Trade Sanctions: Libya

1. Trade Sanctions: Libya Executive order 13566 Maria Seifu & karim seikaly Itrn 603 04/20/2011

2. Overview • Recent developments: • 1988 PanAm bombing over Lockerbie, Scotland • Sanctions lifted in 2003 after taking formal responsibility • Libya renounced weapons of mass destruction which improved relations with the West • Violent response to popular uprising in early 2011 • US and UN imposed sanctions on February 25, 2011 • Executive Order 13566 of February 25, 2011 • UN imposed no-fly zone on March 17, 2011

3. Overview • Libya Country Profile: • Gained independence in 1951 from Italians • Oil discovered in 1959 • Qadhafi leads coup and takes power in 1969 • Population: 6.5 million people (UN, 2010) • Capital: Tripoli • Main exports: Crude oil, petroleum products, natural gas • GNI per capita: US $12,020 (World Bank, 2009)

4. Legislation • Executive Order 13566 of February 25, 2011 • Authority: • International Emergency Economic Powers Act • National Emergencies Act • Section 301 of title 3, United States Code • Reasoning: • Qadhafi, his government and associates have taken extreme measures against the people of Libya • Serious risk Libyan state assets will be misappropriated if not protected • Deterioration in security of Libya constitutes an unusual and extraordinary threat to the national security and foreign policy of the United States

5. Legislation • Key Provisions • Section 1: Blocked property of individuals • Persons listed in Annex • Any person determined by the Secretary of the Treasury in consultation with the Secretary of State • Any senior official of the government of Libya • Any person responsible for political repression in Libya • Section 2: Blocked property of the Government of Libya • Its agencies, instrumentalities, and controlled entities • Central Bank of Libya

6. Legislation • Key Provisions (cont’d) • Section 3: No prior notice needed to prohibit persons from transferring fund to and from Libya • Section 4: Prohibits contributions or donations to persons impacted by Section 1 and Section 2 of Executive Order 13566 • Section 11: Secretary of the Treasury is authorized to determine if blocking of property is no longer warranted • Section 12: Secretary of the Treasury is authorized to submit the recurring and final reports to the Congress

7. Legislation • General Licenses • No. 1: Authorizing Transactions Related to Third Country Libyan-Owned or Controlled Banks (February 25, 2011) • Transactions involving banks that are owned or controlled by the Government of Libya and organized under the laws of a country other than Libya are authorized, provided the transactions do not otherwise involve the Government of Libya or any person whose property and interests in property are blocked • No. 2: Libyan Diplomatic Mission in the United States (March 1, 2011) • Provision of and payment for goods and services to the diplomatic missions of the Government of Libya to the US and the UN and payment are authorized provided: • Conduct of official business of the missions, or for personal use of the employees of the mission • Transaction does not involve the purchase, sale, financing, or refinancing of real property

8. Legislation • General Licenses (cont’d) • No.3: Authorizing Provisions of Certain Legal Services (March 9, 2011) • Provision of legal services to the Government of Libya is authorized provided: • Legal advice are not provided to facilitate transactions in violations of Executive Order 13566 • For representation of persons with respect to the imposition, administration, or enforcement of U.S. sanctions • Provision of legal services in which prevailing U.S. law requires access to legal council at public expense

9. Legislation • General Licenses (cont’d) • No.4: Guidance and General License with Respect to Investment Funds in Which There Is a Blocked Non-Controlling, Minority Interest of the Government of Libya (April 8, 2011) • US persons are authorized to continue the normal operations of an investment fund in which property are blocked pursuant to Executive Order 13566 and have a non-controlling, minority interest provided: • Transfers may only be directed to a blocked account at a financial institution in the US in the name of the blocked person • No transfer is made to account held outside the US • No financial or economic benefit are made available to the Government of Libya • US persons shall not make any loans to, or on behalf of the Government of Libya • Reports must be submitted to the Office of Foreign Assets Control

10. Major Problems • Blocking order deprives U.S. companies of their property and forces them to shut down operations in Libya • Reporting requirement is not clear with regards to frozen property • A freeze on property where a US person is an interested party may harm the US person rather than the target of sanctions • The Executive Order does not include provisions for contracts already started • The U.S. Department of Treasury defines the term “interests” extremely broadly • Existing U.S. export licenses for defense articles are revoked

