Transatlantic sanctions against Russia: steering a delicate course

The nature and extent of each sanctions designation is determined by the underlying legislation which implements it. The detail of such legislation can vary in significant ways. For instance, Executive Order 14024 permits sanctions to be imposed against any person deemed “to be a spouse or adult child” of individuals falling within the scope of the newly-created sanctions categories. This imposition, designed to prevent sanctioned persons, or persons anticipating sanctions, from transferring assets to family members, creates a new set of compliance obligations for businesses and financial institutions. Companies will need to ensure that their systems and controls are sufficiently robust to identify the familial relationships of potential customers and associated persons. It also provokes the possibility that Russian individuals transferring assets to family members could face legal liability for attempting to evade US sanctions.

Similarly, Executive Order 14024 has potentially expanded secondary sanctions for non-US companies facilitating “significant” transactions with a range of individuals and entities sanctioned by the US. Although it has yet to be tested in US courts, the overlap between Executive Order 14024 and previous Executive Orders issued by the US Government indicates that the new measures may fall within the Russian secondary sanctions provisions contained under Section 228 of the Countering America’s Adversaries Through Sanctions Act 2017 (CAATSA). Under this section of CAATSA, a non-US individual or entity will be subject to “blocking sanctions” in the event they are deemed to have facilitated a significant transaction on behalf of any person that is subject to Russia sanctions, or their immediate family members. This would give the expanded sanctions provisions in Executive Order 14024 extra-territorial effect, allowing them to be enforced against any individual or entity in the world, regardless of their US-jurisdictional links.

Both the UK Government’s Anti-Corruption Sanctions and the US Government’s Executive Order 14024 encompass the listing of specified persons, immediately subject to asset freezes. They are perhaps more significant, however, for creating and shaping new sanctions frameworks which can utilised in future to incorporate further sectors, entities and individuals within the regime. Whilst the US Government, in a statement accompanying the sanctions, has made clear that it is not seeking to provoke a cycle of retaliation and conflict with the Russian Federation, the broad nature of the newly-created categories of designation within the Executive Order allow significant scope for further measures down the line. Similarly, the UK Government’s decision to utilise the Anti-Corruption Sanctions in response to an alleged theft of Russian state assets indicates a willingness to wield sanctions outside of the conventional realm of national security.

Businesses will need to have effective horizon-spotting strategies in place for anticipating future developments, ensuring that preventative and mitigatory efforts can be taken as early as possible. This will involve regular and thorough risk assessments of potential sanctions risk to the business, as well as effective compliance strategies for considering alternative approaches. The Russian Government has already promised an “asymmetric” and “tough” response to these sanctions, which emphasises the importance of affected businesses taking a holistic view that considers all potential, competing legal liabilities, rather than merely responding to the latest development.

In order to adapt to an ever-shifting sanctions landscape, businesses will have to ensure that their due diligence and compliance processes are capable of responding at speed to new developments. Particular care and attention must be taken in relation to sanctions clauses in commercial contracts, allowing for the potential imposition of both primary and secondary sanctions from a number of different state actors. Those operating in the UK or the EU will need to consider how to balance existing blocking statutes - which prevent compliance with US sanctions - against the obligations imposed on them by OFAC, alongside any blocking or counter-sanctions measures taken by the Russian Government.

Businesses and financial institutions should plan potential exit strategies from any holdings or contractual relationships classed as high-risk, and identify back-up plans for a range of worst case scenarios. These will have to be coupled with internal screening processes sufficient to detect the existence of customers and associated persons subject to sanctions. The introduction of a specific category of Anti-Corruption Sanctions, applying not merely to foreign public officials but to any individual or entity reasonably suspected to have been “involved in” bribery or corruption, adds another dimension to any potential risk assessment. There is also an additional reporting obligation for financial institutions operating in the UK, who must report to HM Treasury if they know or have reasonable cause to suspect that a person has committed an offence under the Anti-Corruption Sanctions.

We previously reported on Federal Law No. 171-FZ and the effect of that legislation to provide sanctioned Russian individuals and entities the right to have their disputes determined in Russia. The increased scope of sanctions against Russia means that there will be more cases which may be impacted by Federal Law No. 171-FZ. Potential claimants must be alive to the precise sanction status of their opponents to ensure that the risk of a dispute potentially being stayed in favour of determination in Russia is identified at an early stage. This is particularly important for claimants in ex parte applications (for example, freezing orders and service of proceedings out of the jurisdiction) against sanctioned individuals and businesses. A failure to highlight the risk presented by Federal Law No. 171-FZ to the Court may be considered to be a breach of the full and frank disclosure obligation. Conversely, sanctioned defendants should be aware of their rights under Federal Law No. 171-FZ and consider whether they want to seek to have their dispute resolved in Russia.

Sanctions may also impact the smooth running of dispute resolution more generally. For example, sanction may hinder the ability of those involved in dispute resolution processes to travel freely to the jurisdiction – such as to give evidence. Careful consideration should be given as to which individuals (beyond the parties) will be required as witnesses and whether they are caught by sanctions which will prevent them from obtaining the necessary visa to attend a hearing. Advance planning and appreciation of the practical and strategic obstacles is vital. These issues tie into the “access to justice” arguments which a sanctioned person may raise pursuant to Federal Law No. 171-FZ in seeking to have their dispute determined in Russia.