Companies operating in Russia, Ukraine or Belarus, or with business dealings linked to those regions, must immediately reassess their operations to ensure that they will not violate the strict and extensive financial sanctions imposed in response to Russia's invasion of Ukraine.
Proposed restrictions on those with strategic / economic significance to Russia
Australia has this week imposed significant additional sanctions on Russia following the escalating situation in Ukraine. In doing so, it has joined forces with its Western allies, including the US, the UK, the European Union and Japan. The situation is rapidly evolving, and further sanctions are being prepared in response, including against Belarus and key Belarusian individuals and entities complicit in the aggression.
Russia was already subject to an array of goods, services and commercial activities sanctions, predominantly aimed at arms and military dealings, the oil and gas industry, and specified financial institutions.
Australia’s initial response has been to sanction individuals and entities with a strategic and/or economic significance to Russia, thereby limiting Russia’s access to the global financial system. Amendments to the Autonomous Sanctions Regulations 2011 (Cth) impose travel bans and financial sanctions targeting those considered responsible for the violence, including members of Russia’s Security Council, various Russian oligarchs, various military personnel (including army commanders, deputy defence ministers and Russian mercenaries) and members of Parliament. Sanctions have also been applied to a number of entities involved in the development and sale of military technology and weapons, as well as various banks, including Rossiya Bank, Promsvyazbank, IS Bank, Genbank and the Black Sea Bank for Development and Reconstruction.
The Regulations have also been amended to extend the current sanctions measures applied to Crimea and Sevastopol to the Donetsk and Luhansk regions of Ukraine as of 28 March 2022. Donetsk and Luhansk are separatist Russian-aligned regions which President Putin has officially recognised. Those measures restrict a range of sanctioned commercial activities, the exporting or importing of a range of goods and supplies or the provision of specified services (predominantly related to transport, telecommunications and energy sectors, and the exploitation of oil, gas and mineral resources), as detailed in the Regulations and the Autonomous Sanctions (Russia, Crimea and Sevastopol) Specification 2015 (Cth).
Scope of sanctions legislation is demonstrably broad
The intended scope captured by Australia's sanctions legislation is demonstrably broad, with the majority of the sanctions capturing both direct and indirect conduct. The Australian Government expressly intended such wide-ranging prohibitions to ensure that persons and corporations were unable to circumvent sanction laws through intermediaries or by exploiting loopholes.
The legislation also applies to a broad reach of individuals and entities, including any person in Australia, any Australian anywhere in the world, companies incorporated overseas that are owned or controlled by Australians or persons in Australia, and any person using an Australian flag or vessel or aircraft to transport goods or transact services subject to sanctions.
Significant penalties and inherent risks in contravening the laws
The penalties for contravening sanctions laws are severe, and could result in up to 10 years' imprisonment, and / or a maximum fine of $555,000 for an individual, or for a company, a fine of $2.22 million or a fine of 3 times the value of the transaction in breach of sanction laws. The company offences are also strict liability offences, unless it can establish that it took reasonable precautions, and exercised due diligence, to avoid contravening the legislation.
There are also inherent commercial disruption, loss and reputational risks for contravening sanctions laws, and the expansive accessorial criminal provisions currently in force opens directors and employees with a connection to Australia to exposure to accessorial criminal liability.
Targeted due diligence and mitigation measures required to comply with the expanded sanctions
Australian organisations operating in Russia, Ukraine or Belarus, or contracting with companies with ties to those regions, should immediately undertake targeted due diligence on current and future transactions and those with whom they transact to ensure there are no connections or affiliations with the sanctioned individuals and entities.
Russian company structures notoriously lack transparency and accountability. Therefore detailed due diligence is necessary to help circumvent the difficulty ascertaining the true players behind a corporate group. In particular, oil and gas developments are increasingly being managed through a state / political framework, and as such Australian organisations operating in those sectors in particular should exercise extreme caution.
That due diligence should also include:
- consideration of the sanctions put in place by other foreign jurisdictions (including the US, UK, European Union and Japan) should there also be exposure to those regions (e.g. by way of a director of UK nationality); and
- close monitoring of the Department of Foreign Affairs and Trade's consolidated list of sanctioned people and entities, particularly in light of the rapidly escalating situation and inevitable further sanctions.
Additional recommended measures, include:
- establishing and maintaining a robust compliance regime, commensurate with the level and nature of the risk faced, that monitors and detects non-compliance with a sanctions policy;
- incorporating sanctions obligations in contracts and the potential inclusion of a broadly drafted force majeure clause to encompass the effects of sanctions;
- ensuring appropriate insurance coverage, particularly directors and officers insurance, given the substantial costs of investigating or defending allegations of sanctions breaches; and
- if there are any circumstances in which the company considers a sanctions breach is high or cannot be avoided, to cease that activity immediately.
If there is concern that activities may be prohibited under the proposed sanctions, it is possible in some instances to pre-emptively address this risk by applying for a sanctions permit from the Australian Minister for Foreign Affairs, provided it is deemed in the national interest to do so.
Of course, the safety of civilians in the regions is paramount, and companies should take all reasonable measures to protect its employees from the escalating violence.