Russian sanctions – navigating new UK measures

Introduction
Previous sanctions against Russia after Crimea
Proposed amendments to Sanctions Act to speed up designation of individuals
What is the scope of the new sanctions against Russia?
How do the United Kingdom's sanctions compare to those of the European Union?
Who must comply with the UK sanctions rules?
What are the consequences for breaches of UK sanctions?
What should businesses be doing now?

Introduction

It is essential that businesses understand the implications of sanctions that the United Kingdom has implemented against persons and entities linked to Russia and Belarus, as well as further restrictions on trade in response to the crisis in Ukraine. This article provides an overview of the current scope of these new measures and actions businesses should take if affected.

Economic sanctions target foreign governments, companies, groups, organisations, sectors and individuals, and are usually adopted in compliance with UN Security Resolutions and in pursuance of domestic foreign policy objectives (for further details please see "Taking back control – all you need to know but never dared to ask about the UK sanctions regime").

In early February, the UK government laid the groundwork for measures to respond to the situation in Ukraine where it adopted The Russia (Sanctions) (EU Exit) (Amendment) Regulations 2022. These broadened the United Kingdom's powers to adopt sanctions against people and organisations linked to the Russian government, and it gave the UK government a wider discretion to "designate" (ie, impose sanctions on) those persons it had reasonable grounds to suspect were "obtaining a benefit from or supporting the Government of Russia".

Then, on 23 February 2022, the European Union announced the adoption of its own package of sanctions measures against Russia and signalled that more would be adopted in an "incrementalistic" approach.

An unprecedented number and diversity of countries have also now adopted sanctions measures against Russia, including:

• the United States;
• Canada;
• Japan;
• Switzerland;
• South Korea;
• Singapore;
• Australia;
• New Zealand; and
• Taiwan.

Previous sanctions against Russia after Crimea

In 2014, the Council of the European Union began to impose various sanctions in response to the annexation of Crimea by Russia.(1) These included sanctions against individual officials and organisations whose actions "threatened the territorial integrity, sovereignty and independence of Ukraine".(2) On leaving the European Union, primarily by means of the adoption of the Sanctions and Anti-Money Laundering Act 2018 (the Sanctions Act),(3) the United Kingdom adopted its own sanctions regime. Specific regulations concerned with Russia, The Russia (Sanctions) (EU Exit) Regulations 2019 (the Regulations) were also adopted and came into force at the end of the Brexit transition period on 31 December 2020.

Under the Regulations, the UK regime gives the Secretary of State the power to "designate" a person where they have reasonable grounds to suspect the person of being an "involved person", who will then be subject to a range of economic sanctions.(4) In keeping with the wording of the EU regime, the UK regulations defined an "involved person" as one who:

• is or has been involved in destabilising Ukraine or undermining or threatening the territorial integrity, sovereignty or independence of Ukraine,
• is owned or controlled directly or indirectly […] by a person who has been so involved,
• is acting on behalf or at the direction of a person who is or has been so involved, or
• is a member of, or associated with, a person who is or has been so involved.(5)

If a person is "designated", they have their assets frozen, which means that dealing in funds and economic resources belonging to such persons or making funds and economic resources available to such persons is prohibited, and it is an offence. Designated persons may also be subject to travel bans or restrictions on engaging in certain financial services.

Proposed amendments to Sanctions Act to speed up designation of individuals

Following domestic and international criticism of the tardiness and limited extent of the United Kingdom's adoption of sanctions against Russia and that of other states, notably those of the European Union, the UK government on 3 March 2022 tabled before Parliament amendments to the Sanctions Act.

These amendments introduced the ability for the United Kingdom to designate individuals under a so-called "urgent procedure". Under this procedure, the United Kingdom would be able to designate a person where:

• equivalent or similar sanctions measures are in place under the law of the United States, the European Union, Australia, Canada or any other country specified by the Secretary of State; and
• the Secretary of State considers that it is in the public interest for a person to be designated under the urgent procedure.(6)

What is the scope of the new sanctions against Russia?

