On 25 February 2023, the EU marked the one-year anniversary of Russia’s full-scale invasion of Ukraine by announcing its tenth package of sanctions against Russia. The new package added some 121 individuals and entities to the EU’s sanctions list, bringing the total under either an asset freeze or travel ban to 1,473 individuals and 205 entities.[1 As of 25 February 2023] Those sanctioned included additional military leaders and government officials, proxy authorities installed by Russia in occupied areas of Ukraine, members and supporters of Kremlin-associated mercenary organisation Wagner Group, and people and entities involved in spreading disinformation about the conflict. Three additional Russian banks were listed, as well as some 96 additional entities linked to Russia’s military industrial complex, including seven Iranian entities that have been using EU components and supplying Russia with attack drones. The measures also introduced new restrictions on the export of sensitive dual use and advanced technology to Russia and banned the import to the EU of certain Russia-made chemical products.
The US, UK, Canada and Australia had the previous day also announced expanded sanctions to mark the invasion anniversary. The US Department of the Treasury’s Office of Foreign Assets Control (OFAC) imposed sanctions on an additional 22 individuals and 83 entities. It also announced a new determination targeting Russia’s metals and mining sectors, allowing the US authorities to sanction any person that operates or has operated in these sectors. OFAC also designated more than 30 people and companies in third countries that were deemed connected to Russian efforts at sanctions evasion, as well as more than a dozen Russian financial institutions. The UK, meanwhile, announced sanctions against an additional 92 individuals and entities, as well as a ban on the export of “every item Ukraine has found Russia using on the battlefield”.
The latest measures mark the end of a tumultuous year for sanctions compliance professionals. Following Russia’s aggression in February 2022, the web of targeted sanctions imposed by the US, EU and their partners against Russia following its annexation of Crimea was replaced by some of the most sweeping and complex sanctions ever imposed in the modern era.
Against this backdrop, companies face significant challenges in meeting sanctions compliance demands. In June 2022, US Deputy Attorney General Lisa Monaco stated that the risks associated with sanctions violations were no longer only a concern for banks and financial institutions: “For any multinational corporation — indeed, for any business with an international supply chain — sanctions should be at the forefront of its approach to compliance.”
Looking at the year past, we have identified four key trends and challenges associated with sanctions that will also likely shape compliance efforts in the coming year:
1. A moving target: Increasing number and complexity of sanctions regimes
The frequency with which new sanctions are being announced is dizzying. Vlada Tkach, certified global sanctions specialist and managing partner at consultancy Berlin Risk, notes that “The sanctions environment has been far more dynamic in the last year than ever before, and with new rounds of sanctions against Russia or in connection with Russia coming up almost monthly, simply staying abreast is already challenging.”
The latest EU sanctions package against Russia closely follows the ninth package announced in December 2022, which froze the assets of 200 individuals and entities. The package also extended export restrictions on sensitive technologies such as drones, banned most new investments in the Russian mining sector and restricted the provision of an array of professional services to Russia. The number of people and entities targeted and the list of sanctioned goods and services is now greater than under any previous sanctions regime.
While efforts to cripple Russian president Vladimir Putin’s war machine have understandably dominated the sanctions landscape, 2022 also saw the extension of existing sanctions regimes against a number of countries, including Myanmar, Nicaragua and Haiti. Notably, last year also saw the imposition of fresh sanctions on Iran in light of the brutal suppression of widespread anti-government protests that followed the September 2022 death in custody of a young Kurdish woman. In late January and early February 2023, the EU, UK and US announced fresh rounds of coordinated measures that targeted key individuals associated with Iran’s Islamic Revolutionary Guards Corps security agency.
OFAC alone currently has sanctions regimes in place for 24 countries and one region (the Balkans) in addition to multiple additional targeted programmes, such as those aimed at human rights violations worldwide, cryptocurrencies and countering narcotics trafficking. The EU has mirrored this approach by introducing additional thematic sanctions regimes in recent years, including for chemical weapons (2018), cyber attacks (2019) and human rights (2020).
Tkach points to the sheer number of entities and individuals now subject to sanctions and the ever-increasing screening lists that companies must consult: “There are almost 50 financial and trade sanctions programmes in operation in the EU alone, plus UK specific sanctions and of course US sanctions, so companies, and especially financial institutions, need to be extremely agile in terms of updating their screening lists.”
2. Allies in lockstep? Challenges posed by conflicting sanctions regimes
One more challenge that became more pronounced in 2022 – in particular for companies operating globally – is dealing with conflicting sanctions regimes. Although sanctions imposed by the EU and US are usually designed to mirror one another, there are key differences. Companies also need to consider independent sanctions applied by the UK, Switzerland, Australia, Japan and others.
For example, the US has been slower to designate Russian oligarchs than the EU and, in particular, the UK. The latter has not only sanctioned individuals proven to be working for the Russian regime, but also other wealthy Russians with significant economic interests in the UK.
