Why Russia breaks the sanctions mould Ross Denton, Partner, Baker & McKenzie LLP ross.denton@bakermckenzie.com http://www.bakermckenzie.com/sanctionsnews/ Baker & McKenzie LLP is a member firm of Baker & McKenzie International, a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organisations, reference to a "partner" means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an "office" means an office of any such law firm. Agenda 1
What are we going to cover? Overview of Western sanctions against Russia Jurisdictional issues How and what to screen, and how to make sense of the results how to reduce your risk in Russia, and prepare for the future. 3 Overview of Western sanctions against Russia US, EU, Canada, Norway have acted against a number of Russian and Ukrainian nationals and companies involved in: original unrest in Ukraine (e.g Yanukovich) annexation of Crimea continued unrest in Eastern Ukraine In principle, blocking of funds and assets, and travel bans Russia has retaliated against a limited number of US persons 4 2
Why are sanctions against Russia different? Differences across the countries are different US not dependent on Russian energy Most EU countries have a relatively high level of trade with Russia Some EU countries very dependent on Russian gas Russia prepared to use leverage Jurisdictional issues Western sanctions ignored in Russia if you leave, don t bother coming back! Russian formal retaliation OFAC has pulled many punches 5 A U.S. Treasury Department spokeswoman said Mr. Dudley may participate in board meetings with Mr. Sechin, as long as they are covering Rosneft business and not Mr. Sechin's personal business. 6 3
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EU Sanctions Framework EU Sanctions Legal Basis EU looks to follow so-called smart sanctions policy Mostly follow UN multilateral regime Some unilateral regimes that go beyond UN measures in whole (e.g., Syria, Zimbabwe) or in part (e.g., Iran) Not always consistent with US sanctions (can also go beyond US measures) EU sanctions regulations directly applicable in all 28 EU Member States Licensing, penalties and enforcement left to each Member State UK competent authorities: HMT (financial sanctions) and BIS and HMRC (product sanctions) Sanctions apply independently of (albeit often overlap with) export and trade controls 10 5
Typical EU Sanctions Measures Designated person controls (asset freeze, travel ban) Financing, insurance and financial services Investment ban Arms embargo Additional product controls (e.g., oil and gas equipment): sale, supply, transfer or export Controls on related services, technical assistance and financing Import controls Controls on transfer of funds for Iran (note breadth of Iranian person ) Anti-circumvention/facilitation measures Very limited licensing carve outs (although can be flexibly applied) 11 Jurisdictional Scope of EU Sanctions EU sanctions measures apply to: Any entity incorporated in an EU Member State and its EU and non-eu branches Any entity incorporated outside the EU, but only in respect of any business conducted in the EU Any directors, officers, employees, agents, etc. located in the EU (irrespective of nationality) Any directors, officers, employees, agents, etc. that are nationals of an EU Member State (even if located outside the EU) Note UK has extended EU measures to a number of overseas territories outside EU (e.g., Cayman and BVI) Use of EUR or GBP alone would not trigger EU/UK jurisdiction No enforcement akin to US bank cases of causing violation of EU sanctions 12 6
Practical application Entity incorporated in Russia (or anywhere outside EU (or US)) not subject to EU (or US) sanctions (cf. US position on Iran and Cuba) Russian counterparties will not accept corporate policy as an excuse for not carrying out extant obligations in Russia If the contract is governed by Russian law, then Russian courts and adminstration do not take into account Western sanctions arguments What about EU or US persons working in entity incorporated in Russia? They cannot deal with DPs or SDNs even if in Russia if can recuse themselves, and others can take decision, then they can do that if they are only person able to take that decision, they cannot delegate or move relevant powers after designation 13 Making sense of screening No funds or economic resources to be provided directly or indirectly to or for the benefit of any DP EU law indicate ownership or control deemed if any of the following exist: > 50% proprietary rights right to appoint majority of board control majority of voting rights right to use all or part of assets sharing or guaranteeing financial liabilities right to exercise dominant influence 14 7
Making sense of screening UK guidance on ownership/control UK HMT guidance cross-refers to section 1162 of the Companies Act 2006 on parent and subsidiary undertakings Broad overlap with EU criteria Historic UK guidance also focused on: Size of shareholding (40% may be enough) Voting and veto rights 15 US Guidance on SDN Ownership/Control SDN ownership 50% or greater = deemed SDN A person whose property and interests in property are blocked is considered to have an interest in all property and interests in property of an entity in which it owns, directly or indirectly, a 50% or greater interest. SDN ownership less than 50% = act with caution Control short of majority interest: Entities controlled by governments of Cuba, Iran, Syria, Sudan = SDNs Entities controlled by other SDNs act with caution 16 8
Making sense of screening US, EU and Member State laws do not contain specific obligations on how to screen However, EU law does contain defence of did not know nor had reasonable cause to suspect that you were dealing with DP Best practice is a risk-based approach screen at least directors, shareholders and managers of direct counterparty, and check for management agreement check all available resources, but do ask counterparty if this raises any red flags, need to discharge those red flags if no red flags, no obligation to push to next level, but apply risk analysis (e.g. most important JV or business deal? Leave no stone unturned) record and keep screening DD to prove that you did it 17 Practical application DP? 100% 50% Russian Co B Russian Co A 50% Finnish Co Cypriot Nominee Co Cypriot Nominee Co Cypriot Nominee Co Russian non-dps 25% 25% 25% 25% Russian Counterparty C Client supplier 18 9
Practical application Client asks Russian counterparty who owns it told 4 Cypriot Nominee companies and various non-dp Russians no other red flags ( and can t see above the line) no reasonable cause to suspect dealing with a DP? Client does own DD, but doesn t ask Russian counterparty who owns it, and stops with 4 Cypriot Nominee companies Is that proper DD? Client told DP in fact still owns Russian counterparty and thinks above and below the line are part of the same group 19 How to optimize sanctions position Under EU and US sanctions rules, it is a criminal offence to attempt to cirumvent sanctions (in US sometimes put under facilitation heading) However our firm view is that you cannot circumvent something that is not currently unlawful. Therefore, you can undertake preparation to comply with future sanctions without circumventing 20 10
How to optimize sanctions position Ensure foreign operating companies are locally incorporated What about incorporation of all relevant parties in the EU or US? Consider having variable decision making routes (to avoid EU or US persons being a block) Have an effective risk-based screening system, based around client intake Consider keeping back office structures out of the US (and if posisble the EU) Consider finance structures, have non-us banks and non-usd capabilities in reserve Make sure all contracts anticipate sanctions. Force majeure wording usually not enough. Have detailed provision that anticipates sanctions, and works through position during their pendency 21 Why Russia breaks the sanctions mould Ross Denton, Partner, Baker & McKenzie LLP ross.denton@bakermckenzie.com http://www.bakermckenzie.com/sanctionsnews/ Baker & McKenzie LLP is a member firm of Baker & McKenzie International, a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organisations, reference to a "partner" means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an "office" means an office of any such law firm. 11