawn. Restrictive interpretations and purpose-oriented reductions of the provision have repeatedly been suggested and pleaded for from various sides. However, as long as there is no official indicator of a change in approach, market participants cannot rely on these interpretations. In recent years, there has been speculation that section 7 AWV is being looked at closely by the Federal Ministry of Economic Affairs. This would certainly be welcome from the point of view of Germany's export industry and loan market, especially in the current context of increasing uncertainty in the area of international trade relations.
Dr Kurt Dittrich,
Member of the German Executive Team
and Head of the Finance Division Germany,
Linklaters LLP, Frankfurt/Main