Companies must focus on compliance issues as EU and US broaden sanctions against Russia

Out-Law News | 30 Apr 2014 | 10:09 am | 2 min. read

Organisations operating in Russia or doing business with Russian companies outside of Russia should issue compliance questionnaires to companies they deal with to guard against serious penalties incurred by breaching EU and US sanctions, a legal expert has warned.

They should then verify all information received by carrying out online checks to ensure they do not fall foul of sanctions and consider enlisting  the help of professionals to conduct the checks,  said Tom Stocker of Pinsent Masons, the law firm behind Out-law.com.

"As sanctions can mean that a transaction can overnight become unlawful, for material contracts consideration should be given to instructing a more detailed diligence and risk report by a third party professional firm," Stocker said. "It is important to carry out due diligence on your customer, prospective customers, distributors, intermediaries and suppliers to ascertain if they are a sanctioned person and to identify if they have any connections to a sanctioned person."

Stocker made his comments after both the EU and the US stepped up their sanctions regimes against Russia due to its activities in neighbouring Ukraine which they say have undermined the sovereignty of the Ukraine. Australia and Canada have also imposed sanctions.

The EU and US first froze the assets of and issued travel bans to a number of Russians and Ukrainians last month following a referendum in Crimea in which officials said 97% of voters voted to break away from Ukraine and join Russia. The EU and US deem the referendum to be illegal and imposed sanctions which target individuals they alleged to have played an important role in the referendum.

Both the EU and the US have now added to their sanctions lists, saying that Moscow has failed to meet its obligations set out in a peace agreement designed to calm tensions in eastern Ukraine.

The EU has added a further 15 names to the list, focusing on political and military figures, including leaders from separatist groups operating in eastern Ukraine, said the Financial Times. This brings to 70 the total of Designated Persons whom the EU has imposed sanctions against.

Earlier this week the US broadened its sanctions regime from individuals to include 19 companies, targeting the banking, energy and infrastructure sectors. The US has also listed seven more Russian individuals which it says are linked to President Vladimir Putin's 'inner circle', according to the BBC, bringing to 45 the number of individuals on its sanctions list.  Among US additions to the list is Igor Sechin , president of the Kremlin-controlled Rosneft.

"The new US sanctions represent a fairly significant shot across the bows as they have targeted the banking, oil and gas, and infrastructure sectors," said Stocker.

Stocker said that the addition of Sechin to the US list could be seen as a signal that the international community is moving towards targeting companies in which an already sanctioned individual has an interest.

"US sanctions do not prohibit trade with companies connected to sanctioned individuals unless the company is owned or controlled by the sanctioned person," said Stocker. "There is no suggestion that Sechin has a controlling interest in Rosneft. Nevertheless, businesses will be concerned about this development because there is a direction of travel towards targeting companies which the sanctioned person has an interest in."

Stocker pointed out that the extended US sanctions also target companies owned or controlled by Gennady Timchenko and Arkady Rotenberg as well as Bank Rossiya. All three were already subject to US sanctions.

"Their respective businesses are clearly in the spotlight and the imposition of sanctions related to Timchenko, Rotenberg and Bank Rossiya show why businesses need to be careful in trading with companies associated with those who are already the subject of sanctions," said Stocker.

Stocker also suggested that banks could increasingly be targeted for sanctions should the international community move towards sector-wide sanctions.  He pointed out that the banks InvestCapitalBank, SMP Bank and JSB Sobinbank have been added to the US sanctions list. "Business cannot now receive money from or transfer money to accounts with three additional banks. The addition of those banks indicates that future sectoral sanctions may start with the banking sector," he said.