Businesses need to act now to give effect to UK sanctions on Russia

On 24^th February, the UK Government has announced that it will inflict the strongest economic measures the UK has ever enacted against Russia, with the express intention to inflict devastating consequences on President Vladimir Putin and Russia.

Those sanctions came into force on 1^st March 2022 and, as promised, are broader than ever before meaning that businesses will need to act now to ensure that they comply with the new rules. In this article SMB’s Corporate & Commercial team run through the key sanctions and what companies need to be doing now.

Background – the regulations

The new sanctions which came into force on 1^st March are not the only sanctions which apply to Russia. The Russia (Sanctions) (EU Exit) Regulations 2019 came fully into force on 31 December 2020 which implemented in the UK the sanctions which the European Union had already imposed on Russia to cease Russia’s actions in destabilising.

There have been several amendments to the 2019 regulations but following the devastating developments between the Ukraine and Russia, the Russia (Sanctions) (EU Exit) (Amendment) (No. 2) Regulations 2022 and the Russia (Sanctions) (EU Exit) (Amendment) (No.3) Regulations 2022, went before parliament and came into force on 1^st March. It is these Regulations which implement the strongest ever sanctions enacted by the UK against Russia.

Enforcement and non-compliance

Failure to comply with financial sanctions legislation or to seek to circumvent the sanctions can have serious consequences.

Breach of a sanction is a criminal offence for which individuals can be imprisoned for up to seven years.  In addition, in 2017 the Office of Financial Sanctions Implementation (OFSI) gained the power to impose a civil penalty of up to £1 million or half the value of the breach, whichever is greater.

This is in addition to the serious damage to an institution’s reputation and credibility and the potential for a business in breach of sanctions to become a sanctioned organisation in turn.

Now, as the sanctions on Russia are wider than ever before, even more businesses will need to monitor their dealings with Russia.

Sanction areas

The majority of sanctions imposed are financial, introducing additional measures to prevent Russian companies from issuing transferable securities and money market instruments in the UK. However, there are a number of new sanctions regarding exports of technology, as well as sanctions for which will apply to industry and transport.

Financial sanctions

Financial restrictions include:

• restrictions to prohibit UK individuals and companies from undertaking financial transactions involving the Central Bank of the Russian Federation, the Russian National Wealth Fund, and the Ministry of Finance of the Russian Federation.
• A power to prevent designated banks from accessing Sterling and clearing payments through the UK. This will match the power the US already has. Banks subject to this measure will be unable to process any payments through the UK or have access to UK financial markets.
• Comprehensive sanctions covering Russian elites, companies and financial institutions announced following Russia’s full-scale invasion of Ukraine
• Russian bank assets in the UK to be frozen in order to close off Russia’s banking system from UK finance markets
• Russian state-owned and key strategic private companies banned from raising finance on the UK financial markets
• the exclusion of Russia from the SWIFT financial system

Export and technology sanctions

The new regulations introduce a set of measures to strengthen the current trade restrictions against Russia. This includes a prohibition against the export of a range of high-end and critical technical equipment and components in sectors including electronics, telecommunications, and aerospace.

The territorial sanctions that the UK has imposed on Crimea will be extended to Donetsk and Luhansk, meaning no UK individual or business can deal with the territories until Ukraine controls them again.

Transport

Russia’s national airline Aeroflot has been banned from UK airspace

What UK companies need to be doing now

Check your contracts with Russian companies, individuals and institutions

Businesses may need to end or pause contracts with Russian companies so check for clauses on termination, choice of law and jurisdiction, and force majeure clauses not only in contracts directly with Russian persons and businesses but also with any entity linked to Russia or to the territories Donetsk and Luhansk.

This will help to identify your rights and any contractual remedies available should those relationships be impacted by the new sanctions.

For new contracts, businesses may wish to add a specific carve out to their force majeure clauses allowing the contract to be paused whilst sanctions continue.

Analyse your service provision

Although many UK companies will consider themselves to be outside the framework of the financial sanctions, because they do not provide financial services or export goods, it is prudent to consider whether other activities will trigger a breach or circumvention of the sanctions.

For example, government guidance on compliance with sanctions states that if it is prohibited to raise capital on financial markets, providing advice on how this affects a business will be permitted but preparing documents to raise such capital may amount to an attempt to circumvent sanctions.

Regulators in the UK are likely to adopt a broad view of what constitutes “circumvention” in any case. Companies that have any concerns will need to address those concerns swiftly and companies providing financial information to Russian entities, or providing advice of any kind will need to consider their offering carefully and whether their activities could amount to circumvention of a particular sanction.

Cross border considerations for group companies

Although the UK, EU and US have co-ordinated the sanctions imposed, they are not identical and group companies with subsidiaries in different countries are likely to be subject to varying levels of  sanctions across the group structure .

Companies should be aware that the UK’s sanction regulations include anti-circumvention provisions preventing businesses from benefiting from discrepancies between sanctions in different countries. This means that it is not possible to get around a particular sanction by routing business through a group company registered in a location where sanctions are less strict.

Know your customers and suppliers

Businesses should consider updating their customer due diligence (CDD) records, take steps to carry out sanctions-related screening, and consider seeking updated end-use declarations from Russian based customers.

Exceptions

There are exceptions to the current sanctions rules. These exceptions come in the form of a specific or general licence issued by the OFSI.

A general licence, issued by OFSI on behalf of HM Treasury, allows multiple parties to undertake specified activities which would otherwise be prohibited by sanctions legislation, without the need for a specific licence. There are already several General Licences which permit certain goods, services and technology to be exported for particular purposes. These are published on OFSI’s website.

In addition, companies may be able to apply for a specific licence for their activities. Specific licences are only available in certain circumstances, such as where a business is providing humanitarian aid, or facilitating an individual’s basic needs.

Details of how to apply for a specific licence, and what licences may be granted for, are set out here.

The information in the article was last updated on the 1^st March 2022. As the situation develops, this list of sanctions and their impact on businesses and individuals will continue to expand. Anyone who wants to better understand the position and its impact should be sure to review the information publicly available on a regular basis.

Please contact Peter or Anthony should you require further information. We will continue to provide updates as the situation changes.