Brexit also means the UK and EU are no longer applying sanctions in lockstep. For example, there are differences in assessment of aggregate ownership. The EU (together with the US) aggregate the shareholdings of sanctioned individuals when determining whether an entity falls under sanctions, the UK only applies this aggregation rule when sanctioned shareholders exercise their rights jointly as part of a pre-agreed arrangement.
There are also key differences in how the US and the EU/UK apply sanctions to legal entities owned or controlled by designated/sanctioned individuals. The US automatically applies sanctions to companies that fall under the 50 percent ownership rule – meaning that a legal entity is designated if a sanctioned person owns 50 percent or more. In the EU and UK, sanctions only apply if more than 50 percent is owned or controlled by a sanctioned person; the reference to control is important, as it is more difficult to define control than ownership.
The EU looks to be making some efforts to improve international coordination on sanctions; at the end of 2023, it appointed a former diplomat to the new position of International Special Envoy for the Implementation of EU Sanctions, responsible for coordinating with allies (as well as enforcement – see below). It is hoped the new envoy will help ensure closer alignment, to reduce the compliance headaches for businesses and minimise overcompliance.
3. Evaders and their enablers
As more companies and their owners found themselves shut out of legitimate avenues for participation in the global economy in 2022, efforts at evasion likewise increased. Reports on both sides of the Atlantic have highlighted methods that designated individuals and entities are employing to circumvent restrictions. In July 2022, the UK’s National Economic Crime Centre and HM Treasury’s Office of Financial Sanctions Implementation released a red alert notice identifying sanctions evasion techniques employed by Russian elites and their enablers.
Among the behaviours identified were efforts by designated persons to transfer assets to proxies, including family members or long-time associates; selling or transferring assets before sanctions take effect; and divesting investment stakes to ensure that ownership of companies remained below 50 percent threshold.
In one recent example, the US Department of Justice on 7 February 2023 announced the indictment of US-resident Russian citizen Vladimir Voronchenko for participating in a scheme to make payments of more than USD 4 million “to maintain four real properties in the United States that were owned by Viktor Vekselberg, a sanctioned oligarch, as well as to attempt to sell two of those properties.” Voronchenko was reportedly a self-described close friend and business associate of Vekselberg, who was added to OFAC’s specially designated nationals (SDN) list in April 2018 and redesignated in March 2022.
Meanwhile, a report published on 20 February 2023 by the Belarussian Investigative Center exposed how a sanctioned state-owned Belarussian company was using front companies firms to sell its fertiliser in the EU. The report alleged that fertiliser producer Grodno Azot continued exports into the EU using a front company named Grikom, set up in July 2021, whose director was Grodno Azot’s long-time employee and which was part-owned by a local government body. Grodno Azot was sanctioned by the EU in December 2021, after staff members who participated in peaceful protests and a strike were dismissed, intimidated and threatened by both its management and regime representatives.
As well as proxies, front companies and ownership transfers, sanctions evaders have taken advantage of regulatory loopholes. One recent due diligence investigation uncovered the suspected use of a loophole in Liechtenstein’s regulatory oversight of alternative investment funds. Trusted human sources indicated that a company backed by a number of Liechtenstein-registered funds was widely known as an investment vehicle for a designated Russian individual.
Closer scrutiny found that the funds’ legal forms had been changed immediately following the introduction of new legislation requiring them to declare beneficial ownership via the country’s expanded UBO register. The new legal form did not require disclosure, heightening suspicions of the Russian SDN’s involvement.
More generally, The New York Times in January 2023 reported that Moscow was being helped to circumvent sanctions on the import of Western technology by several nearby countries such as China, Kazakhstan, Turkey, Armenia, Belarus and Kyrgyzstan, which were rerouting trade flows through their own territories. Armenia, reportedly, saw a tenfold jump in smart phone imports in the summer of 2022, which was matched by a similar jump in smartphone exports to Russia.
Iran also continues to employ sophisticated evasion techniques in response to the comprehensive sanctions imposed by the US. Indeed, OFAC on 9 March 2023 announced that it had sanctioned 39 entities that it considered part of a significant “shadow banking” network enabling Iranian sanctions evasion. It stated that the network was one of several multi-jurisdictional illicit finance systems established with the intention of granting sanctioned Iranian entities, such as Persian Gulf Petrochemical Industry Commercial Co and Triliance Petrochemical Co Ltd, access to the international financial system and to hide their trade with foreign customers.
The above cases highlight the need to remain apprised of ways in which sanctions evaders might seek to hide their ownership of assets, and the imperative to ensure due diligence reaches past first-level checks and examines the wider networks of potential business partners.
4. Enforcement: The EU plays catch-up
Reports in February 2023 that Russia’s GDP had contracted by much less than expected (around 2 percent) in 2022 fuelled debates around the genuine effectiveness of sanctions in crippling the Russian war machine. Such debates have, in turn, caused the authorities to turn their attention to improving enforcement. OFAC continues to lead the way on penalising sanctions violations, imposing civil penalties alone worth USD 42.6 million against 16 companies in 2022.
