Russia sanctions, implementing client sanctions policies

Truck at Russian Border Crossing

Date: Fri, 26 Sep 2014
From: Paul Backer <contact@skalalaw.com>
Subject: Russia sanctions, implementing client sanctions policies

Part 1. Russia sanctions, implementing client sanctions policies. Skala Law client update.

Sanctions’ impact will worsen through 2015. Failing to understand sanctions’ purpose and enforcement materially and avoidably damages listed and unlisted entities. Lack of a sanctions policy renders entities noncompetitive in tenders and direct foreign sales, cripples their foreign affiliates, ability to secure funding, procure equipment and disposables. Failure to implement a viable sanctions policy is seen as responsible for the recent arrest of Euro 30,000,000 of Arkady Rotenberg’s property in Italy.

The author: Mr. Backer is an American attorney, with a residence in Moscow, his sanctions experience began 20 years ago as a U.S. government attorney advising on enforcement of investment and technology transfer as to the Former Soviet Union’s energy sector.

Sanctions excel at damaging business and individuals, but lack a track record of achieving the goal of changing a sanctioned government’s policies. See Cuba, Belarus, Iraq, Iran, Syria, etc. Unlike laws and regulations meant to create fair and predictable rules, sanctions are explicitly intended to maximize collateral damage and lack clear, developed enforcement standards.

A person or a company doesn’t have to be listed, i.e. explicitly identified by OFAC or other responsible agency as a subject of a sanction regime, to lose their business.

If you sell, buy or invest to or from a sanctioned state, either implement a sanctions policy or look to prayer, wishful thinking, willful ignorance and indignation. Some plan for an emergency, others let the prayer wheel, energy crystals and the dream catcher do the heavy lifting. Historically, a favorite is doing nothing and then airing your laundry in the local press.

Sanctions enforcement is very complex, highly punitive and often retroactive. Somewhat ironically, sanctions may cause the greatest damage to unlisted businesses. G. Gref, the head of Sberbank had a rather telling quote on sanctions: it doesn’t really matter what is written in sanctions, everything in reality is much worse.

A lack of a sanctions policy leads many (most?) potential commercial and financial counter-parties to refuse to transact with or offer fair terms to companies linked to a sanctioned country. Unlisted Russian companies have seen the collapse of their daughter and affiliated company revenues in North America and Europe.

What is the impact on an unlisted company’s business if a party believes that alternate dispute resolution will not function, correspondent accounts may be frozen or that their insurance won’t cover them?

An example: an unlisted sanctioned country business participates in a tender to sell manufacturing or power generation equipment or widgets to a EU company. The documentation is tender compliant and the cost/value advantage over competitors is 15%. Lacking a sanctions policy, the prospective client’s risk management department advises that the chance of correspondent accounts being frozen is about 10%, of adoption of applicable sectoral sanctions 10%, of listing 10% and of shipping restrictions is 10%, etc.

The advantage is gone; the bid will never see daylight. All without any negative client feedback as to the goods offered or the tender documentation. Costs and opportunity wasted.

Sanctions policies enable unlisted companies to transact and for listed entities to optimize their posture as to sanctions. If you or your companies are listed, the time to seek remedy such as listing removal in most sanction regimes is severely limited. In the U.K., the time limit to act is 60 days.

Sanctions have extremely broad reach. U.S. sanctions apply to every U.S. national everywhere. What is the impact on a Chinese or Canadian company with a U.S. person as a principal officer or owner?

Sanctions occupy an unusual legal position, it is expressly violative to try to “circumvent” their provisions. EU 208/2014: “… prohibited to participate, knowingly and inten­tionally, in activities the object or effect of which is to circumvent the measures referred to in Article 2.”

Sanction are very fluid and complex. From 2/2014 to 8/2014, OFAC updated over 20(!) separate sanctions programs. OFAC is only one U.S. government entity administering sanctions. Multiply that across the many implementing nations and agencies. EU sanctions are applied by each individual member state under their own laws.

Absent a sanctions policy, something that is perfectly legal to sell from nation A, may be arrested in transit in nation B or payment frozen in nation C. An act may be punishable as a felony in one EU member state and as an administrative violation in another.

Sanctions are very difficult to cancel. Sanctions against the Russian Federation expressly reference Crimea. Likely, they cannot be mitigated or cancelled until Crimea is reincorporated in Ukraine. Most commentators do not see reincorporation as likely.

Sanctions don’t function the way that people think they do. As emergency measures, sanctions are drafted extremely broadly and lack clarity. Persons and companies may be subject to sanctions without awareness that they apply to them. New sanction regimes lack clarification, commentary and history of application needed to make them predictable. Sanction regime application differs between nations and sometimes between agencies within a nation.

Sanctions impose severe challenges for legal professionals, particularly law firms seeking business with sanctioning governments. What happens when a sanctioned entity is a E500,000 client to a French law firm while the government seeking confidential information to enforce its sanctions is a E20,000,000 client?

Can a listed company secure counsel within the sanctioning jurisdictions and get tangible benefit from this representation? Can frozen funds can be used to pay for legal services? Yes, yes and a qualified yes.

[JRL web editor: Any material appearing on the JRL relating to law is the responsibility of the author(s); is provided for informational purposes only; does not constitutes legal advice by the author or the JRL; does not establish an attorney-client relationship; and may be accessed and viewed only on those terms and with that understanding.]

Comment