It is essential that businesses understand the implications of sanctions which the UK and the EU have implemented against Russia and Belarus linked persons and entities, as well as further restrictions on trade in response to the crisis in Ukraine. In this briefing, we provide 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. We provide a general overview of how sanctions regimes work in one of our previous articles.
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 UK's powers to adopt sanctions against people and organisations linked to the Russian Government, and gave the UK Government a wider discretion to 'designate' - i.e. 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 EU announced the adoption of its own package of sanctions measures against Russia; and signalled that more would be adopted in an 'incrementalism' approach.
An unprecedented number and diversity of countries have also now adopted sanctions measures against Russia, including the US, 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. These included sanctions against individual officials and organisations whose actions "threatened the territorial integrity, sovereignty and independence of Ukraine". On leaving the EU, primarily by means of the adoption of the Sanctions and Anti-Money Laundering Act 2018 ("the Sanctions Act"), the UK 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 transitional period for the UK's exit from the EU, 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. 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."
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 is an offence. Designated persons may also be subject to travel bans or restrictions on engaging in certain financial services.
Proposed amendments to the Sanctions Act to speed up designation of individuals
Following domestic and international criticism of the tardiness and limited extent of the UK's adoption of sanctions against Russia and that of other States, notably those of the EU, the UK government on 3 March tabled before the UK Parliament amendments to the Sanctions Act.
These amendments introduce the ability for the UK to designate individuals under a so-called "urgent procedure". Under this procedure, the UK would be able to designate a person where:
- equivalent or similar sanctions measures are in place under the law of the USA, the EU, 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.
What is the scope of the UK's new sanctions measures 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 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: (i) chemicals; (ii) construction; (iii) defence; (iv) electronics; (v) energy; (vi) extractives; (vii) financial services; (viii) information, communications and digital technologies; and (ix) transport.
As a result of this amendment, the Government has a broad discretion to impose sanctions on anyone 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."
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" (i.e. restrictions or limitations on the financial actions of sanctioned persons) and "trade sanctions" (i.e. 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 Sterling and clearing payments through the UK; and
- prohibitions on UK persons from providing certain financial services to, among others, 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 as well as the provision of technical assistance, financial services, funds or brokering services in relation to such goods and technology. "Critical-industry" goods and technology cover products in a variety of sectors, including electronics, telecommunications and aerospace.
The UK 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 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 UK together with the US, Canada and the EU is working to exclude certain Russian banks from the SWIFT financial system. The UK 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 UK's sanctions measures compare to the EU's package of sanctions?
By contrast to the united response to the annexation of Crimea by Russia in 2014, the UK, EU and US 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. 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 (i.e. asset freezes, financial sanctions and travel bans).
The other financial sanctions include:
- restrictions on dealings involving transferable securities and money-market instruments issued by, among others, the Government or Central Bank of Russia, and certain Russian banks and other entities;
- restrictions on providing new loans or credit to such persons;
- the prohibition of transactions with the Russian Central Bank;
- the prohibition on the listing and provision of services in relation to shares of Russian state-owned entities on EU trading venues;
- restrictions on financial inflows from Russia to the EU, including the prohibition on:
- the acceptance of deposits exceeding certain values from Russian nationals or residents and Russian entities;
- the holding of accounts of Russian clients by the EU Central Securities Depositories;
- the selling of euro-denominated securities to Russian clients;
- the prohibition on investment, participation and contribution in future projects co-financed by the Russian Direct Investment Fund; and
- the prohibition on the sale, supply, transfer and export of euro-denominated banknotes to Russia or for use in Russia.
The EU has also imposed a prohibition on the provision of public financing and financial assistance for trade with, and investment in, Russia. An exception applies to: (i) financing or financial assistance commitments entered into before 26 February 2022; (ii) the provision of public financing or financial assistance of up to EUR 10 million per project to SMEs established in the EU; and (iii) public financing or financial assistance for trade in food, or for agricultural, medical or humanitarian purposes. Financial assistance is defined broadly as the disbursement of own funds or economic resources, and includes grants, loans, guarantees, letters of credit, supplier or buyer credits, import or export advances and all types of insurance and reinsurance. Financial assistance does not extend to payment or terms and conditions of payment of the agreed price for a good or a service made in line with normal business practice. As such, arrangements outside of normal business practice may be suspect.
