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Russian Sanctions Necessitate Enhanced Compliance and Due Diligence by Companies – a Hong Kong Perspective.

Russian money has flooded into Asia in recent years. For Hong Kong, the Double Taxation Agreement between Russia and Hong Kong effectively facilitated business, improved capital flows from Russia and boosted economic and trade connections between Hong Kong and Russia.  

Companies in Hong Kong and elsewhere may now find themselves deeply exposed to action by the US and its allies after the imposition of sanctions on Russia in response to the invasion of Ukraine. 

What is the impact in Hong Kong and elsewhere? 

Hong Kong does not implement unilateral sanctions. Rather, its sanctions laws are designed to implement sanctions issued by the United Nations Security Council (“UNSC”)[1]. As a permanent member of the UNSC, Russia has the right to veto UN sanctions. As it will veto any sanctions regime targeting itself, UN sanctions against Russia, and therefore Hong Kong sanctions against Russia, are highly unlikely. That does not mean there is no impact for Hong Kong and those doing business within it. This will have impact for other Asian countries also – as well as globally.

The US Congress recently authorised the imposition of penalties on non-US persons for knowingly engaging in a variety of activities involving Russia or Russia-related projects[2]. For example, the US Government is now required to impose sanctions on non-US persons who facilitate a significant transaction with persons placed on the Specially Designated Nationals and Blocked Persons List (“SDN List”) in connection with Russia-related sanctions.  The US Government may also impose sanctions on non-US financial institutions that engage in certain defence and energy-related transactions on behalf of certain persons on the SDN List.

The general yardstick for companies is that any dealings with Russia, involving Russian-owned entities or connected to Russia now require careful scrutiny for sanctions risk given the numerous sectors, activities and transactions being targeted by international sanctions. 

Key Considerations – Global Perspective

Some of the key questions for consideration to determine potential exposure could include:  

  1. Is there a Russian nexus to any transactions, operations or business due to the counterparties involved or the export/import of goods and services? 
  2. Have the following all been screened: counterparty business name; the names of any persons or entities that own the counterparty; and any person known to control the entity?
  3. Do any international sanctions apply due to any party being a person designated under international sanctions targeting Russia?
  4. If any party is designated under international sanctions, do those sanctions apply to my business, this transaction or the staff involved? 
  5. Has supply chain due diligence been conducted? This should include verification-of-origin and recipient checks. It may be necessary to check paperwork such as import and export licences and bills of lading.
  6. Are goods or services being exported destined for Russia, or is there a risk they may be onward exported? If so, do any prohibitions apply to the goods (including parts of the goods) or services? It’s important to understand the wide-reaching nature of sanctions to the export of, for example, US-origin goods.
  7. Am I exporting goods from Russia to third parties? If so, do the import laws of the destined jurisdictions have prohibitions in place? Are there any general licences or exemptions that apply?
  8. Does any element of my business or intended transactions involve a Russian bank? Will the transaction be hindered by the SWIFT ban or international sanctions relating to lending, correspondent banking etc? 
  9. Am I currently reliant on Russian-flagged vessels or Russian aircraft for transport of any cargo? What impact do the aviation and marine sectoral sanctions have?
  10. Does any staff member need to recuse themselves from a project or transaction due to international sanctions applying to them personally? 
  11. If I have contractual arrangements, including financing agreements with Russian-nexus counterparts, are any sanctions clauses in the contracts engaged? Do I have a right or obligation to terminate the contract?
  12. What are the commercial risks of continuing to do business where there is a Russian nexus? For example, non-performance of contractual obligations as well as risks arising from the general adverse economic impact on the Russian economy, including the depreciation of Russian ruble and the declining value and liquidity of Russian securities (where relevant to the transactions in question).
  13. Will my business be impacted by the large-scale market volatility and collateral impact on global commodity prices (including oil and natural gas) as a response to international sanctions?
  14. Will the adverse outlook on certain stock markets and foreign-exchange markets affect the performance of the portfolios/investment products managed or issued? 
  15. Is my business linked to or reliant on digital assets? Are those digital assets at risk of being abused by persons impacted by Russian sanctions to circumvent the prohibitions relating to banking and finance?
  16. Does the removal of Russia’s “most favoured nation” status by G7 countries mean increased tariffs apply to any export activity involving Russia impacting my business?
  17. Are there any reputational issues to be addressed? Reputational risk may arise even if sanctions do not specifically apply. 
  18. What is the follow-on impact of compliance? For example, could contract terminations lead to allegations of contract breaches? 

Up-to-date Customer Due Diligence, Screening and End-use declarations

The Russian sanctions are extremely complex. As people are getting up to speed with what the new regulations and restrictions are, it can be complex to try to understand what the potential touchpoints are related to Russia on a transaction-by-transaction basis. Given that breaching sanctions exposes businesses and their employees to the risk of committing an offence, there is a need to proceed with extreme caution by checking each proposed transaction.

To avoid a breach, businesses should urgently refresh and strengthen their compliance and due diligence capabilities to identify if they are currently transacting with any entities owned or controlled by the new sanctions targets. Companies need to update their customer due diligence (CDD) records, take steps to carry out sanctions-related screenings, and consider seeking updated end-use declarations from Russian based customers.

There may also be a need to engage quickly with licensing authorities, banks and insurers and being able to show that the business holds up to date CDD, sanctions screening records and end-use declarations. In short, it is essential that companies now dedicate appropriate resources to their compliance and legal teams.

KorumLegal has a platform of top-quality, experienced legal consultants in the field of compliance and due diligence who can assist with the assessment of heightened risks in this testing environment. Our flexible outsourced solutions are designed to support your compliance and legal teams with the increased work-load. Please get in touch with KorumLegal should your team require an extra set of hands.

[1] On August 8, 2020, the HKMA issued guidance instructing institutions that “unilateral sanctions imposed by foreign governments are not part of the international targeted financial sanctions regime and have no legal status in Hong Kong.” The guidance does not expressly prohibit companies from complying with however, and advises that companies’ policies should be “informed by a thorough assessment of any legal, business and commercial risks involved and based on a balanced approach.

[2] The referenced legislation is the "Countering America's Adversaries Through Sanctions Act" ("CAATSA")

Author bio

Charné is Head of Sales and Business Development, North Asia at KorumLegal.  A South-African qualified lawyer, she started her legal career at ENSAfrica, Africa’s largest law firm. In 2015, she moved to Hong Kong where she has since gained broad legal, business development and project management experience. Charné has previously worked as Legal Counsel across compliance, risk, corporate services and litigation and has also worked in the intelligence and investigations space.

Charné Van Biljon