Following the recent invasion of Ukraine by Russia, the UK and world news-cycle has – understandably – been dominated by the way in which the international community will respond to these ongoing events.
While there appears to be little chance of the direct involvement of Western military powers the response of the US, EU and UK has focused on the way in which non-military pressure can be applied to the Russian Government through measures which severely and adversely impact the Russian economy and in turn, the ability of Russia and its supporters (including Belarus) to operate effectively.
Following Russia’s initial invasion of Ukraine in 2014 (and in order to align its position with the EU and the US, post-Brexit), the UK imposed sanctions on a number of Russian entities and individuals via the Russia (Sanctions) (EU Exit) Regulations 2019 (“the Regulations”), issued under section 1 of the Sanctions and Anti-Money Laundering Act 2018 (“the 2018 Act”).
Prior to 10 February 2022, the Regulations allowed the UK Government to ‘designate’ (that is, to impose sanctions on) a person who is or has been involved in ‘destabilising Ukraine or undermining or threatening the territorial integrity, sovereignty or independence of Ukraine’. Individuals and entities that are so ‘designated’ are listed on the UK Consolidated Sanctions List (“the UK Sanctions List”) along with confirmation of the reasons for designation.
However, over recent weeks and in response to Russia’s full-scale invasion of Ukraine, the UK has responded not only by adding a number of significant Russian institutions and individuals to the UK Sanctions List, but also by expanding its ability to impose sanctions on a significantly wider category of individuals and entities. In addition, the UK has also imposed sanctions on a number of Belarusian officials and two military enterprises in response to the role of Belarus in the invasion.
In this alert, we provide an overview of the sanctions position in the UK, with a particular focus on Russia and the UK’s use of ‘Financial Sanctions’ (specifically asset freezes), as well as a summary of the most recent changes and designations and what they – and sanctions generally – mean for UK businesses.
What are ‘Sanctions’?
In simple terms, sanctions are measures aimed at imposing restrictions on dealing with specified individuals or entities. In the UK (post-Brexit) the key legal instrument through which sanctions are imposed is the 2018 Act which allows the UK government to make sanctions regulations where it considers that it is appropriate to do so, either in order to comply with its international obligations (such as those imposed by the UN) or for one of a number of defined purposes. These purposes (many of which overlap) include, the prevention of terrorism, in the United Kingdom or elsewhere, the interests of national security, the interests of international peace and security or to contribute to multilateral efforts to prevent the spread and use of weapons and materials of mass destruction.
There are a number of different types of sanction that can be imposed, including immigration, trade, shipping, and aircraft sanctions. In addition, there are number of financial sanctions that can be imposed including ‘investment bans’ and restrictions on dealing with certain financial securities issued by specified entities as well as restrictions on entering into correspondent relationships or providing loan or credit facilities.
However, in this note, we focus on the ‘asset freeze’ elements of financial sanctions which are the most common form of sanction (by reference to the number of individuals and entities to whom they apply) and, because of the broad nature of the activities they restrict, are most likely to engage the activities of a wide range of UK businesses across industry sectors.
Focus – Financial Sanctions (Asset Freeze)
These types of sanction seek to impose prohibitions or requirements for the purposes of:
- freezing the funds or economic resources owned, held or controlled by certain individuals and entities;
- preventing financial services being provided to or for the benefit of certain individuals or entities;
- preventing funds or economic resources from being made available to or for the benefit of certain entities or individuals; or
- preventing funds or economic resources from being received from certain individuals or entities.
What do the Regulations prohibit you from doing?
Dealing with funds/economic resources
A person (P) must not “deal with” funds or economic resources owned, held or controlled by a designated person. This would include dealing with such funds in any way resulting in a change in volume, ownership or control. The term “deal with” is capable of being interpreted extremely widely and can involve any participation in the possession or transfer of funds or economic resources.
Making funds/economic resources available
A person (P) must not make funds (or economic resources) available directly or indirectly to (or for the benefit of) a designated person if P knows, or has reasonable cause to suspect, that P is making the funds so available. Making funds available indirectly to a designated person includes, in particular, making them available to a person who is owned or controlled directly or indirectly by the designated person.
