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EU Sanctions against Russia - Liar's Poker and Due Diligence

April 29th, 2015 - Posted by Debbi Lyle Essey in Sanctions

The EU's sanctions regime against Russia, introduced after the annexation of Crimea and separatist action in Ukraine, is broadly working and has been boosted by the recent dramatic fall in oil prices.  However, the complex nature of the sanctions means that British companies should carry out enhanced due diligence to ensure compliance and that they do not inadvertently break the law.

Analysis by JKW Law concluded that, despite bluster from the Kremlin and their continued rhetoric that sanctions will never work, the general view among Western commentators is that they are having their desired effect.  There are dissenters from the consensus, however, with people in the European Oil & Gas Industry saying that the sanctions are doing more damage to western businesses than their target.  Dr Rainer Seele, chairman of Germany's largest Oil & Gas Company, Wintershall, recently said: "The impact of the sanctions is very moderate.  Russia's economic downturn was caused by oil prices.  Sanctions worked more against western European countries because of the trade balance."

In a presentation in London, John Walmsley, the owner of JKW Law, compared the action taken against and by Russia with Liar's Poker - a bar game where players try to bluff their opponents into believing that a bid does not exceed the serial numbers of the dollar bills they are holding.

The EU sanctions are targeted against capital markets and financial services, military equipment, so-called 'dual use' goods and technology, travel bans and restrictions on travel and asset freezes.  Mr Walmsley said that evidence suggests that Russian financial institutions and companies in its energy sector had been impacted the most by sanctions.

Any company which deals with the funds or economic assets of a designated person or organisation, or makes funds or economic resources available, would be breaking the law and could face fines and its directors' imprisonment.

UK companies should therefore carry out enhanced due diligence on suppliers, customers and third parties.  They should, he said, make sure that they do not become involved in loan or credit arrangements with a maturity exceeding 30 days with named Russian banks, energy and defence companies and any non-EU subsidiaries in which these entities hold a majority shareholding.

Companies should implement a number of measures to ensure compliance including:

  • Auditing Russian activities or dealings with Russian individuals or organisations
  • Assess whether any current business has links with a sanctioned individual or organisation
  • Checking whether they hold accounts or funds for any sanctioned individuals and freezing them if they do
  • Refraining from dealing with such funds or assets unless specifically licensed to do so by the UK Treasury

Companies should be particularly vigilant because there is evidence that Russian companies were restructuring to get round the sanctions regime.  Sogaz, which provides insurance to Russian firms including some on the sanctions list, was, until March last year, 51 percent owned by Bank Rossiya.  However, the bank transferred 2.5 percent of its stake shortly before the sanctions came into effect meaning that Sogaz was able to avoid the full effect of the regulation.

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