EU companies at risk under EU and US sanctions against Russians and Ukrainians

Businesses with existing contracts should seek an amendment to their current legal agreements to protect themselves from the unfolding sanctions regime, as political uncertainty hangs over Crimea and both the EU and US warn of increasing economic sanctions targeting Russian individuals and businesses, they said.

Tom Stocker of Pinsent Masons, the international law firm behind Out-Law.com,urged companies to pay close attention to sanctions to ensure they are trading legally, warning that they risk serious penalties if they fail to comply.  He warned that EU businesses could see their trading finance dry up should the US impose far-reaching sanctions on its own banks, which could impact on EU banks dealing with them and any business that conducts international transactions in US$.

The EU has frozen the assets of and issued travel bans to a total of 21 Russians and Ukrainians and the US has imposed similar sanctions on 11 people, three of whom were among those already listed by the EU.  The move followed Sunday's referendum in Crimea, in which officials say 97% of voters voted to break away from Ukraine and join Russia. The EU and US deem the referendum to be illegal and have now imposed sanctions which target individuals they allege to have played an important role in the referendum. However US president Barack Obama has warned that Washington is "ready to impose further sanctions" depending on what Russia does next, reports the BBC.

Stocker said: "The current finance and trade sanctions are limited in scope, but as we saw with Syria and Iran, they are likely to be ratcheted up. That means that very quickly a shutter can come down on a trade that one day is legal and the next day is illegal.

"Those businesses doing trade with Russia need to make sure they have a contractual entitlement to get out of their obligations in the event that the EU or US sanctions change," he said. "It looks like sanctions will be ratcheted up in the next few weeks and if a business does not have a contractual entitlement to suspend the contract they risk huge losses. It all depends on what sanctions are imposed over the next weeks and months. It will most likely be further targeted asset freezes but the EU and/or the US could be extend to restrict trade and business with Russia should the crises worsen."

Businesses might enjoy some protection against sanctions if their contracts contain a force majeure clause, which could free both parties from obligation or liability if there is an extraordinary circumstance which is beyond the control of both parties.  However Stocker said that this will not always be the case. A contract between a UK and a Russian company, for example, would normally state that both parties comply with "all applicable laws", meaning  the national laws in each country. This could offer protection in the event of sanctions. However, if the sanctions are scaled up there is a risk that the US will impose tough sanctions which would put restrictions on its banks in relation to trade.

When the US did this in relation to Iran, EU banks that used the US financial markets had to comply with US laws and they refused to finance EU and other non-US companies who were not complying with the US sanctions regimes, even when US sanctions did not actually apply to those companies. Some EU businesses suddenly found themselves having to make a choice between going ahead with deals with Iran and having their financing pulled. Such situations did not fall always within the "applicable laws" rules, and many companies incurred massive losses as a result.

Under the newly introduced sanctions, businesses must immediately inform the "competent authority" in their national jurisdiction of any information which will facilitate compliance with the prohibitions. In the UK that is HM Treasury, which has issued a notice requesting all businesses to check if they hold any accounts, funds or assets for the 21 designated persons named in the EU Regulations and to report any suspected matches to HM Treasury. 

Stocker said of the UK response: "If the UK adopts the same approach that it has taken with sanctions relating to Iran and Syria, it will pass a law in the next couple of days which will require any person who is regulated under the Financial Service and Markets Act 2000 to report if it holds any funds for any person listed in the EU Regulations. UK financial businesses will also be required to report to HM Treasury if they become aware that any funds or resources are being made available for the benefit of a person listed in the Regulations. That duty will apply over and above the usual requirements for filing Suspicious Activity Reports. "

The UK law which will implement the EU Regulations will specify that funds and assets must not be made available for the benefit of one of the designated persons, where the business making the funds or assets available knows or has reasonable cause to suspect that to be the case. The UK will also make it a criminal offence to do anything which has the object or effect of circumventing the EU restrictions. This means that it is likely to be an offence to structure transactions through overseas subsidiaries and third parties with the intention of avoiding the prohibitions.

The new rules also effectively impose trade sanctions. The Export Control Organisation in the UK has suspended all existing licences and licence applications for export to Russia for military and dual use items destined for units of the Russian armed forces or other state agencies which could be or are being deployed against Ukraine.

"Those undertaking business in Russia should ensure they have written contracts in place which allow them to suspend and terminate the contract without liability in the event that their counterparty or any person connected to the counterparty becomes subject to EU or US sanctions, or in the event that the product or services to be provided is subject to restrictions under EU and US laws," said Stocker. "Most small-to-medium sized enterprises are not set up at all to deal with this. But big companies trip over the law regularly too. Things move very fast, sanctions can be added very quickly indeed. If businesses find they are not complying they should stop what they are doing and take legal advice – a voluntary disclosure to the authorities may be necessary."

Stocker outlined a number of practical steps businesses can take to ensure compliance. These include checking if a business is holding funds for any person with a name which is on the list of designated persons. If funds are held for a person with one of the names listed, enquiries should be made to establish if that person is in fact the designated person. Stocker said that businesses which are dealing with a Russian company or holding funds for a Russian company should check who stands behind it. If a designated person is connected to the company, legal advice should be taken.  Businesses should sign up to email alerts from their home competent authority and from the US Department of Treasury to notify them when another person is added to the relevant sanctions lists.

Yuri Botiuk of Pinsent Masons predicted that some of the designated persons on the EU and US sanctions list might  bring legal appeals against the measures in courts in EU countries. His comments follow reports that some of the 29 Russian and Ukrainian officials who have been subject to such sanctions claim to have had little to do with Russia's Ukraine policy.

Botiuk said: "There is a due legal process for appealing the sanctions and, given some of the reaction in Moscow today, it seems almost inevitable that legal avenues could be pursued. London could become something of a legal battleground. If the movement of assets into and out of accounts held in London is blocked, for instance, some of the first actions we see may be at the High Court. There are two standard defences for individuals to appeal against sanctions applied in the UK. First, by arguing that the sanctions do not apply on the basis that the government erred by putting the person in question on the list. In these circumstances the argument that some of those targeted claim not to have any influence over Russia's Ukraine policy would likely be tested."