The EU’s economic sanctions targeting Russia’s banking, oil and defence sectors, which were set to expire at the end of January, will now run until 31 July 2016. This follows a decision by the European Council just before Christmas. Financial institutions must therefore ensure their continued compliance with those sanctions for the immediate future.
The EU Sanctions Regime: General
As outlined in our previous briefing on sanctions here, the EU applies sanctions within the framework of the Common Foreign and Security Policy on an autonomous EU basis or by implementing binding resolutions of the UN Security Council. EU sanctions are intended to bring about a change in policies which either violate international law or human rights or are disrespectful of the rule of law or democratic principles: they apply to all persons (including bodies corporate) located within the EU, irrespective of their nationality.
EU Sanctions against Russia
Since March 2014, the EU has progressively imposed restrictive measures against Russia. The first wave of sanctions targeted individuals and organisations that had promoted or supported the annexation of Crimea. Following the shooting down of Malaysian flight MH17 on 17 July 2014, the EU imposed a second wave of sanctions with a broader economic/financial focus.
From a capital markets perspective, Council Regulation 833/2014 as amended (the “Regulation”) is of particular relevance as it prescribes restrictions on briefing access to the capital markets for certain financial institutions. The European Commission issued a Guidance note on the implementation of certain provisions of the Regulation in September 2015.
The Regulation has a very broad scope and applies not only within the territory of the EU, but also to any persons who are nationals of an EU Member State, any legal person incorporated or constituted under the law of a Member State, as well as to any legal person in respect of any business done in whole or in part within the EU (collectively, “EU Persons”).
Article 5 of the Regulation imposes substantial limitations on transactions involving transferable securities and money-market instruments when issued by certain Russian financial and defense industries. Specifically, it prohibits EU Persons from buying or selling (directly or indirectly) or otherwise dealing with transferable securities and money-market instruments issued after 12 September 2014 by certain entities (“Named Entities”) with a maturity exceeding 30 days.
The Named Entities are:
- credit or other institutions established in Russia, with over 50% public ownership or control, that “have an explicit mandate to promote competitiveness of the Russian economy, its diversification and encouragement of investment ...”;
- Russian entities whose major activities include the “conception, production, sale or export of military equipment or services, as listed in Annex V, except … [those] active in the space or the nuclear energy sectors”; and
- entities established in Russia with over 50% public ownership or control with estimated total assets exceeding 1 trillion Russian Roubles, “whose estimated revenues originate … [mainly] from the sale or transportation of crude oil or petroleum products, as listed in Annex VI”.
The restrictions on transactions involving transferable securities and money-market instruments also apply to:
- a non-EU entity where more than 50% of that entity’s proprietary rights are directly or indirectly owned by a Named Entity; and
- any entity acting on behalf of or at the direction of such a non-EU entity, or a Named Entity falling within categories 2 or 3 above.
The Regulation defines “transferable securities” to include shares in companies; other securities equivalent to shares in companies, partnerships or other entities; bonds or other forms of securitised debt, including depositary receipts; and any other securities giving the right to acquire or sell any such transferable securities. The term “money-market instruments” includes classes of instruments that are normally dealt in on the money-market, particularly treasury bills, certificates of deposit and commercial papers. Instruments of payment are excluded from both of the above definitions.
The Regulation also prohibits arrangements to make new loans or credit with a maturity exceeding 30 days to any of the entities listed in Article 5, subject to certain exceptions.
A breach of the Regulation is an offence under the European Union (Restrictive Measures Concerning Ukraine) Regulations 2015 and may lead to imprisonment for up to three years and/or a fine not exceeding EUR 500,000.
The Central Bank of Ireland is responsible for the administration, supervision and enforcement of financial sanctions in Ireland in so far as financial institutions are concerned. The Central Bank has published FAQs (available here) to assist financial institutions in their compliance obligations.
Comment and Next Steps
Strong corporate governance is an essential component of an effective sanctions compliance programme (“SCP”) and both directors and senior managers need to ensure that the SCP is integrated into decision-making at all levels in the institution. While there are many issues competing for top-level attention, a financial institution must ensure that the SCP remains strongly supported by its Board of Directors and senior management.
Each financial institution should also ensure that both the SCP and its underlying internal risk assessment are monitored and reviewed on an on-going basis to take into account both possible changes in its own activities and possible changes to the EU sanctions regime.
On-going review is particularly important from a third party due diligence perspective. As sanctions extend beyond the Named Entities to their non-EU subsidiaries and entities acting on their behalf, in-scope third parties may change very rapidly and due diligence measures need to take this into account.