'Know your customer' procedures will help guard against Russia and Ukraine sanctions risks, says expert

Out-Law News | 25 Mar 2014 | 10:54 am | 3 min. read

Businesses dealing with Russia and Ukraine must closely follow 'know your customer' (KYC) procedures to guard against serious penalties incurred by breaching EU and US sanctions, legal experts have warned.

Companies should also secure payment ahead of delivery to businesses and individuals linked to Russia and Ukraine, amid speculation that the international community will impose further sanctions affecting both countries. 

Tom Stocker, of Pinsent Masons, the law firm behind Out-Law.com issued the warnings as G7 leaders warned they are "ready to intensify actions including coordinated sectoral sanctions that will have an increasingly significant impact on the Russian economy, if Russia continues to escalate this situation."

The comments came as G7 leaders met on the sidelines of a nuclear security summit at The Hague this week. UK prime minister David Cameron said that the planned meeting of G8 world leaders would now not take place in the Russian resort of Sochi, due to events in the Crimea.

"Events in Crimea over the weekend mean that further sanctions are likely," said Stocker. "More individuals and companies may be added to the sanctions lists. There is a need to prepare for further sanctions. Companies should keep updated by subscribing to US government and European Commission updates. Other prudent steps include carrying out 'know your customer' due diligence to identify the existence of any politically exposed persons who may be associated with a customer or client, putting in place robust sanctions and termination clauses into any new contracts, and seeking payment in advance of delivery."

The EU and US froze the assets of and issued travel bans to a number of Russians and Ukrainians following 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 imposed sanctions which target individuals they allege to have played an important role in the referendum. Last week the US also added Gennady Timschenko to its list of sanctions targets. Timschenko was at that point a significant shareholder in Gunvor, the world's fourth largest oil trading company. Timschenko had to dispose of his shares in Gunvor or risk international businesses refusing to trade with Gunvor. Targeting Mr Timschenko hurt Gunvor and indicated that the US may target wider economic sanctions against the energy sector, said Stocker. Canada and Australia have also imposed sanctions.

Stocker said: "The US has passed an Executive Order which authorises further sanctions to be imposed, if need be, against the energy, financial service and mining sectors. Such sanctions would impact directly on Russian and US businesses."

Stocker warned that EU businesses who may believe they have no US law exposure could be surprised to find they are hit by the US sanctions. "The sanctions would also affect many non-US companies," said Stocker. "The way in which the global financial system works means that most banks are caught by US sanctions. Banks, in turn, require their business customers to comply with US sanctions. US sanctions are therefore far reaching in effect."

'Know your customer' guidelines were established by financial authorities to help firms effectively manage their money laundering risks by helping them to understand how to detect whether their goods and services are being procured for money laundering purposes. They were also designed to help firms meet their obligations under the Proceeds of Crime Act 2002.

Stocker pointed out that the methods of gaining customer information advised in the guidelines may be useful in helping firms establish whether they are dealing with one of the individuals against whom the EU and US have imposed sanctions. Stocker, who gained extensive experience representing businesses affected by sanctions against Iran, warned that firms who breach sanctions can face "eye-watering" fines from the authorities.

Stocker said: "The US sanctions go the furthest because the sanctions target Bank Rossiya and several Russian businessmen. European sanctions remain targeted at politicians and civil servants. Assets freezes imposed by the US and Canada on Bank Rossiya effectively prevent it from doing any business with most western banks. That impacts on Bank Rossiya's customers, as demonstrated by Mastercard, Visa and Western Union withdrawing payment services to customers of Bank Rossiya. More importantly, the imposition of sanctions on a bank indicates that the US may consider wider sanctions against the Russian financial service sector to effectively freeze it out of international financial markets."

Stocker pointed out that sanctions described as "assets freezes" actually go further, because they prohibit the provision of goods and, in respect of the US sanctions, services to any sanctioned person or to another person or company if the sanctioned person will derive a significant benefit. "This means that companies in the US, EU, Australia and Canada need to be careful in their business dealings with any company that is associated with a sanctioned person," said Stocker.

Stocker said that while in theory, economic sanctions targeting particular sector or industries could also be imposed, he believes this is less likely because Russia could challenge such trade restrictions as contrary to World Trade Organisation rules.