A person must not intentionally participate in activities knowing that the object or effect of them is (whether directly or indirectly) to circumvent any of the finance restrictions or to enable or facilitate the contravention of any such prohibition.
A person who contravenes the restrictions in the Russia Regulations (including the above) commits a criminal offence and is liable on conviction to a term of imprisonment of 7 years, an unlimited fine or both.
Russian Interests in the UK
As can be seen from the above, the UK financial sanctions regime is very widely drafted and include a number of broadly defined concepts. This places the burden on businesses to take reasonable steps to identify the risks that their clients or counterparties are sanctioned entities. Unfortunately, the broadness with which the provisions are drafted will often make it extremely difficult (if not impossible) to achieve certainty that entering into a commercial relationship with a particular entity or individual will not engage sanctions where there is some form of link with the Russian State and/or an element of Russian State ‘ownership or control’, within the meaning of the Regulations.
Achieving any certainty will already be common problem for many businesses given the extent of Russian business interests in the UK, which has received significant coverage in recent years.
According to a House of Commons research briefing issued on 25 February 20221, ‘Russian investment in the UK totals tens of billions, but it is not clear exactly how much because of the difficulty in tracing the beneficial (ultimate) owners of some assets, including UK property’. The same paper confirms that ‘24 Russian companies are listed on the London Stock Exchange [and] Transparency International estimates that £1.5 billion of UK property has been bought by Russians accused of corruption or links to the Russian Government, including £430 million of property in the City of Westminster alone.’
The risk of engaging with an entity with links to a sanctioned person has heightened by the addition of a number of individuals and entities to the UK Sanctions Lists in recent days. These include a number of major Russian banks with international presence such as VTB Bank and Sberbank as well as prominent individuals including Vladimir Putin himself and Russian Foreign minister Sergei Lavrov – all are now subject to an asset freeze2.
In addition, the pace with which the sanctions regime is evolving, combined with the expansion of the categories of individuals and entities on whom the UK may impose sanctions means that business engaging in activities with Russian businesses or individuals today run the risk of those activities being sanctioned tomorrow, if the UK Government decides that the individual/entity should be ‘designated’ and included on the UK Sanctions List.
On 10 February 2022, the UK Government expanded its power to designate entities and individuals from a wide variety of sectors as it gave itself the power to designate persons ‘involved in obtaining a benefit from or supporting the Government of Russia’, including:
- Carrying on business as a Government of Russia affiliated entityThis will include any entity which is owned directly or indirectly by the Russian Government or in which the Government of Russia holds directly or indirectly a minority interest or which has received some form of financial or other material benefit from the Government of Russia.
- Carrying on business of economic significance or in a sector of strategic significance to the Government of RussiaThis includes the Russian, chemicals, construction, defence, electronics, energy, extractives, financial services, information and communications and transport sectors.
- Owning or controlling directly or indirectly or working as a director or trustee of a Government of Russia affiliated entity or an entity falling within any of the other above categories.
It is important to note that simply because an entity may fulfil the above criteria, it does not mean that it is itself sanctioned and one would expect the UK to take a targeted approach rather than seeking to prohibit UK businesses from engaging with any entity operating in these industry sectors.
Notwithstanding the expectation of a targeted approach, it has been widely reported that the UK is preparing a ‘rolling programme’ of sanctions over the coming weeks and so we are likely to see further secondary legislation, new provisions and undoubtedly the addition of a number of individuals and institutions to the UK Sanctions list. This approach – which is likely to be reflected by the EU and the US – will add an additional layer of complexity to the already challenging and ever-changing world of sanctions compliance which requires businesses to consider a number of country-specific regimes in tandem.
With varying but potentially severe penalties for non-compliance, not to mention possible reputational damage, UK business may wish to put sanctions compliance to the top of their priority lists now and when reviewing their internal policies and procedures. In addition, given the expansion of the ability of the UK to designate a wide variety of individuals and entities with links to Russia it would be commercially expedient for UK businesses to implement a pro-active policy alongside their standard compliance risk assessments to guide their interaction with new and existing clients who fall within the categories that the UK Government has the power to designate.