11. Effects of Sanctions on Trade • The order was rapidly executed, blocking an estimated $30 billion dollars in assets belonging to the Government of Libya in the US. • The State Department’s Directorate of Defense Trade Controls announced the immediate suspension of all licenses it had issued for exports to Libya and no exemption in the International Traffic in Arms Regulations may be used to export defense services to Libya • Objectives of the sanctions are to prevent further bloodshed, secure state assets for the benefit of Libyans when a future government begins to operate

12. Effects of Sanctions on Trade • However, the sanctions have already caused some considerable backlash • Major oil companies have halted trade with Libya • Banks are pulling back from funding deals • Insurance companies are not willing to insure risky transactions for fear of breaching sanctions • Firms that have stopped trading oil with Libya: • Exxon Mobil • Morgan Stanley • ConocoPhillips

13. Effects of Sanctions on Trade • US Companies are asking the Treasury department for measures to protect them from sanctions • US companies need to protect their assets in Libya • US companies need to evacuate expatriate employees from Libya • US companies need to maintain operations to the extent possible • US companies seek authorization to provide for the continued safety, welfare, and support of their employees • US companies question if OFAC will distinguish between entities controlled by opposition forces and entities controlled by Qadhafi

14. Effects of Sanctions of Trade • Effects of a blocking order: • Qadhafi property must be blocked regardless of whether anyone else has an interest in the property, which potentially deprives US companies of their property, for example: • US company that is owed money under a contract with the Libyan government cannot collect the money • US company that receives payment from the Libyan government cannot clear it if the Libyan government has a right to return funds for a failure of contract performance • US companies cannot withdraw money on deposit with a Libyan controlled bank organized under Libyan law • US companies cannot withdraw equipment because exit fees will be considered as property in which the Government of Libya has an interest • US companies cannot pay taxes or royalties to the Libyan Government even if they face expropriation

15. Effects of Sanctions on Trade • Burden of reporting requirements examples: • Are US companies required to report manufacturing work that has been frozen as required per the Executive Order? • Are US individual required to report contract-for-services that can no longer be performed because of the blocking order? If so, how does OFAC deem services that will never be performed as blocked? • What is the value in reporting work that will never be performed?

16. Effects of Sanctions on Trade • Impact on Shipping Trade • Libya can’t export oil • Libya can’t import needed food and consumer goods (mostly grain) • Companies that trade wrongfully can end up with huge fines or go to jail • Sanctions have introduced high compliance costs • More time spent on verifying contracts • Smaller companies don’t have adequate staff to make all necessary checks • Charterers have to make sure oil is loaded only at ports that are no longer under the control of the government • Underwriters may add additional war risk premium on shipments

17. Effects of Sanctions on Trade • Consequences: • Rebels via the National Libyan Council are trying to create a parallel economy • Libyan Oil company Agoco trying to make arrangements to market oil directly to foreign buyers instead of through the state-owned parent, National Oil Corp. • Lines of authority are haphazard • Lack of certainty and transparency • So far, international shippers are not willing to engage in trade • Prudent for companies to be wary less their dealings come back to haunt them

18. Effects of Sanctions on Trade • Added Scrutiny brings unwanted media coverage: • Shady Dealings Helped Qaddafi Build Fortune and Regime • Boeing • Raytheon • ConocoPhillips • Occidental • Caterpillar • Halliburton • Bernard Madoff • Coca-Cola • Caterpillar • Petro-Canada • Houston Oil lobbyists paid for Former Congressman’s Libya Mission

19. Effects of Trade Sanctions • Latest developments: • France recognizes the Rebel National Council as the representative of Libya • Qatar recognizes Rebel National Council • Rebels have seized control of some of Libya’s oil industry • Qatar has agreed to sell oil on behalf of rebels • Washington has made clear that opposition oil sales will not be subject to sanctions • Qatar supplying rebels with petrol, diesel, and cooking gas

20. Effects of Sanctions on Trade • Libyan Economy and its impact: • Pre-crisis level: • 1.6 million barrels a day • Morgan Stanley exported 2 million barrels of oil per month worth around $234 million based on a Brent price of $117 a barrel • Conoco had a non-operating 16 percent interest in Waha concessions. 45,000 barrels a day • Exxon was buying a substantial volume of Libyan crude oil. • During Crisis: • Capacity now reduced, which has triggered price rally and forcing Saudi Arabia to increase production • Opposition can boost production to 400,000b/d. At current prices of $115 (March 28, 2011), the exports could be worth $1.4 bn a month. • Other firms, maybe Chinese or Russian firms, will move in to fill gap. • JP Morgan issued statement that despite Qatari help, there remains significant “operational constraints”, citing lack of readiness of vessels to dock at Libyan ports.

