Written by Jake Plenderleith on Wednesday April 13, 2022
Russia’s invasion of Ukraine has initiated an unprecedented political and humanitarian crisis not seen in Europe since the Second World War.
In response, governments worldwide have introduced a massive package of sanctions designed to curtail Russian aggression and to bring the conflict to an end.
The sudden, rapid imposition of sanctions has affected banks, financial institutions and many other businesses, some of whom may be struggling to keep up with the specific measures adopted by governments.
The following FAQs, taken from attendees to ICA’s recent webinar on Russia sanctions, are intended to help provide clarity on what firms can do to protect themselves from sanctions exposure.
Disclaimer: the following is not intended as legal advice. Your first point of reference should be your firm’s policies and procedures, as well as your relevant jurisdiction’s legislation and regulatory guidance.
Given the fast-moving situation, the direction of travel on Russia sanctions is not easy to ascertain. There are, however, steps that can be taken.
Firms should be constantly reviewing their sanctions risk exposure to Russian financial institutions and their owners and controllers. This is likely to affect a firm’s overall sanctions risk ratings and appetite.
Horizon scanning is also key, along with comparing key jurisdictions’ listings to obtain an idea of the differences between them. In doing so, you will be able to see where jurisdictions like the UK, the US and the EU align (as well as where they don’t) which will give you an idea of how your firm can protect itself. Understanding the commercial and operational risks is also vital in this respect.
Should payment providers and banks adopt a risk-averse approach, this could cause problems facilitating payments to Russia, even where there are no active sanctions in force against an entity.
There are now several jurisdictions with active unilateral sanctions regimes in force. The US, the UK and the EU provide perhaps the best examples of extraterritorial reach. This is especially the case with the US: the international reliance on the US dollar and how they define a ‘US Person’ provides the US with greater extraterritorial global enforcement options.
Any correspondent banking relationship that provides US dollar clearing facilities will be extremely mindful of not breaching US sanctions. This will also be true of Euro-clearing EU institutions. This, in no small part, is why so many firms around the globe are taking a very risk averse approach to any exposure to Russia.
In addition, the US ‘nexus’ whereby OFAC may exert jurisdiction is very wide and may also include the use of US infrastructure, etc. The US has the ability to deploy secondary sanctions – particularly under the CAATSA legislation – meaning that firms with limited direct exposure to the US need to be aware of the potential impact of US sanctions.
Overall, the political response in Europe to Russia’s invasion of Ukraine has been one of unity, with almost every European country condemning Russian aggression to a greater or lesser degree. These countries’ application of sanctions on Russian entities has been similarly uniform.
Where sanctions measures do differ between jurisdictions, this is due to how exposed these jurisdictions are to Russian oil & gas, or trading in Russian wheat, for example. Driven by divergences in geopolitical agendas and focus, these differences between jurisdictions clearly add complexity.
Yet there is evidence of joined-up thinking when it comes to European sanctions measures.
Take Switzerland, a non-EU member, as an example. The Swiss response to Russian aggression has led to the roll out of comprehensive sanctions, including sanctions on Russian oligarchs, the Russian central bank as well as banning any exports that ‘could contribute to Russia’s military and technological enhancement’.
On 4 March 2022, Switzerland also adopted EU measures on Russian banks’ access to SWIFT.
Switzerland’s sanctions reveal the importance of unilateral sanctions from individual countries, and how they form part of a wider, multilateral, and largely aligned and coordinated response from their European neighbours.
Firms need to evaluate their global sanctions policy – i.e. the lists that they screen across all jurisdictions/centres, if they are cross-jurisdictional – and any country specific legal requirements, where customers or businesses in that jurisdiction is screened.
It stands to reason that Russia will try to find solutions to the restrictions they now face and the use of cryptocurrencies to facilitate the movement of funds is one area that many are identifying as a potential route.
Banks and other financial institutions should therefore be alert to possible circumvention and evasion red flags.
These include corporate vehicles, shell companies and the use of third parties. It is well known that corporate vehicles have historically been used to obscure ownership, as well as any countries involved and source of funds. Shell companies pose an obvious threat, given their ability to conduct international wire transfers in countries totally different from that of the company’s registration, whilst third parties offer a means of hiding the identity of sanctioned persons.
Accounts that are newly established, and which try to conduct business with sanctioned institutions, are also worth observing carefully, as well as any increase in the foundation of new companies in jurisdictions formerly associated with financial flows related to Russia. Unusual foreign exchange transactions which may involve (indirectly) sanctioned Russian institutions will also require scrutiny.
Finally, two really key areas worth following closely: cryptocurrencies and assets, which may be exploited for sanctions circumvention without using the traditional banking system; and accounts with a sudden increase in transferred value – if these do not display a clear business rationale, then they should be flagged.
It is vital that you ensure that you are up to date with the latest legislation, guidance and lists from your relevant jurisdiction’s sanctions body.
The website of the US’s OFAC provides sanctions lists, general guidance, sanctions programmes and country information, as well as a licence application form.
In Europe, the EU’s sanctions map contains a useful, easy-to-use guide on its current sanctions legislation.
In addition, the European Commission’s restrictive measures portal offers a detailed overview of the sanctions in place on Russian entities.
The UK’s OFSI has published the following:
UK Finance is also an excellent source of UK-based sanctions guidance.
If ownership by a designated person is less than 100% then the level of ownership must be established and, depending on the jurisdiction concerned, the entity may still be considered blocked and subject to the same sanctions restrictions as the designated person.
