With the scope of sanctions against Russia already at a limit, the only path for many countries is to toughen its enforcement of those sanctions already in place
In response to Russia’s full-scale invasion of Ukraine, many countries have now put in place unprecedented sanctions. The United Kingdom, for example, has sanctioned more than 1,600 individuals and entities (including 29 banks with global assets worth £1 trillion and more than 130 oligarchs with a combined net worth of more than £145 billion) and 96% (more than £20 billion) of U.K.-Russia trade. The United States, the European Union, and other G7 countries’ measures are similar.
The extent of these sanctions has reached a point where there is now little scope for new measures. The focus now has shifted to tightening the implementation of those measures that are in place.
This means tougher regulation and enforcement, both to prevent deliberate evasion and to punish inadvertent breaches due to inadequate compliance. Businesses that have not already done so would be well-advised to review their procedures to ensure that they are not found on the wrong side of the law.
Tougher regulations
The Russia sanctions are being coordinated at the level of the G7 states (the U.S., Canada, the U.K., Germany, France, Italy, and Japan) as well as the E.U., which are cooperating to track down and freeze the assets of Russian elites, proxies, and oligarchs and of the Russian state until Russia pays for the damage it has caused to Ukraine.
G7 states are also coordinating bilaterally, for example, through the designations by the U.S. and the U.K. of professional enablers suspected of helping Russian oligarchs hide their assets.
Reporting obligations have been broadened. In the U.K., relevant firms — not only banks, but others such as auditors, estate agents, and metal exchanges — must inform the Office of Financial Sanctions Implementation (OFSI) if a customer is a known or suspected designated person and provide any information they have about the designated person and any funds or economic resources held on behalf of the customer.
The E.U. has similar measures, but these apply to all persons and now require reports on assets that have not been properly frozen and on the assets of designated persons subject to any move or change in the two weeks preceding their designation.
Tougher enforcement
E.U. and U.K. penalties historically have been significantly lower than those in the U.S., and to date, in 2023, the United States has imposed 10 fines totaling more than $557 million.
By contrast, the U.K. total for 2022 was £45,000 and there had been none in 2023 until August, when a £1 million fine was levied for a breach of trade sanctions. There are, however, clear indications of a tougher approach being developed.
In the U.K., OFSI doubled its staff in 2022, and a breach of financial sanctions is now a strict liability offense, meaning that a person may be fined even if they did not know or have reasonable cause to suspect that they were in breach of sanctions.
OFSI may publicly name and shame organizations that have breached sanctions, potentially inflicting serious reputational damage.
The E.U. has appointed a special envoy to stop sanctions evasion and has issued new guidance on the due diligence expected to be taken by firms to prevent circumvention. Sanctions violations now constitute an E.U. crime, alongside terrorism, money laundering, and corruption. The E.U. also is working on a draft directive to stiffen penalties for sanctions violations to include up to five years in prison and, for companies, exclusion from access to public funding, disqualification from business, placement under judicial supervision, judicial winding-up, or a fine of up to 5% of total group worldwide turnover.
This tougher stance is also reflected in a stricter approach at the E.U. member state level. In 2022, for example, Germany adopted two Sanctions Enforcement Acts and established a Central Office for Sanctions Enforcement. At least 150 cases were reportedly under investigation there, and it is likely that this number has since increased significantly.
Tougher compliance
With governments gearing up, businesses need to ensure that their compliance mechanisms are fully effective and proportionate to their level of risk. Key steps include:
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- rigorous screening for on-boarding and continuing relationships with business partners, checking not only the counterparties but also their major shareholders, directors, and senior managers to determine whether the counterparty is owned or controlled by a designated person;
- identifying which jurisdictions apply to their transactions and whether U.S. jurisdiction applies — this includes not only transactions in U.S. dollars, but also those routed through U.S. servers or involving direction, facilitation, or back-office support by U.S. persons;
- checking on the use of third-party intermediaries and trans-shipment points for Russia and Belarus (for example, China, Armenia, Turkey, and Uzbekistan) for possible sanctions evasion;
- if conducting business under a sanctions license or exception, ensuring that the conditions (such as reporting and recordkeeping) are met;
- keeping up to date on sanctions developments because the sanctions measures against Russia have evolved very rapidly, with new measures announced and in force the same day, sometimes without notice;
- fulfilling all reporting obligations;
- determining whether other financial or trade sanctions may apply to a proposed transaction, such as granting new loans, dealing in securities, making new investments, and exporting or importing sanctioned goods and services;
- ensuring that staff have up-to-date guidance and training, and that robust internal reporting and audit procedures are in place; and
- checking that contracts can be suspended or terminated without liability or serious risk of judicial challenge if sanctions prevent their performance.
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Having effective compliance policies not only helps prevent violations but also, if one should occur, helps offset the risk and size of a penalty, as well as the related reputational damage. In the coming months, there is likely to emerge a growing list of businesses that failed to heed the warnings and suffered severe consequences.
The contents of this article do not constitute legal advice and are provided for general information purposes only.
