Introduction
Russia’s invasion of Ukraine has led to the imposition of some of the most aggressive, expansive, and coordinated sanctions ever by dozens of countries. These sanctions have come from places widely expected to take such action, including the United States, United Kingdom, and European Union, yet also from other countries taking actions almost unprecedented in their histories, including Singapore and Switzerland.
The impact of these sanctions on the Russian economy has been dramatic already, and with few signs of a Russian willingness to withdraw from Ukraine, the economic situation in the Russian Federation is likely only to worsen. The unprecedented breadth of sanctions, by some measures now turning Russia into the “most sanctioned country in the world” pose substantial challenges for U.S. and international businesses that have engaged in Russia, and those who may have entered into business with entities controlled by Russia’s oligarchs.
The importance of adherence with U.S. and international sanctions should be an integral part of any compliance program operated by a U.S. business, but the dramatic evolution of the sanctions picture in the last week may leave U.S. companies needing to take a careful review of their third parties, business partners, or joint ventures to ensure that they are in compliance with the latest developments.
The Limits of List-Based Reviews
All compliance tools rely primarily on data from lists published by a variety of U.S. and foreign governments, including the U.S. Office of Foreign Asset Control (OFAC), Global Affairs Canada, the United Kingdom’s Treasury and the European Commission. These tools allow compliance professionals to easily run the names of business partners (both individuals and entities) against the lists compiled by these (and other) organizations to identify businesses they are required to avoid. However, these tools are far from infallible and should be regarded as only one pillar of a comprehensive sanctions compliance program. Many companies have run afoul of sanctions by relying solely on the electronic review of their third parties, with even the highest tech companies such as Apple being forced to settle with the U.S. government after dealing with a Specially Designated National (SDN).
The addition of multiple new individuals to U.S. SDN lists and their international equivalents necessitates that companies reassess their affiliates to ensure that their business partners haven’t joined the ranks of the sanctioned, but such a review will not alone be able to overcome ownership-based sanctions that form a key part of OFAC’s 50 percent rule.
Enhanced Due Diligence Necessary for Sanctions Compliance
While sanctions screening and international due diligence tools can help companies avoid obvious offenders, a more comprehensive sanctions due diligence approach is often warranted. OFAC’s much vaunted “50 percent” rule means that any entity in which 50 percent or more is held (directly or indirectly) by a sanctioned individual or entity is regarded as sanctioned by virtue of its ownership. This rule can substantially complicate the issue of sanctions compliance, and can require extensive public records, open source, and human intelligence work to verify whether entities with complex or opaque ownership structures are subject to sanctions. Similar rules exist in other international sanctions structures as well, with the U.K. Treasury’s rules related to “control” arguably being even more expansive.
For companies that have engaged in extensive business in Russia, with Russian companies or high-profile Russian individuals (oligarchs, “minigarchs” etc.) there is likely substantial need to urgently review third parties, joint-venture partners or investments to ensure that their current status isn’t in violation of U.S. or international sanctions. As the U.S. and international sanctions picture continues to evolve over the coming weeks or months, companies will need not only to review existing relationships, but consider more stringent initial due diligence checks on partners and customers to ensure that they are maintaining strict adherence to global sanctions regimes.
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