20
June
2024

G7 considers a bold move leveraging frozen Russian assets to rebuild Ukraine

While the UK does not utilise secondary sanctions, the Government has taken steps to align with its allies by designating several additional Russian financial bodies and entities. This move demonstrates the UK's commitment to maintaining pressure on Russia despite differing sanction mechanisms.

John Hartley | Head of Business Crime and Regulation

Partner and Head of Business Crime and Regulation, John Hartley, discusses the G7’s creative approach to potentially use frozen Russian assets to support Ukraine’s recovery. He also explores the UK’s alignment with its allies through targeted designations and the need for due diligence among UK businesses to navigate the complex international sanctions landscape effectively.

“It was recently reported that the G7 is exploring a creative way to support Ukraine’s recovery using currently frozen Russian assets, estimated to total around $300 billion worldwide, with most held in the EU. 

“The plan involves lending money to Ukraine on international markets and using the interest earned on these seized funds to repay the loans and cover interest expenses. This approach aims to make the financial support cost-neutral for Ukraine. While the G7 does not directly issue sanctions, its member nations and the EU can implement such measures independently.” 

The US expands secondary sanctions to curb sanctions evasion

“The US recently announced additional secondary sanctions aimed at companies evading the primary sanctions against Russia. Primary sanctions have driven much of Russia’s business toward Asia, particularly China and the Central Asian nations such as Kazakhstan and Uzbekistan. Consequently, significant trade is emerging from these regions, indirectly impacting US interests. 

“The US targets businesses selling products to Russia that could support its war effort, especially those involving dual-use items like electronic and radio components that can be adapted for military purposes. These businesses and their owners may face exclusion from the US financial system, severely restricting their ability to trade in dollars and potentially affecting their operations in other markets.”

What is the UK’s approach to Russian sanctions?

“While the UK does not utilise secondary sanctions, the Government has taken steps to align with its allies by designating several additional Russian financial bodies and entities. This move demonstrates the UK’s commitment to maintaining pressure on Russia despite differing sanction mechanisms.” 

Implications of secondary sanctions

“Secondary sanctions are specifically designed to target businesses with no direct nexus to the US. Although there are no criminal penalties for breaching these sanctions, affected businesses may be blocked from trading in dollars. Individuals associated with these businesses could be barred from entering the US. 

“These sanctions force companies to make a critical economic decision – continue trading with Russia or maintain access to the US market. However, the implementation of secondary sanctions can sometimes leave businesses with little time to make this choice.”

Due diligence for UK businesses

“For UK businesses, it is crucial to conduct thorough due diligence to ensure they are not engaging with entities that are designated or controlled by designated individuals.  

“At Primas Law, we can provide expert advice and assistance in this area, helping businesses navigate the complex landscape of international sanctions and avoid inadvertent violations. 

“The sanctions against Russia highlight the importance of vigilance and compliance for businesses worldwide. The G7’s innovative proposed use of frozen assets, the US’s expanded secondary sanctions, and the UK’s targeted designations highlight the global effort to support Ukraine and penalise Russia for its actions. Businesses must remain informed and proactive to navigate these challenges effectively.”

What are the compliance issues that banks will need to address? 

“Generally speaking, banks are in a slightly different position due to being highly regulated. They have access to materials that highlight if their customer or transaction is connected to a designated entity. Banks use databases and software to check the designated list in real time, flagging any high-risk activity immediately. For instance, if a particular financial market, like the US, has cut off an entity from using the dollar, the business would be unable to process any payments in that currency.

“In the UK, banks are advocating for advance notice from the relevant government body (OFSI) about the designation of business entities or individuals. This proactive approach aims to prevent assets from being moved out of the jurisdiction by those who suspect they are about to be designated. Currently, banks find out about such designations at the same time as the designated person, leaving a very small window for the withdrawal of assets.

“The landscape is notably different for non-regulated businesses. Such businesses may not be as familiar with the necessary screening of new customers and clients. For example, the importing and exporting of goods will require particular scrutiny regarding their origin, final destination and the ownership of the customer.” 

Are you concerned that the UK sanctions will place too much pressure on compliance officers?

“There are significant concerns surrounding the pressure that UK sanctions will place on compliance officers. Although sanctions have been in place for many years, previously under the EU regime, the implementation of new sanctions and rules has placed a massive burden on compliance teams. 

“The sheer volume and speed of these new regulations have exacerbated the issue. There’s a longstanding tension between trade bodies and the government, as there is an expectation for businesses to react with no advance notice. This expectation is unrealistic and strains resources. 

“Historically, sanctions compliance teams have been quite small. However, the current demands have overstretched these teams significantly. The Office of Financial Sanctions Implementation (OFSI) itself is seemingly understaffed, given the extensive delays in responding to queries and the processing of licenses, which can now take several months. For example, OFSI has only this month provided guidance on the payment of personal staff by those subject to sanctions. This backlog further complicates the compliance landscape for businesses.”

If you’re interested in advice regarding navigating the complexities of international sanctions, contact our Partner and Head of Business Crime and Regulation, John Hartley via john.hartley@primaslaw.co.uk

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