Out-Law News 3 min. read

Russian sanctions necessitate fresh due diligence and screening by businesses

Businesses need to stiffen their efforts to ensure that who they are transacting with – including intermediary financial institutions through which funds may pass – are not subject to newly imposed sanctions on Russia, experts have said.

Stacy Keen, Michael Finn and Hinesh Shah of Pinsent Masons were commenting after the UK and US governments announced fresh sanctions on Russia on Tuesday. EU officials are expected to finalise a further package of sanctions at a meeting on Tuesday afternoon. The move follows Russian president Vladimir Putin’s decision to recognise the so-called Donetsk People’s Republic (DNR) and Luhansk People’s Republic (LNR) – two areas of eastern Ukraine – as independent on Monday evening and associated reports that Russian troops had been ordered to move into the areas.

In the UK, five banks and three individuals have been designated as subject to UK financial sanctions under a legislative framework updated last week. UK prime minister Boris Johnson described the new sanctions as “the first tranche” and said that further sanctions could be deployed in due course.

Details of the new sanctions targets were published by the UK Office of Financial Sanctions Implementation (OFSI), which sits within the Treasury.

The five banks designated by the UK government are Rossiya, IS Bank, General Bank, Promsvyazbank and the Black Sea Bank. The three individuals designated as the subject of the sanctions are Igor Rotenberg, Boris Rotenberg and Gennadiy Nikolayevich.

Stacy Keen said: “In broad terms, UK persons – incorporated entities, nationals and those in the UK – are prohibited from making funds or economic resources available to these targets. Nor can they accept such funds or resources from them. These prohibitions also extend to dealings with businesses that are directly or indirectly owned or controlled by these targets.”

“Many UK persons would have already been reluctant to deal with these new UK targets, and businesses that they own or control, because most were already the subject of US sanctions. Those that provide material assistance, financial, material, or technological support for, or goods or services to or in support of, US sanctions targets can themselves be designated as sanctions targets. Many UK businesses – and those operating across the globe – will have contractually undertaken not to deal with US sanctions targets even if they have no touch points to the US.  Such clauses are a common feature in agreements with banks, insurers and counterparties with a footprint in, or links to, the US,” she said.

The OFSI has shown its willingness to take action against UK persons that transfer funds to UK sanctioned financial institutions even if the end-beneficiary of the payment is not subject to sanctions. It imposed a fine just this week on payments provider Clear Junction Limited in relation to a series of transactions it said contravened the existing UK Russian sanctions regime,” Keen said.

In the US, president Joe Biden expanded the suite of existing US sanctions imposed in relation to Russia’s interference in Ukraine. A new executive order he has issued lists a range of newly prohibited activities which are designed to cut the flow of investment, goods, services, technology and finance into the DNR or LNR regions of Ukraine.

In addition, a range of new economic sanctions have also been ordered in the US enabling senior individuals continuing to operate in DNR or LNR, or those who materially assist, sponsor or support them, to be targeted for sanction by the US government.

General licences have been issued by the US authorities that authorise certain transactions that would otherwise be prohibited under the executive order including the wind down of certain transactions.

EU leaders have condemned the latest Russian action and promised to act swiftly to impose its own sanctions. A joint statement by the presidents of the European Commission and European Council, Ursula von der Leyen and Charles Michel, confirmed an initial package of sanctions would be voted on by EU27 foreign ministers on Tuesday.

According to the statement, the EU package contains proposals: to target those who were involved in the illegal decision; to target banks that are financing Russian military and other operations in those territories; to target the ability of the Russian state and government to access the EU's capital and financial markets and services, to limit the financing of escalatory and aggressive policies; and to target trade from the two breakaway regions to and from the EU, to ensure that those responsible clearly feel the economic consequences of their illegal and aggressive actions.

German president Olaf Scholz has already confirmed that Germany is suspending the Nord Stream 2 project, which bypasses Ukraine to run gas directly from Russia to Germany through the Baltic Sea, in light of the latest Russian actions.

Michael Finn said: “The finalised EU package of sanctions is eagerly awaited by businesses given the potential widespread impact on existing operations, transactions and contracts.”

Hinesh Shah said there are actions businesses can take in light of the new sanctions announced.

“Businesses should be refreshing their due diligence and sanctions screening to identify if they are currently transacting with any entities owned or controlled by the new sanctions targets,” Shah said.

“To avoid a breach, they should ensure that due diligence and sanctions screening carried out extends to the banks and financial institutions involved in transactions, and other relevant parties.” he said.

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