On 10 February 2022, the UK regime was updated by statutory instrument. The Regulations now include within the definition of "involved person", a person who "is or has been involved in obtaining a benefit from or supporting the Government of Russia". The Regulations explain that this will include a person:

• carrying on business as a government of Russia-affiliated entity;(7)
• carrying on business of economic significance to the government of Russia;
• carrying on business in a sector of strategic significance to the government of Russia; or
• owning or controlling, or working as a director, trustee or equivalent of any of the above.

The Regulations define several sectors as being of "strategic significance" to the government of Russia, including:

• chemicals;
• construction;
• defence;
• electronics;
• energy;
• extractives;
• financial services;
• information, communications and digital technologies; and
• transport.

As a result of this amendment, the UK government has a broad discretion to impose sanctions on anyone that it knows or suspects is involved in obtaining a benefit from or supporting the Russian government. The UK government has been keen to stress the severity of the new Regulations, with Minister for Europe James Cleverly describing them as "the toughest sanctions regime against Russia that we have had and [marking] the biggest change in our approach since leaving the European Union."(8)

Since 24 February 2022, and in response to the conflict in Ukraine by Russia, the UK government has implemented a number of packages of sanctions measures which include both "financial sanctions" (ie, restrictions or limitations on the financial actions of sanctioned persons) and "trade sanctions" (ie, measures which impose controls on trade).

The financial sanctions include:

• asset freezes and restrictions on making funds and/or economic resources available to, or for the benefit of, a number of companies and individuals with connections to the Russian government;
• prohibitions on dealing with transferable securities and money-market instruments issued by, among others, the government of Russia, a person connected with Russia, and certain Russian and Russian-owned entities;
• prohibitions on granting new loans or credit to persons connected with Russia, the government of Russia and certain other entities;
• prohibitions on UK banks establishing or continuing a banking relationship with designated persons;
• the prevention of designated persons and banks from accessing pound sterling and clearing payments through the United Kingdom;
• the prohibition of investments in relation to non-government controlled Ukranian territory; and
• prohibitions on UK persons from providing certain financial services, such as the Russian Central Bank, National Wealth Fund and Ministry of Finance.

There are also immigration sanctions in the form of travel bans on designated persons.

The trade sanctions include new trade prohibitions relating to:

• the export, supply, delivery and making available of "critical-industry" goods and technology ("critical-industry" goods and technology cover products in a variety of sectors, including electronics, telecommunications and aerospace); and
• the provision of technical assistance, financial services, funds or brokering services in relation to such goods and technology.

The United Kingdom has also imposed restrictions relating to air operations and shipping, including:

• a ban on all scheduled aircrafts owned, chartered or operated by a person connected with Russia or registered in Russia from UK airspace;
• a prohibition on directly or indirectly providing technical assistance to, or to the benefit of, a designated person for an aircraft or a ship;
• a prohibition on Russian ships and certain other specified ships from entering UK ports;
• the power for the Secretary of State to control the movement of and detain Russian and certain other specified ships;
• a prohibition on the registration of ships owned, controlled, chartered or operated by designated persons or persons connected with Russia on the UK Ship Register; and
• the power for the Secretary of State to terminate the registration of such ships.

The UK government has also implemented travel bans and asset freezes against certain individuals and enterprises in Belarus.

Further measures are expected, with Foreign Secretary Liz Truss saying, "Nothing - and no one - is off the table." In particular, the United Kingdom together with the United States, Canada and the European Union is working to exclude certain Russian banks from the SWIFT financial system. The United Kingdom is also due to introduce legislation to prevent Russian companies in the aviation and space industry from accessing the UK insurance sector.

How do the United Kingdom's sanctions compare to those of the European Union?

By contrast to the united response to the annexation of Crimea by Russia in 2014, the United Kingdom and the European Union adopted different initial approaches to the current conflict in Ukraine in their sanctions regimes. As noted above, over time this divergence may become more apparent than real.

Since 23 February 2022, and in response to developments in Ukraine, the Council of the European Union has adopted numerous packages of sanctions measures, including related to trade, transport and broadcasting. To date, over 700 individuals and entities including the Russian president and certain persons from Belarus have now been designated under the EU regime, and are subject to various restrictive measures, such as asset freezes, travel bans and several financial sanctions.(9)

Moreover, as agreed with the United Kingdom and the United States, the European Council will exclude certain Russian banks from the SWIFT financial system from 2 March 2022.(10)

Who must comply with the UK sanctions rules?

