Background

The sanctions landscape against Russia has changed dramatically over the course of the past month. Most recently, on 17 March 2014, pursuant to EU Regulation No 269/2014 (the “EU Regulation”), all funds belonging to or controlled by 33 Russian persons listed in Annex I to the EU Regulation were frozen[1]. In addition, on 17 March, the US issued Executive Order 13661 (the “Executive Order”), pursuant to which sanctions against 27 Russian individuals and Bank Rossiya have now been authorised. The US also issued Executive Order 13662 on 20 March 2014, which provides the jurisdiction to impose sanctions on persons (and those assisting them) operating in specific economic sectors in Russia [2].  

The continuing development of sanctions against Russian individuals (and, potentially incorporated entities) is likely and will, as a result, have an impact on those engaged in business with Russian counterparties.

Key question

In a situation where you participate in a joint business activity/own or control assets jointly with a person sanctioned by US authorities, and jointly owned assets are frozen in an EU bank account, what action can you take?

When considering the above, you have to first address the following issues.

Who has been sanctioned?

The first step is to ascertain whether your business activities are connected with any person on these sanctions lists.

Who do sanctions apply to/how do they operate around the world?

  • EU: The EU Regulation applies:
    • Within the territory of the EU;
    • To any person inside or outside the EU who is a national of an EU Member State:
    • To any legal person, entity or body, inside or outside the EU, which is incorporated or constituted under the law of an EU Member State; and
    • To any legal person, entity or body in respect of any business done in whole or in part in the EU.
  • US: The Executive Order applies:
    • To any US citizen, anywhere in the world;
    • To any person resident in the US; and
    • To any entity incorporated in the US (including foreign branches of US companies).

Any person or company falling within the above categories must comply with the relevant sanctions. So, for example, US banks (including foreign branches) holding assets belonging to sanctioned persons must freeze the funds and report this to the US authorities.

The next step, therefore, is to ascertain whether jointly owned or controlled assets may be frozen because they are held with institutions or persons falling within the categories listed above.

What is the link between you and the sanctioned person?

The next step is to ascertain whether you are involved in any joint business enterprises with sanctioned persons/entities.

To do this, you ought to consider:

  • Who are the ultimate beneficial owners of your partners;
  • Where your joint business vehicle is incorporated and where it carries on its business;
  • Where its assets are held; and
  • The legal and beneficial links between you and the sanctioned person (including your companies and vehicles).

As a result of this review, ideally carried out with the assistance of Eversheds, you/we will be able to ascertain if sanctions restrictions are triggered at all.

How do sanctions apply to jointly owned or controlled assets?

The EU and US sanctions are designed to prevent the direct and indirect funding of sanctioned persons. In this respect, a number of considerations are important as regards JVs:

  • If a sanctioned person or entity controls or owns more than 50% of a joint vehicle, it is likely that the joint company or JV vehicle and its assets will be subject to sanctions.
  • Even in situations where the sanctioned person has an ownership interest in the JV of less than 50%, but that interest is nonetheless considered to be significant, the US Office of Foreign Asset Control advises counterparties to exercise caution when dealing with such entities. The same is likely to be true in respect of EU sanctions.
  • If there is a risk that any profits, dividends or loans will directly or indirectly benefit the sanctioned person, they may be frozen. As a practical matter, if it is not clear which funds are due to which person, but may be held for or controlled by a sanctioned person, it is likely that they will be frozen as banks will almost certainly take a conservative view of their sanctions obligations.
  • Alternatively, if it can be established that certain funds are held solely for/controlled by a non-sanctioned person, even if they are held by a sanctioned company, it is possible that sanctions may not apply to them, but much will turn on the facts of the particular circumstances. However, this will have to be proved and as a matter of practicality, this may be difficult to evidence clearly and, as indicated above, most entities will exercise caution in this area.

What do you do if your assets are wrongly frozen?

US and EU banks receive updated lists containing newly proscribed entities on a daily basis. Internal compliance teams will subsequently audit the lists and, in cases where bank accounts of proscribed entities are identified, implement freezes.

However, if a bank interprets its obligations incorrectly and implements a freeze where – applying the criteria set out above – assets should not be frozen, what should you do?

There are a number of actions to take in this situation:

  • First, contact the bank (this is best done through a law firm) and request the bank to explain, without delay, the reasons why the assets have been frozen.
  • Upon receipt of the reasons provided by the bank, gather the available evidence to demonstrate that the freeze was incorrect and/or there is no connection between you and the sanctioned person(s)/entities. Again, this is best carried out with the assistance of a law firm.
  • Respond to the bank and address its reasons (again, this is best done through a law firm), explaining precisely why the account has been incorrectly frozen (providing relevant evidence) and demand that the account be released.
  • If the bank refuses, contact the authority responsible for regulating the bank’s activities and explain why the freeze is incorrect.
  • If the regulatory authority refuses to interject, you should consider court action in the jurisdiction where the bank account is held or the bank is domiciled[4], on the basis of an incorrect freeze on your assets. Different rules apply in different jurisdictions in relation to challenging inappropriate freezes, and it will be necessary to take advice from lawyers in the relevant jurisdiction(s). It is also possible to apply to the European Court for a declaration in relation to the applicability of the sanctions, although this process is slower.

What are your rights and obligations in respect of current and prospective contracts if your counterparty becomes a sanctioned person?

Should your counterparty become a sanctioned entity, you will need to consider carefully your position to ensure you do not breach the sanctions legislation. There may be a number of options open to you upon which you should seek advice:

  • Current contracts – In respect of contracts already in operation, your ability to refuse to perform your obligations or terminate the contract will depend on both the laws of the jurisdiction governing the contract and the terms of the contract itself. Equally, there may be a number of commercial options, which may include, among other possibilities, the mutual cancellation of the contract in question, and/or, to the extent possible, an agreement to otherwise continue with the commercial relationship at an unspecified future date if/when the sanctions are lifted. 

Prospective contracts – For contracts that have not yet been executed, you should seek advice as to the inclusion of relevant clauses which will safeguard your position should your counterparty subsequently become sanctioned.