UK and EU sanctions on Russia: the end of the beginning

May 2023  |  SPECIAL REPORT: FINANCIAL SERVICES

Financier Worldwide Magazine

May 2023 Issue

The war in Ukraine resulted in the proliferation of sanctions imposed on Russia both by the UK and the EU over the course of 2022. In the first quarter of 2023, the introduction of new sanctions has been more sporadic, except for measures brought in on the anniversary of Russia’s invasion to signal that the UK and EU’s commitment to sanctions remains firm.

The UK and the EU both designated a large number of individuals and entities, ranging from Russian politicians, banks and oligarchs to TV stations. Largely, the regimes targeted the same individuals and entities when it came to individual designations. The UK and the EU similarly aligned with each other on sectoral bans (targeting, broadly, the same sectors of the Russian economy and entities that assist Russia’s defence capabilities). In terms of timings, they typically dovetailed in terms introducing new designations and restrictions, while also targeting entities owned or controlled by sanctioned individuals.

However, the two regimes diverged at certain points, causing issues for firms that operate in both the UK and the EU. By way of example, the EU banned professional services from being offered to legal entities established in Russia; in the UK, any ban on professional services applied (in addition to companies established in Russia) to individuals located or ordinarily resident in Russia. The UK’s regime includes specific licences in respect of certain designated entities and activities, while no such overarching regime exists in the EU. UK licences denote that an activity is permitted by government authorities, but they do not automatically guarantee that third parties will give effect to such activity – for example, a transaction might be licensed, but it is not certain that a bank will process it. By contrast, the EU typically sets out permitted grounds of derogation from certain prohibitions, but it is otherwise for member states’ relevant authorities to permit transactions or activities – there is, therefore, no centralised authority or agency to apply to at EU level.

The UK ushered in legislation to cast light on assets whose ownership was previously obscured. The Economic Crime Act introduced the overseas entities register, which imposes registration requirements on overseas owners of property in the UK. Failure to comply with those requirements can result in a fine, a custodial sentence or both; it will also result in restrictions on dealing with the property. The Economic Crime Act also provided the Office of Financial Sanctions Implementation (OFSI) with increased powers, which mean that OFSI, for offences committed after 15 June 2022, does not have to prove that a person had knowledge or reasonable cause to suspect that they were in breach of financial sanctions. The scope of firms that must report frozen assets to OFSI was also widened to include cryptocurrency exchange firms and custodian wallet providers.

The EU added sanctions violations to the list of EU crimes and put forth a proposal to harmonise the definition of criminal offences and penalties for sanctions violations. It also appointed a special envoy to liaise with third countries to avoid circumvention of its sanctions. The themes of enforcing sanctions and preventing circumvention or evasion of sanctions are both expected to take centre stage for the remainder of the year.

In the UK, OFSI doubled its headcount as it seeks to tackle complex cases of financial sanction breaches. The government also announced a new Economic Deterrence Initiative (EDI) as part of its new Integrated Security Fund. The EDI will tackle sanctions evasion across the UK’s sanctions, and £50m in funding has been provided to improve sanctions enforcement. The government also stated that it plans to work with the private sector to maximise the reach of sanctions against those who pose a threat to the UK.

The EU, through its new special envoy, intends to work with third countries to ensure that loopholes in its sanctions regime are closed and that operators do not circumvent its prohibitions. In that regard, the special envoy confirmed that work is already underway with the United Arab Emirates and more countries, such as Turkey, are expected to follow. It is also expected that harmonising the definitions of sanctions offences and penalties across member states will result in more enforcement outcomes at national level. As part of its 10th sanctions package, the EU also introduced a reinforced reporting obligation on EU operators and individuals. The reporting obligation covers frozen assets and assets not yet treated as frozen, as well as movements of assets in the two weeks prior to designation under EU sanctions. Additionally, EU individuals and legal entities have an obligation to report information on the assets and reserves of the Central Bank of Russia and the Russian National Wealth Fund.

The EU and the UK are both members of the Russian Elites, Proxies and Oligarchs (REPO) task force, which aims to use multilateral coordination to pursue sanctioned assets and restrict sanctioned individuals’ access. In a recent joint statement, the REPO task force confirmed that it has seized or frozen assets worth dozens of billions of dollars, as well as working collectively to investigate and counter Russian sanctions evasion. It also issued a global advisory in respect of the latter, which, among others, identified the following typologies of Russian sanctions evasion: (i) the use of family members and close associates to ensure continued access and control; (ii) the use of real estate to hold value or benefit from wealth; (iii) the use of complex ownership structures to avoid identification; and (iv) the use of enablers to avoid involvement.

Another focal point for sanctions enforcement both in the UK and the EU will be confiscation of assets. The position here is more straightforward where assets are the product of sanctions breaches, such as money received to facilitate a sanctioned person’s evasion of financial restrictions. In the UK, such assets could be confiscated under the Proceeds of Crime Act. While non-conviction-based confiscation is generally more complex, the UK’s enforcement options include unexplained wealth orders (UWOs), which law enforcement agencies can use to require an individual to account for how they acquired an asset. If the explanation is not satisfactory, then law enforcement agencies can apply for a civil recovery order to confiscate the asset. Reforms to UWOs through the Economic Crime Act have made it easier for law enforcement agencies to seek such orders – for example by limiting their liability for costs. UWOs can be deployed where authorities reasonably suspect that there has been a serious crime, such as a sanctions offence, as opposed to having to prove the offence took place. In terms of confiscating assets which are frozen as a result of a designation, such an option would require amendments to existing legislation.

At the EU level, a proposed directive on asset recovery and confiscation sought to enhance the ability of national authorities to identify, freeze, confiscate and manage tainted assets. However, any confiscation of assets would be linked to the overall harmonisation efforts across member states. Individual countries have also been vocal about the establishment of a central agency in the EU akin to the US’ Office of Foreign Assets Control (OFAC), but suggestions have not yet progressed at an institutional level.

The coming months will be critical for firms as both the UK and the EU move toward greater sanctions enforcement. For financial services firms, it is important to continually assess compliance to ensure that internal policies account for the sometimes divergent approaches between the UK and the EU, as a transaction or a counterparty could ostensibly be captured by both regimes. The impact of enforcement action can be significant reputationally, as it will affect third parties’ willingness to transact in the future – even if enforcement action has been resolved favourably.

 

Olga Bischof is a partner and Menelaos Karampetsos is an associate at Brown Rudnick LLP. Ms Bischof can be contacted on +44 (0)20 7851 6095 or by email: obischof@brownrudnick.com. Mr Karampetsos can be contacted on +44 (0)20 7851 6181 or by email: mkarampetsos@brownrudnick.com.

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BY

Olga Bischof and Menelaos Karampetsos

Brown Rudnick LLP

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