For the purposes of the UK's sanctions rules, there must be a "UK nexus" in order for the relevant prohibitions to apply. Guidance published by the Office of Financial Sanctions Implementation (OFSI) provides a non-exhaustive list of conduct which may have a UK nexus, which includes activities involving:

• UK nationals;
• entities incorporated or constituted under UK law;
• transactions using clearing services in the United Kingdom;
• actions by a local subsidiary of a UK company;
• actions taking place overseas but directed from within the United Kingdom; or
• financial products or insurance bought on UK markets but held or used overseas.(11)

What are the consequences for breaches of UK sanctions?

Under the United Kingdom's sanctions regime, breaches of the financial or transport sanctions can result in criminal penalties and imprisonment of up to seven years or a fine (or both). Breaches of the trade and export restrictions can result in imprisonment for a term of up to 10 years and/or a fine.

Neither the United Kingdom or EU member states have been particularly assiduous in investigating and enforcing the sanctions rules to date. This is so notwithstanding in the case of the United Kingdom's stringent custodial sentences for breach, which were increased by the Sanctions Act as a signal of its now "independent" sanctions regime.

Public opinion in relation to the Russian invasion and the level of scrutiny of UK action in this area may lead to more robust investigation and enforcement than has been seen to date.

Furthermore, both UK and EU sanctions regimes impose prohibitions on the participation in activities which will circumvent their sanctions measures.

What should businesses be doing now?

Businesses trading with or investing in Russia or Belarus need to assess the extent to which these new sanctions measures may apply to their ownership, operations, projected investments, their customers and suppliers. Particular vigilance is required where the business operates in or supplies to the sectors of "strategic significance", namely:

• chemicals;
• construction;
• defence;
• electronics;
• energy;
• extractives;
• financial services;
• information, communications and digital technologies; and
• transport.

In particular, businesses should be aware that sanctions are currently subject to constant changes and additions, with often scant if any transitional provisions to allow businesses to adapt. Therefore, when assessing risk exposure, businesses should take a dynamic view and also consider whether particular entities, which may not currently be subject of sanctions measures, may be vulnerable to being so designated in the future.

Specifically, businesses should:

• ensure that they have a robust sanctions screening policy in place and that it is dynamically updated so as to identify any involvement with entities that may be subject to the new sanctions measures;
• ascertain and monitor whether any designated entities or individuals are involved in the supply chain (suppliers, intermediaries and customers);
• take steps to determine the extent to which the business is engaged in activities involving the Russian state, Central Bank or other financial institutions;
• carry out checks in respect of the business' products or services to understand whether they are caught by the new trade and export controls;
• conduct business involving a Russian nexus in the ordinary course of business dealings and ensure that it does not constitute any element of public financing or financial assistance; and
• ensure all relevant personnel is informed of and mindful of anti-circumvention prohibitions, so as to ensure that any activities do not inadvertently breach the relevant sanctions measures.

For further information on this topic please contact Bernardine Adkins or James Stunt at Gowling WLG by telephone (+44 207 379 0000) or email ([email protected] or [email protected]). The Gowling WLG website can be accessed at www.gowlingwlg.com.

Endnotes

(1) A list of these sanctions is available here.
(2) See Foreign Affairs Council, 17 March 2014.
(3) Other UK legislation includes the Export Control Order 2008 and the Anti-Terrorism, Crime and Security Act 2001.
(4) The Russia (Sanctions) (EU Exit) (Amendment) Regulations 2022, regulation 6(1)(a).
(5) Ibid, regulation 6(2).
(6) The Economic Crime (Transparency and Enforcement) Bill (Amendment Paper).
(7) That is, a natural or legal person who is controlled by the government of Russia, or in whom the government of Russia holds an interest or who benefits financially or otherwise from the government of Russia. See ibid, regulation 6(7).
(8) Further information is available here.
(9) Further information is available here.
(10) Further information on the sanctions adopted by the European Union is available here.
(11) See OFSI, Monetary penalties for breaches of financial sanctions, paragraph 3.7.