The trade sanctions include:
- prohibitions relating to trade in arms, as well as related services and financing;
- the prohibition on the sale, supply, transfer or export to Russia of specific goods and technologies in oil refining, and related services and financing;
- an export ban covering goods and technology in the aviation and space industry, and the prohibition on the provision of insurance and reinsurance and maintenance services related to those goods and technology, as well as related technical and financial assistance;
- an export ban covering dual-use goods and technology, and the prohibition on the provision of related technical and financial assistance, as well as brokering and other services; and
- restrictions on exports of a wide variety of other items that might contribute to Russia's military, defence and security including certain computers and sensors.
The transport sanctions include a ban on any aircrafts operated by Russian air carriers and aircrafts owned, chartered or otherwise controlled or registered by a Russian person from EU airspace.
The EU has also implemented a prohibition on state-owned media Russia Today and Sputnik from broadcasting in the EU.
Moreover, as agreed with the UK and the US, the European Council will exclude certain Russian banks from the SWIFT financial system from 2 March 2022.
EU has stressed that it "stands ready to swiftly adopt more wide-ranging political and economic sanctions in case of need".
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 UK;
- actions by a local subsidiary of a UK company;
- actions taking place overseas but directed from within the UK; or
- financial products or insurance bought on UK markets but held or used overseas.
What is the ambit of the EU rules?
There needs to be a 'nexus' with the EU for EU sanctions to apply - and the EU is careful to avoid their sanctions being of extra-territorial affect, as the EU Council states in the Sanctions Guidelines:
"EU restrictive measures should only apply in situations where links exist with the EU. Those situations….cover the territory of the European Union, aircrafts or vessels of Member States, nationals of Member States, companies and other entities incorporated or constituted under Member States' law or any business done in whole or in part within the European Union".
What are the consequences for breaches of UK and EU sanctions?
Under the UK'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.
Under the EU's sanctions regime, the administration and enforcement of sanctions is the purview of the individual EU Member States. In this, Member States are required to ensure the 'effect utile' of EU law, and so must implement "effective, proportionate and dissuasive" penalties, such as fines and prison sentences.
Neither the UK 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 UK stringent custodial sentences for breach which were increased by the Sanctions Act as a signal of the UK's now 'independent' sanctions regime.
Public opinion in relation to the Russian invasion and the level of scrutiny of UK and EU action in this area may lead to more robust investigation and enforcement than has been seen to date.
From an EU perspective, as we note above, the principal instrument for the sanctions against Russia is a regulation, which can be enforced or relied upon in an EU domestic court - for example as a defence to contractual claim.
As Advocate General Hogan made clear in his recent opinion in the Bank Melli case in relation to the EU's Blocking Regulation, which is concerned to block compliance with US sanctions over Cuba and Iran:
"Here, it should be recalled that it is for the national courts responsible for applying, within the framework of their jurisdiction, the provisions of EU law having direct effect to ensure that they are fully effective.
Since, according to Article 288 TFEU, a regulation, such as the EU blocking statute, is directly applicable in any Member State, this obligation is imposed on those courts even in the absence of a provision in the national legislation transposing that regulation."
Furthermore, both 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 are recommended:
- to ensure that they have a robust sanctions screening policy in place and 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);
- steps are taken to determine the extent to which the business is engaged in activities involving the Russian State, Central Bank or other financial institutions;
- checks are carried out in respect of the business' products/services to understand whether they are caught by the new trade and export controls;
- business involving a Russian nexus is conducted in the ordinary course of business dealings and does not constitute any element of public financing or financial assistance; and
- all relevant personnel are informed of and mindful of anti-circumvention prohibitions so as to ensure that any activities do not inadvertently breach the relevant sanctions measures.