The EU has lagged behind, hampered by unequal and disjointed responses across its member states. (Data shows the disparity in efforts to enforce sanctions; the EU has since the beginning of the full-scale conflict collectively frozen some EUR 20.3 billion-worth of sanctioned Russian assets; media reports indicate that while Italy, Ireland, France, Spain, Germany, Belgium, Luxembourg and Austria have each notified EUR 1 billion, Malta froze just EUR 200,000 and Greece EUR 220,000.)
However, in recent months, the bloc has taken steps to boost enforcement efforts. For example, the European Commission in December 2022 put forward a proposed directive to criminalise the violation of EU sanctions, seeking to harmonise definitions of criminal offences and penalties for their violation. The move, which followed the EU Council’s unanimous adoption on 28 November 2022 of a decision to add the sanctions violations to the list of serious “EU crimes”, would make it easier for members states to investigate, prosecute and punish violations.
The above developments could pave the way for sanctions violations to be prosecuted at the EU level. In fact, following the calls by the French and German justice ministers for the European Public Prosecutor’s Office’s (EPPO) remit to be expanded to include EU sanctions violations, the EU Commissioner of Justice Didier Reynders on 23 January 2023 stated that the European Commission was assessing the role the EPPO could play in investigating and prosecuting the violations of restrictive measures.
Meanwhile, Euractiv on 20 February 2023 reported that the Netherlands had formally proposed the establishment of a central EU sanctions watchdog to tackle circumvention of the restrictive measures imposed in response to the war in Ukraine. Under the proposal – reportedly backed by a dozen other EU countries – the Brussel-based watchdog would serve as a central point for information and resources on sanctions effectiveness and evasion, and would draw up a watch list of sectors and trade flows with a high circumvention risk.
While the US has long used secondary sanctions to pressure third countries to comply with sanction regimes, the EU is also proposing to increase its scrutiny of third-country actors. It is hoped the newly appointed International Special Envoy for the Implementation of EU Sanctions will be able to effectively lobby third countries on enforcement. Moreover, Germany’s Federal Minister for Economic Affairs Robert Habeck on 23 February 2023 proposed measures that make it significantly more difficult to circumvent sanctions against Russia. Reportedly, the measures would include making exports of sanctioned goods to certain third countries possible only if transparent “end-use declarations” were submitted as part of export declarations, with intentional misrepresentation becoming a criminal offense.
According to Handelsblatt, Germany was adapting national regulations to this effect and working for the implementation of this policy at the EU level. In comments to media, Habeck added that companies in third countries that transferred a product of EU origin that was on the sanctions list to Russia should be excluded as recipients of these goods in the future. Habeck is reportedly also proposing a new criterion that would allow for a person or company to be sanctioned simply for their involvement in the transfer of a European product to Russia via a third country.
The year ahead
Unfortunately, 2023 looks set to be another year of significant global tensions and conflict. Western countries will continue to rachet up the pressure on Russia, given that sanctions are yet to succeed in crippling its economy to the extent that the Kremlin is unable to continue its war in Ukraine. As well as further coordinated sanctions on individuals and entities, there will be constant reassessment and recalibration of existing measures, making it crucial for businesses to remain apprised of the changes.
As well as Ukraine, evolving crises in Iran, Haiti, Myanmar, Ethiopia, Syria, Afghanistan, Lebanon and Yemen are also likely to remain under the lens of sanctions-imposing bodies. Moreover, reports that Beijing is considering lethal aid to Russia to use in Ukraine will increase the likelihood of further targeted export controls against China by the US, which may also consider the imposition of more wide-reaching sanctions. Indeed, Reuters on 1 March 2023 reported that the US was “sounding out close allies”, especially G7 partners, about the possibility of imposing sanctions on China if it provides military support to Russia in its war against Ukraine.
Sanctioned individuals will continue to seek out novel ways of evading sanctions, challenging regulators. For example, there has been periodic media speculation in recent months that Russia is mulling the creation of a stablecoin backed by gold for use in cross-border trade. Bitcom.com reported on 26 January 2023 that the chairman of the Financial Market Committee of Russia’s lower house of parliament Anatoly Aksakov had confirmed the measure was being considered and had been discussed with Iran, with Forbes speculating that the stablecoin could be used by Russia to pay for Iranian drones used in Ukraine. However, any such move would likely trigger a regulatory response from the US that would limit the cryptocurrency’s utility outside bilateral Iran-Russia trade.
Meanwhile, in Europe, should the EPPO be empowered to prosecute violations at the European level, this would likely result in more pressure on companies to ensure their sanctions compliance policies are watertight. As far back as May 2019, OFAC identified inadequate sanctions due diligence (SDD) on customers, supply chains, intermediaries and counter-parties as one of the root causes of sanctions violations. Tkach notes that, given the current context, companies should consider going beyond list screening to a more comprehensive SDD approach as a necessity when they “are engaged in cross-border transactions, particularly in jurisdictions that pose heightened sanctions risk or with partners that have a heightened risk profile – whether because of their geography, the sector they are operating in, the type of activity they are engaged in, the complexity of their structure or the difficulty in identifying their ownership.”