In particular, the EU, the UK and the US all apply their own rules whereby significant ownership of an entity by a designated person confers sanctions measures upon the owned entity.
In all three countries the rule is labelled ‘the 50% Rule’, but each jurisdiction applies this slightly differently. Furthermore, the EU and the UK also apply a rule regarding the exercise of control by a designated person over an entity, and if this is in effect then that entity is still considered blocked and subject to sanctions restrictions, even if the 50% Rule thresholds have not been met.
A key difference between the US and the EU and the UK is that in the US, ownership is defined as holding directly, or indirectly, 50% or more of the voting stock, whereas within the EU and the UK, it is defined as more than 50%. This 1% could make all the difference.
It is also important to check individual jurisdictions’ rules and definitions concerning ‘control’, to ensure that even where a sanctioned individual does not legally meet the ownership criteria, they are not still captured under the control aspects of the relevant jurisdictional legislation.
The permissions in this licence do not authorise any act which the person carrying out the act knows, or has reasonable grounds for suspecting, will result in funds or economic resources being dealt with or made available in breach of the Russia Regulations, save as permitted under this or other licences granted under the Russia Regulations
This licence expired on 3 April 2022. It only applied to the named designated persons and their subsidiaries, which for this particular licence were:
It permitted activity for any transactions to which you are a party to be wound down, if they involved the listed designated persons, Novikombank or a subsidiary. This included closing out any positions. A relevant institution, designated person, Novikombank or a subsidiary could carry out any activity reasonably necessary to this end.
It’s really important for a business to fully understand their exposure in this regard and to identify that, even when a sanctioned entity doesn’t directly fulfil the ownership criteria, there may still be a jurisdictional sanctions exposure through the ‘control’ aspect.
A company that is majority owned by a Russian sanctioned entity is, in itself, subject to the same restrictions applicable to the parent company. A vendor relationship still entails making funds or other economic resources available to the vendor for services/products provided and that would require consideration on permissibility and licences necessary to continue that relationship.
Furthermore, the entity should consider the resilience and integrity of the supply chain and whether the vendor will be able to continue providing the services/products required considering their restricted status.
Early on in the invasion, the UK announced that it would limit the amount that Russian nationals would be allowed to hold in bank accounts in the UK. Since that initial announcement rumours have circulated that a ban would be announced, said to be a limit of £50,000 on accounts held by Russian nationals. However, given the delay between the announcement at the end of February till now, the UK government is clearly still working out the consequences – and possibly the permissibility – of such a measure.
While the financial services sector is very much the focus of attention in respect of sanctions measures, it is also vital to understand that sanctions apply to a wide range of additional sectors, including shipping and aviation, retail, the services and entertainment sectors, precious metals, the energy sector, accountancy, law and trust and company service providers. Each of these industries, including the legal sector, has been affected by the imposition of sanctions, to varying degrees of severity. Those working within any of these sectors must ensure that they are not exposed to sanctions risk, by following government and regulatory legislation and guidance.
Hundreds of new listings by the UK have been forthcoming since ICA’s Russia sanctions webinar. The UK has, for instance, strengthened its sanctions legislation through the introduction of the new Economic Crime Act 2022, which received Royal assent on the 15 March 2022. This provides focus in three areas: registration of overseas entities, unexplained wealth orders and sanctions. The UK has moved to a strict liability enforcement approach, which firms will need to mindful of when planning their response to the new sanctions measures.
There still exist permissible payment channels and of course permissible activity. Practically, you would want to try to speak to the relationship manager at your bank or financial institution to provide evidence for the permissibility of your payment and evaluate whether they have the correspondent relationships in place, or the risk appetite, to process it.
Mitigation is included in various jurisdictions’ approaches to enforcement, and a regulator will consider if a firm has ‘self-disclosed’ a breach. But the UK, as an example, has recently moved to a position of ‘strict liability’, which suggests that they will be perhaps less lenient, not more in the first instance.
Depending on jurisdiction, failing to adhere to sanctions might carry a strict liability enforcement, which means that there is no minimum threshold to being fined under the relevant legal framework for failing to adhere to the sanctions imposed. This is the case in the US and, as mentioned, in the UK with the new provisions under the Economic Crime Act.
The second aspect of this – relevant to a compliance/systems and controls failure which the regulator (the FCA rather than OFSI in the UK) would assess differently and would consider whether a breach or potential breach has occurred – is caused by a systemic failing by the firm which brings it into scope of breaching SYSC and Principles requirements.
In either case, firms should operate to ensure full compliance with sanctions including being able to demonstrate how they have taken all reasonable steps to ensure that outcome.
There are some prohibitions and exceptions for insurance, but the Russia sanctions do not currently have the level of insurance-related restrictions that are contained, for instance, in the UK’s Belarus sanctions.
Insurance is classed as a financial service under the UK’s SAMLA S.61, so Part 3 (Finance) of the Russia sanctions should be reviewed.
Russia sanctions – additional sections for insurance:
HM Treasury licences under schedule 5 allow an application for a licence to pay insurance premiums under the basic needs provisions.
Ships are covered under Part 6. This has had significant expansion and now has new sections 57A – 57i.
There is a new Chapter 4A covering ships under trade sanctions in Part 5. As with insurance, there are exceptions under trade and emergencies.
Maritime enforcement is under Part 10; again this has been expanded in order to take into consideration the widening of other areas, such as the change from a restriction on ‘military goods and military technology’ being expanded to ‘restricted goods and restricted technology’.
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