Russia – Ukraine: sanctions and financial services

Update on 22 February 2022

Since the below article was published, and after Russia ordered troops into two rebel-held regions in eastern Ukraine, the UK has imposed sanctions on five Russian banks and three billionaires namely:

1. Gennady Timchenko
2. Igor Rotenberg
3. Boris Rotenberg
4. Rossiya
5. IS Bank
6. Black Sea Bank
7. General Bank
8. Promsvyazbank

The sanctions imposed mean that any assets based in the UK have been frozen and the individuals also banned from entering the UK. (Please follow this link for the most up to date sanctions list).

It is noteworthy that in the announcement of these sanctions the Prime Minister, Boris Johnson, commented that a larger package of sanctions was inevitable as time goes on.

Russia – Ukraine: sanctions and financial services

As the prospect of a Russian invasion of Ukraine increases, so too does the prospect of the imposition of wide-ranging economic sanctions.

The UK has implemented an independent sanctions policy since 31 December 2020 under the framework of the Sanctions and Anti-Money Laundering Act 2018.  In a clear display of its powers, on 10 February 2022, the UK government laid legislation to amend the current 2019 Russia (Sanctions) (EU Exit) Regulations before Parliament, to expand the UK’s sanctions regime against Russia.

As a result, the UK can now impose sanctions on Russian businesses and individuals who are of economic and strategic significance to the Russian government, along with the owners, directors and trustees of these entities. This applies to a wide range of strategically significant sectors to Russia, including the chemical, defence, extractives, ICT and, crucially, the financial services industries.

At this stage, the proposed changes do not automatically impose or designate sanctions on any new individuals or entities but will provide additional powers for the government to do this in the event of any further Russian intrusion into Ukraine, which – according to reports – appears imminent.

Focus on economic sanctions

Under the original 2019 regulations, only those deemed to be “involved in destabilising Ukraine or undermining or threatening the territorial integrity, sovereignty or independence of Ukraine” could be designated.  Those designated face a wide range of restrictions under the original regulations including:

• Asset freezes and restrictions on making funds and or economic resources available to, or for the benefit of, certain designated persons (directly or indirectly).
• Restrictions on the provision of certain financial services and processing payments to designated persons– i.e., payment and money transmission services, including credit, charge and debit cards, travellers’ cheques and bankers’ drafts.
• Prohibitions on dealing in certain transferable securities and money market instruments (these focus on certain issuers and their subsidiaries, as well as the type of instrument).
• Prohibitions on the grant or entering into any arrangement involving certain types of loans with designated persons.

The amendments mean that now any individuals and/or entities who are or who have been involved in “obtaining a benefit from or supporting the Government of Russia” can be designated. This can include:

• Russian Government-affiliated entities (which can include those businesses in which the Russian Government has a minority stake and businesses that have received funding or an economic or other benefit from the Russian Government);
• Businesses of economic significance to the Russian Government;
• Businesses or persons that own or control, or act as a director, trustee or equivalent of, a Russian Government-affiliated entity.

What next?

In light of the increasingly volatile situation developing at the borders of Ukraine, it is likely that the UK government will use its additional powers to expand the list of designated individuals and entities.

Whilst it remains to be seen how far the UK government will go, firms operating in the FS space that have exposure to Russia need to act now to consider how they might be affected.

As a first step, firms must identify and assess their current clients that have any connection – no matter how marginal – with Russia in order to determine how to mitigate their risks.  Firms will also need to review their contracts with Russian counterparts and re-consider certain business development plans if there is any Russian exposure.  This may require further reviews and amendments to the firm’s current due diligence and KYC procedures to ensure that they are robust enough to pick up on potential links to the Russian government.    Firms will also need to consider what exemptions to the regulations may apply or consider what licences under the sanctions regime they may apply for from the Office of Financial Sanctions Implementation (OFSI).  

This is unlikely to be a straightforward task for any firm, no matter how comprehensive their systems may be.

But the potential risks that may flow should not be ignored.  Violation of the sanctions regime could have civil or criminal consequences. Criminal prosecutions could result in imprisonment or unlimited fines. In respect of civil cases, OFSI can impose fines up to the higher of: (1)  £1m; or (2) half of the value of the breach.  By way of illustration, late last year, OFSI fined TransferGo Limited, a fintech company, £50,000 for breach of sanctions regulations in relation to a sequence of payments to accounts held at the Russian National Commercial Bank. The value of the relevant transactions was only £7,764. The penalties that OFSI have imposed to date have ranged from £5,000 to £20.47 million.

As the threat of action continues to grow, so too does the potential risk of default for firms operating in the financial services space. 

Click here to read more about UK sanctions in relation to Russia.