Dealings with sanctions target-owned businesses require UK licence

Sanctions specialist Stacy Keen of Pinsent Masons said that the UK sanctions regime applies to transactions involving businesses owned by individuals targeted by sanctions, even if those individuals take steps to cede control over the day-to-day operations of those businesses.

Keen was commenting after the UK government announced details of a fresh packages of sanctions in the wake of Russia’s invasion of Ukraine. Five banks and three individuals were initially designated as subject to UK financial sanctions last week, but the UK government has since extended its Russian sanctions list to cover Russian financial institutions, businesses and their directors and equivalents.

Russian president Vladimir Putin and foreign minister Sergei Lavrov are among the individuals newly designated, along with a series of Russian financial institutions. Wider sanctions are anticipated that target the country’s central bank and national wealth fund.

A further extension of the UK’s Russian sanctions regime is expected to be announced later today. Individuals who voted to recognise the independence of Donetsk and Luhansk and more than 100 new entities and individuals, including major manufacturers that support “Putin’s war machine”, are expected to be designated as sanctions targets.

In a statement published on Monday morning, the UK government said it will prevent designated banks from accessing Sterling and clearing payments through the UK, in a move that mirrors efforts by the US to prevent Russian financial institutions from trading in dollars. The UK and US, and other international partners, have also committed “to ensuring that selected Russian banks are removed from the SWIFT messaging system”. SWIFT is a global provider of secure financial messaging services which connects more than 11,000 institutions in more than 200 countries and territories.

In addition to the measures taken by the UK and US, the EU has imposed its own significant package of Russian sanctions.

Keen said: “Financial sanctions prohibit making funds and economic resources available, directly or indirectly, to or for the benefit of sanctions targets. The scope of those sanctions can be broad where it is established that the sanctions target owns or controls another entity – in which case transactions involving those entities are also caught by the sanctions regime. There are, however, important differences between how financial sanctions imposed in the UK and EU are implemented. This can have major implications for businesses.”

“According to EU best practices for the effective implementation of EU sanctions, if a business is owned or controlled by a sanctions target, it is presumed that the provision of funds and economic resources to that entity is in breach of the sanctions prohibition. However, that presumption can be rebutted under the EU sanctions regime if it can be demonstrated that the supplied funds or economic resources will not be used by or for the benefit of the sanctions target. This rebuttable presumption within EU sanctions laws is not replicated under UK law,” she said.

“In the UK, if it is established that a sanctions target owns or controls an entity, then the financial sanctions prohibitions are in play with respect to that entity. It does not matter whether or not any funds or goods provided to the relevant entity will be used by or for the benefit of the sanctions target,” she said.

“This means that, in the UK, businesses will need a licence from the Office of Financial Sanctions Implementation (OFSI) to make funds or economic resources available to businesses owned by sanctions targets, regardless of any efforts those targets take to cede control of those businesses – short of them giving up their ownership. Businesses risk criminal penalties for non-compliance. This risk applies whether the business is a customer, supplier or service provider of, lender to, or otherwise transacting with, the businesses owned by sanctions targets,” she said.

“It is important businesses do their due diligence to understand exactly who they are transacting with currently and screen who they might do business with in future, to check for sanctions risks. While it may be possible to apply for an OFSI licence to obtain an exception for continuing business dealings with a sanctions target, businesses can expect significant delays in the processing of their application, in our experience,” Keen said.