[co-authors: Andrew Hood, John Cassels, Richard Tauwhare]
The EU's foreign policy chief, Josep Borrell, said in March that the bloc has nearly exhausted its options for punitive measures against Russia: "There is little left to control other than basic commercial items." The focus now, he said, is to tighten the implementation of sanctions. This means closer cooperation with allies in blocking circumvention through third countries (some of which have experienced suspiciously large increases in their imports of goods that are prohibited for export to Russia) coupled with tougher enforcement at home.
At the Group of Seven (G7) Summit in Hiroshima, Japan on 19 May, the "G7 Leaders' Statement on Ukraine" announced further coordinated steps to prevent the evasion and circumvention of sanctions, including:
- continuing work in the G7 "Russian Elites, Proxies, and Oligarchs" (REPO) Task Force and the G7 Enforcement Coordination Mechanism;
- engaging with third world countries to ensure sanctions are not circumvented;
- reinforcing coordination to take action against third world country actors who materially support Russia's war, including preventing third world country branches of Russian banks from being used to avoid sanctions; and
- fully mapping holdings of Russia's sovereign assets immobilized in G7 jurisdictions and keeping them immobilized until Russia pays for the damage it has caused to Ukraine.
In the week leading up to the summit, the U.S. and the EU announced an enhanced bilateral partnership to share expertise and to align their implementation of sanctions, promote compliance and strengthen enforcement. The U.K. and U.S. issued a similar joint statement last October.
On the same day, the U.S. Department of the Treasury, Office of Foreign Assets Control (OFAC) and the U.S. State Department issued over 200 new sanctions designations specifically targeting those involved in circumvention, including procurement networks in Liechtenstein, the Netherlands, Czechia, Poland, Germany, Finland and Estonia. These new sanctions target key Russian industries such as defence and related material, technology, metals, mining, and energy. This followed coordinated designations in April by the U.S. and the U.K. on 'professional enablers' suspected of helping Russian oligarchs to hide their assets, including a number of persons in Cyprus. The U.S. subsequently provided the Cypriot government with substantial dossiers detailing the alleged activities.
An amendment to EO 14024 Directive 4, which already restricts transactions with the Russian Central Bank and other federal financial institutions, requires anyone who holds property interests of such entities (including equity, bonds, debt instruments, etc.) to file an annual report to OFAC declaring that property. The first report is due by 18 June. Further, the U.S. implemented additional restrictions including a prohibition on exports from the U.S. or by U.S. persons of architecture or engineering services to persons located in Russia pursuant to EO 14071, and two new export control rules to strengthen U.S. export restrictions and cut off Russia's access to critical commodities with potential military applications.
At the time of writing, the EU is understood to be finalizing details of its 11th package of Russian sanctions, announced by the EU Commission on 9 May. The package is focused on cracking down on circumvention in close coordination with international partners. Proposals under discussion are reported to include:
- restricting exports to third world countries of goods and technology whose export to Russia is prohibited, where there is a demonstrated risk of circumvention (if agreed, this would represent a further shift away from the EU's traditional rejection of extraterritorial sanctions, following its earlier addition to the asset freeze listing criteria of persons who facilitate the circumvention of EU sanctions);
- expanding the bans on transit via Russia of items exported to third world countries from the EU (given the risks that such items will stay in Russia);
- expanding the EU list of entities to which stricter export restrictions apply, including those in third world countries involved in the circumvention of sanctions; and
- prohibiting access to EU ports of vessels transporting sanctioned goods or suspected of breaching EU sanctions on Russian oil.
U.K. and EU enforcement has long been less serious than in the U.S. In 2022, the U.K. imposed total penalties of £45,000 for two sanctions violations; there have been none so far in 2023. By contrast, so far in 2023, the U.S. Office for Foreign Assets Control (OFAC) has imposed six fines totalling over $540 million. However, there are signs that the times are changing.
In the U.K.:
- this week, the U.K. issued new guidance on preventing the circumvention of trade sanctions. Traders are expected to ensure that they consider the risks as part of their due diligence on counterparties, both when on-boarding and then repeated at intervals to ensure that the risk has not changed;
- the Office of Financial Sanctions Implementation (OFSI) doubled its staff during 2022 and is appointing a second Director focused specifically on enforcement;
- a breach of financial sanctions is now a strict liability offense, such that OFSI may issue a monetary penalty without needing to demonstrate that a person had knowledge or reasonable cause to suspect they were in breach of a financial sanction;
- OFSI now also has the power to publicly name organizations that have breached sanctions, even where it decides not to impose a penalty, potentially inflicting serious reputational damage; and
- the Financial Conduct Authority (FCA) expects firms to have established systems to ensure compliance with sanctions as a key part of their controls on financial crimes; the FCA can take enforcement action if it detects – or receives reports of – deficiencies in those systems.
In the EU:
- issued guidance on adequate due diligence in April 2022 and the EU's FAQs on 'Circumvention and Due Diligence' recommend a risk-based approach including a risk assessment, multi-level due diligence and ongoing monitoring);
- a Special Envoy for sanctions implementation has been appointed to work with third world countries to address circumvention;
- reporting obligations of frozen assets have been expanded to include information about assets not yet treated as frozen (such as assets that have been concealed) and assets that were subject to any moves or alterations in the two weeks preceding a designation;
- a 'Freeze and Seize' Task Force has been set up to ensure EU-level coordination of sanctions on oligarchs;
- consideration is being given to extending the role of the European Public Prosecutor's Office to include the investigation of sanction violations;
- such violations now constitute an "EU crime", alongside offenses such as terrorism, money laundering and corruption. The EU is currently considering a draft Directive to harmonize and stiffen penalties for sanctions' violations across all EU Member States, including penalties of up to 5% of total worldwide turnover of the corporate group concerned;
This is also reflected in a much more robust approach to sanctions compliance and enforcement at the EU Member State level. To take just one example: Germany adopted two Sanctions Enforcement Acts last year, to enhance cooperation among the various agencies and to establish the Central Office for Sanctions Enforcement. In 2022, at least 150 cases were reportedly under investigation by the German authorities for alleged violations; and it is expected that this number has since increased significantly.
With the U.S., U.K., EU, and G7 gearing up their enforcement efforts and arming themselves with the resources and regulatory firepower they need to make their sanctions fully effective, now is a good time for all companies to ensure that they in turn have dedicated proportionate resources to manage these risks. Key elements to consider include:
- implementing a risk-based approach for Russia, Belarus, and similar jurisdictions;
- identifying which jurisdictions apply to which transactions;
- employing rigorous screening processes and policies for onboarding and continuing relationships with all business partners;
- monitoring the use of third-party intermediaries and transhipment points for Russia and Belarus (e.g., China, Armenia, Turkey and Uzbekistan) for possible sanctions and export controls evasion;
- fulfilling reporting obligations in respect of any partners that are subject to an asset freeze;
- determining whether other financial or trade sanctions apply to a proposed transaction, such as granting new loans, dealing in securities, making new investments, exporting or importing sanctioned goods and services;
- ensuring that staff have up-to-date guidance and training, and robust internal reporting and audit procedures are in place; and
- checking that contracts can be suspended or terminated without liability or serious risk of judicial challenge, in the event that sanctions prevent their performance.