On the 24 February 2022, Russian troops moved into the Donbas region of Ukraine in what President Vladimir Putin described as a “special military operation” and most Western countries described as a full-scale invasion.
In the wake of this military incursion, many countries including the UK hurriedly implemented a wide range of sanctions against Russian individuals and corporate entities, leaving many businesses grappling with an unfamiliar and rapidly evolving regulatory regime.
What exactly are sanctions anyway?
Sanctions are controls, limits or outright bans imposed on finance, immigration, trade and movement of goods in respect of specified ‘designated persons’ or persons or categories of persons associated with a particular country.
The Sanctions and Anti Money Laundering Act 2018 (SAMLA) gives the government the power to impose sanctions for a range of reasons including the prevention of terrorism, national security, the prevention of human rights abuses or in order to promote the resolution of international conflict and protect civilians.
SAMLA was introduced post-Brexit to ensure that the UK continued to have the legislative framework to impose sanctions as required by the United Nations and other international obligations, as well as in the UK’s own national interests.
Financial sanctions in the UK are the responsibility of OFSI, the Office of Financial Sanctions Implementation.
Who has the government sanctioned and why?
The government has passed a number of regulations under SAMLA, establishing and expanding a range of sanctions against Russian individuals and companies, including High-Net-Worth Individuals associated with the Russian regime, Russian banks and major companies, including some producing weapons and military equipment.
It has imposed restrictions on trade with Russia, including trade in ‘dual use goods’ which are goods that might be put to a military purpose, and has banned the Russian airline Aeroflot from British airports. A number of Russian banks have also been removed from the SWIFT banking system, which is the established process for transferring money internationally.
The sanctions imposed are designed to inflict financial damage on President Putin and his close associates and increase the pressure on him to deescalate the conflict in Ukraine. They are also intended to cut off access to supplies and equipment that he may put to military use.
Initial sanctions on specific individuals and companies have rapidly expanded, making it increasingly difficult for UK businesses to keep up to date with who they should or should not be dealing with, particularly in respect of ongoing business relationships. The full list of current UK sanctioned designated persons and entities can be found on the OFSI Consolidated List.
Why do I need to know?
Many firms do business with Russian clients or may be asked to receive or pay funds to Russian banks. Breaching sanctions is a criminal offence and can result in substantial fines and up to 7 or 10 years in prison, depending on the nature of the sanction breached.
This includes widely drafted offences of participating in activity which circumvents sanctions or enables or facilitates the evasion of the sanctions regime.
Besides this, most reasonable people will have been horrified by events in Ukraine and ethical firms will be anxious to do their part to ensure that they are not making money and goods available which might prolong the conflict.
Companies are expected to maintain an awareness of sanctions as part of their broader compliance obligations. You should consider sanctions risk as part of your Anti Money Laundering policies, controls and procedures.
Bear in mind that sanctioned individuals and entities may take steps to obscure their involvement in a supply chain or a financial transaction through the use of an agent or by disguising their beneficial ownership of a company or trust.
OK, so what do I need to do?
In respect of new clients, effective internal checks or checks through a reputable due diligence service provider should already compare the client’s name and the names of known beneficial owners against the OFSI Consolidated List.
As for existing clients, these should be regularly reviewed and due diligence checks repeated on long-standing clients where appropriate to ensure that the risk has not changed. Initially, checking individual names against a live client list may have been a reasonable stop-gap arrangement but is unlikely to have kept pace with ongoing additions to the list of designated persons and companies.
It is therefore important to ensure that staff are made aware of the risks associated with Russian clients and know what your firm’s policies are on reverifying existing clients when information is regularly changing.
The UK’s banks should stop payments to known sanctioned entities, but you should not ignore the risk that for example, money in your client account which you are paying to a vendor in a property sale, is originally sourced from a Russian HNWI whose name is now on the Consolidated List.
If you do find that you are doing business with a client who is on the OFSI list, you must report the matter to OFSI before you can proceed with any transaction.
Whilst most firms will manage this process through their MLRO, be aware that sanctions are not legally the responsibility of the MLRO and do not directly fall into the SAR regime. Furthermore, the NCA cannot give consent under the Proceeds of Crime Act for you to act for a sanctioned entity.
You should also be aware that many millions of Russians are not individually sanctioned, and even those who are sanctioned continue to be entitled to access certain services including some legal services. Should you identify a sanctioned client as part of your due diligence process, it may be possible for you to continue to work with them by obtaining an OFSI licence.
Where can I go for further information?
Information about Russian sanctions can be found on this gov.uk webpage. Broader information on how the sanctions regime works is published by OFSI online in a general guidance booklet. The OFSI Consolidated List is available in a range of formats here. OFSI also publish information on obtaining a licence to deal with a sanctioned person or company.