BRIAR LOCK: How to avoid penalties for violating sanctions against Russia

Just because you or your business are domiciled in SA doesn’t mean you’re immune to a potential violation of the many sanctions against Russia. And the penalties are eye-watering.

With the aim of weakening Russia’s ability to finance the war against Ukraine, sanctions target the political, military and economic elite responsible for the invasion. And they are increasingly targeting anyone enabling or suspected of enabling the evasion of these sanctions. 

Whether you’re an individual, a company or even a trust, you could face both civil and criminal penalties if you ignore Russian sanctions. And for companies, there could easily be separate penalties imposed on the legal entity as well as the officers who run it. 

SA does not have an autonomous sanction regime. However, the government implements the targeted financial sanction resolutions adopted by the UN Security Council. These relate to the financing, prevention and suppression of terrorism and terrorist financing, as well as the prevention, suppression and disruption of the proliferation of weapons of mass destruction and its financing.

The sanctions imposed against Russia to date represent a co-ordinated response by Western allies but are not backed by a security council resolution. The UN has been unable to impose restrictive measures against Russia because of the veto power that country holds as a permanent member of that council. The other permanent members are China, France, the UK and US. A “no” vote from any one of the five permanent members stops action on any measure put before it.

However, even in the absence of a security council resolution against Russia, SA individuals and entities can still get caught up in the US, EU and UK sanction regimes, which are extremely far-reaching. For example, EU sanctions apply to nationals of EU member states, “wherever in the world they are”, as well as EU incorporated entities and their non-EU branches.

US sanctions apply to US citizens (including dual nationals), permanent residents (green card holders), entities formed under US law and their foreign branches, and people in the US or any person taking or causing action within the US. Furthermore, electronic payments denominated in dollars are prohibited if targeted countries or people are involved in any related transactions. 

Complexity 

Sanctions are a niche, complex and fast-changing area, spanning multiple regimes and many individual pieces of legislation. While screening tools may assist with the identification of sanctioned individuals or entities, most will not detect sectoral sanctions — prohibited transactions with certain sectors — for example. Screening must be deployed alongside a broader set of robust non-screening controls to be truly effective.

The ways in which those identified as “designated persons” under the sanctions are trying to circumvent them are complex. They are transferring assets to trusted proxies such as non-Russian or dual-national family members or associates. They are also transferring assets and funds directly and indirectly to jurisdictions where sanctions are not in place. And they are exploring alternative payment methods, including the use of crypto assets to move funds to circumvent sanctions and mitigate reduced access to the SWIFT payment system. 

Are sanctions working? 

While sanctions have stung the Russian economy — according to the World Bank, IMF and Organisation for Economic Co-operation and Development, Russia’s GDP dropped by about 2.1% in 2022 — they have not caused economic collapse or succeeded in pressuring President Vladimir Putin to stop Russia’s aggression against Ukraine. In fact, the IMF has forecast that Russian GDP — in a turnaround of fortune — will grow in 2023. Russia is a particularly challenging sanctions target because it is a key exporter of crucial commodities, including oil.

What SA companies should do  

Every SA company that operates across borders, transacts in global currencies or employs dual nationals should conduct a thorough sanctions risk assessment that considers where the company operates (both where it is incorporated and where it sells its products and services), where its clients are based and how they earn their wealth, and whether their employees are required to comply with sanctions by virtue of their nationality.

Constant vigilance is required — reviewing known and potential exposure on a continual basis, exercising extra caution when onboarding new business and maintaining robust governance and oversight mechanisms. The reality for some companies is that the potential risk and cost of a violation may make certain types of business relationships unpalatable.

• Lock is head of risk & compliance (investment management) SA for Stonehage Fleming.