21. Effects of Sanctions on Trade • Other countries: • UK: Order 2011. Order imposes targeted financial sanctions against senior Libyan government officials and affiliates. UK does not go as far in explicit terms in targeting the Government of Libya and its institutions. • Canada: Sanctions similar to those of the US. Sanctions target Qadhafi’s inner circle, the Government of Libya, the Central Bank. Not clear if Canada will follow approach of US in exempting third country entities. • UN: More narrowly targeted multilateral sanctions on Libya. Sanctions do not broadly sanction the government of Libya and contains a process whereby payments may be received under preexisting commercial contacts under certain conditions • Sanctions targeted at Qadhafi and key associates • Arms Embargo • Process for payments under preexisting commercial contracts • EU: Decision 7081/11 implementing the UN measure. EU additionally prohibits trade with Libya in equipment “which might be used for internal reasons”. Also sanctions on travel bans to an additional 10 individuals and the asset freeze to an additional 20 individuals. Unclear if asset freeze extends to sovereign wealth fund of Libya, the Libyan Investment Authority or the Central Bank of Libya

22. Policy Proposal • Authorities need to recognize that properties have two or more interested parties, so sanctions need to be structured in a way that limits the liability of US individuals and companies • It may be better to just prohibit dealings with Qadhafi instead of requiring assets be frozen and reported. • Reconsider sanctions after a certain time-frame to judge against stated objectives, provide an adequate timeframe for banks and insurance companies to determine risk of dealing with Libya

23. Policy Proposal • In additional, OFAC can provide certain guidelines: • Issue general license for oil-related transactions already commenced before the effective date of US sanctions. (Example of Libya in 1980’s) • Follow up on suggestion from EU countries to establish a trust account, sponsored by an international organization, into which blocked payments would be made. • Make sure companies receive payments for goods and services rendered prior to the effective date of the Executive Order. • Define how companies can distinguish between opposition forces and entities controlled by Qadhafi. • Provide guidance on how donations of humanitarian goods and services are to be handled by persons in Libya not blocked under the order.

24. Policy Proposal • Impact: • Reduces risk of companies acting in contravention of the Order. • Reduces regulation which currently increase oil-prices in a very tight market • Ensures that objectives of sanctions are being met, and that they don’t drag indefinitely like in the case of Iraq in the 1990s. • Simplifies the reporting and implementing process of Executive Order 13566 with regards to blocked assets • Enables US companies to keep their on-the-ground contacts in a oil-rich market ahead of competition • Return to pre-crisis of oil production as soon as possible

25. References • Akin Gump LLC, International Sanctions against Libya, http://goo.gl/OKUpu • BBC Country Profile, Libya, http://goo.gl/NzXtL • Brian Cave LLP, Memorandum, http://goo.gl/hGno6 • Federal Register, Executive Order, http://goo.gl/ATYbP • OFAC, General License No.1A, http://goo.gl/cfJYZ • OFAC, General License No.2, http://goo.gl/9VF0z • OFAC, General License No.3, http://goo.gl/qapYc • OFAC, General License No.4, http://goo.gl/qapYc • Financial Times, Middle East & North Africa, http://goo.gl/nZJaB • Foreign Policy, http://goo.gl/kbvh4 • IOL business report, http://goo.gl/4n3BP • New York Times, The Lede, http://goo.gl/DmPbD • New York Times, Africa, http://goo.gl/ZrBBC • Reed Smith, Global Regulatory Enforcement Law, http://goo.gl/uNRCd • Reuters, Business and Financial News, http://goo.gl/RkPSM • Wall Street Journal, Corruption currents, http://goo.gl/DXyvN