This update aims to provide a basic understanding of the implications of UK sanctions imposed on named Russian individuals and corporate entities (“Designated Persons”) for businesses which may have dealings or connections with a Designated Person; in short, what is required to stay within the law.
As explained in the overview section below, these financial sanctions, in place in response to Russia’s recent invasion of Ukraine, form only a part of the overall UK sanctions regime, the majority of which was already in place following Russia’s earlier interventions in Ukraine and the detail of which is outside the scope of this update.
The limited purpose of this update is to de-mystify and explain the legal basis for the sanctions which have been the focus of so much recent media attention and, importantly, to highlight the need for those businesses with Russian clients, suppliers or, perhaps, partners to understand what those sanctions mean for them.
If your business requires specific advice in relation to its own circumstances, please get in touch with your usual Stevens & Bolton contact or use the contact details on the left of this page.
Russia sanctions overview
With effect from 1 January 2021, when the UK exited the EU, the Sanctions and Anti-Money Laundering Act 2019 replicated for the UK government the general powers to impose sanctions which had previously been conferred by the EU sanctions regime.
Also effective 1 January 2021, The Russia (Sanctions) (EU Exit) Regulations 2019 (“the Regulations”) maintained existing sanctions which heavily curtailed the ability of UK businesses to trade in various sectors with or for the benefit of the Russian state or Russian businesses. Prohibited activities (in all cases subject to specified exceptions and the issue of licences) included:
- in the financial sector, provision of credit and lending facilities, correspondent banking arrangements, foreign exchange dealing and asset management;
- in the insurance sector, provision of insurance and reinsurance for aviation and space activities;
- across a variety of sectors (primarily IT, defence, energy and infrastructure) the export of specified goods and the transfer of technologies;
- imports emanating from, and certain exports for use in, Crimea.
The Regulations also maintained for the UK the ability to name Russian individuals and corporate entities as Designated Persons, to be subject to the financial sanctions and any circumvention thereof with which this update is concerned. Those sanctions prohibit the use of funds or assets owned or controlled by Designated Persons, or the making of funds or assets available to them, and are together referred to in the Regulations as an “Asset Freeze”, in either case subject to certain listed exceptions or licences issued by HM Treasury’s Office of Financial Sanctions Implementation (“OFSI”).
Whilst some amendments have been made to the Regulations in recent weeks which relate to the prohibited activities summarised above, more attention has been devoted to the UK government’s imposition of Asset Freezing sanctions on a growing list of Russian oligarchs and connected corporate entities now identified as Designated Persons.
Meaning of the UK’s Asset Freeze sanctions for persons other than the Designated Persons?
To assist the UK government with the policing of the Asset Freeze sanctions, the Regulations:
- require relevant businesses, which include those operating in the financial, professional services and real estate sectors, to provide to OFSI relevant information received in the course of their business about anyone they reasonably suspect to be a Designated Person and any funds or assets they may hold for that Designated Person.
To give effect to the Asset Freeze (and also to assist with the policing thereof), the Regulations:
- prohibit any person (and not just those in the regulated businesses as described above) in possession or control of funds or other assets belonging to any person (individual or corporate) who they have reasonable cause to suspect is a Designated Person from dealing with the funds or other assets in any way (including by using, altering, moving, transferring or accessing them);
- require any such person to provide relevant information to OFSI about any such funds or other assets;
- prohibit any person from knowingly making funds or assets available to or for the benefit of Designated Persons, whether directly or indirectly, other than, in the case of funds, in discharge of a liability that accrued before the designation; and
- prohibit any person from engaging in actions which circumvent the sanctions, again whether directly or indirectly.
The Asset Freeze does not expressly prohibit dealings with the Designated Person, but:
- if the Designated Person is a supplier, the Asset Freeze will be likely to prevent the making of payment for goods or services;
- if a Designated Person is a customer, whilst the Asset Freeze appears not to prohibit the supply of services, it will prevent the Designated Person making payment, directly or indirectly.
Acting in any way which is prohibited as set out above, or failing to comply with reporting obligations, also as set out above, will result in a criminal offence being committed, punishable by imprisonment (including for directors of corporate entities complicit in any wrongful act) or fine, or both.
Do UK sanctions attach to just the named Designated Person?
Although only the targeted individual or corporate will be named as a Designated Person, the sanctions will apply to any other entity owned or controlled, directly or indirectly, by the Designated Person.
The ownership and control requirement is made out if the Designated Person holds more than 50% of a company’s shares or voting rights, or has the right to appoint/remove a majority of the board, or if it is reasonable to expect they could ensure the entity carries on in accordance with their wishes.
It is therefore important for any business to consider carefully such information as may be available relating to the legal and beneficial ownership of any entity with which it may be in or contemplating entering into a relationship where there may be grounds to suspect it has some Russian connection.
Who must comply with UK financial sanctions and where?
UK sanctions apply to any legal person residing or operating in the UK, and to any UK national residing abroad, and to any corporate entity established under UK law and operating abroad (eg as a foreign branch).
UK sanctions will therefore apply to a UK subsidiary, and probably to a branch too, of a corporate entity established under non-UK law, eg in an EU member state.
Whilst UK sanctions will not apply to a foreign subsidiary of a UK established entity, provided that dealings between that subsidiary and a Designated Person are not arranged to circumvent the UK sanctions which would need to be complied with by the UK parent.
Commercial consequences of Asset Freeze sanctions
Self-evidently, any business contemplating entering into a business relationship with a Russian individual or corporate should first check the UK government-published updated list of Designated Persons and otherwise take care to understand the ownership and control structure of any relevant corporate entity. Not to be in a business relationship with a Designated Person will mean no risk of committing a sanctions breach or incurring a civil liability; to be in one leaves some risk of doing one or both of those things.
For any business already in a relationship with a Designated Person when the designation occurs, care should be exercised when deciding on next steps.
A Designated Person will be unable to pay for goods or services so a supplier will need to consider carefully whether:
- express contract terms permit suspension of performance or termination of the contract based on non-payment;
- non-payment may amount to a repudiation of the contract by the Designated Person permitting the supplier to treat it as terminated;
- any force majeure clause operates to relieve the Designated Person from liability or even to prevent suspension or termination;
- the contract can be declared void by reason of the illegality attaching to the performance of a key obligation;
- it is appropriate to seek to avoid any of these or similar issues (including how to collect payment for goods or services already provided) by applying to OFSI for a licence permitting actions on its or the Designated Person’s behalf which would otherwise be prohibited by the Asset Freeze.
In the opposite scenario where it is the counter-party to the Designated Person which is unable to pay the Designated Person, it is likely to be able to rely on the illegality of it doing so as bringing the contract to an end, but it should not assume that payment will never need to be made.
If the business relationship does not involve respective supply and payment obligations, whether in the short-term or at all, different considerations will be likely to apply, including whether compliance with the sanctions necessitates suspension or termination of the relationship with the Designated Person at all.
Many businesses will be considering what is the “right thing” to be doing in terms of their Russian connections, having regard to their profile, customer and/or employee concerns and other “soft” factors, even where they are not dealing with Designated Persons. Severing ties, if that is the preferred course, may have the potential to be a very expensive option in the absence of an express right to terminate at will.
Andrew Quick