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In the first quarter of 2022 after Ukraine’s conflict with Russia, European Union, United States, United Kingdom and all their ally countries began to announce new sanctions on designated Russian individuals and entities. The sanction includes trade restriction on certain products, freezing of assets on target individuals including wealthy business leaders “oligarchs” and politician, travel bans, limitation on designated Russian banks, cancelling on SWIFT (Society for Worldwide Interbank Financial Telecommunication) restricting fund movement. Sanction by United Nations Security Council (UNSC) against Russia has not yet been made, having considered Russia holds a veto vote as one of the five permanent members in UNSC.
Sanctions Risks As a result, risks inherent in any sanctions include:
1. Unilateral sanctions Unilateral sanctions are sanctions imposed by a country or a group of countries. Many EU and non-EU countries have announced various sanctions targeting financial institutions, individuals and/or goods in this Russia-Ukraine incident. These sanctions are very tricky as they depend on the country that a person or entity is domiciled, the trading partner (usually from the sanctioned country, e.g. Russia) and the business activities. Unilateral sanctions affect businesses operating from the sanction imposing country.
For example, Monetary Authority of Singapore (MAS) Act has announced and is applicable to financial institutions. Financial institutions are prohibited from:
i. raising new funds for the Russian government and the Central Bank of Russian Federation. ii. entering into transactions with four designated Russian banks and designated entities. iii. entering into financial transactions, financial assistance or services to specific sectors in Donetsk or Luhansk. iv. providing financing or financial services in relation to export of military goods and certain dual-use goods to Russia under Strategic Goods Control List. v. entering into transactions related to (1) to (4) using digital payment token.
Hence, if you operate your business via a Singapore entity, you should be well aware of MAS’s guideline and Strategic Control List and do not carry out business activities that is related to military goods, dual-used goods or any other sanctioned goods under Strategic Goods Control List to mitigate unilateral sanctions risk.
2. Secondary Sanctions Secondary sanctions target individuals or entities who are foreign to the sanction imposing country preventing them from dealing with the sanctioned country. Secondary sanctions usually refer to the sanction by United States’ Office of Foreign Assets Control (OFAC) of US Treasury. OFAC sanction prohibits US citizens and entities from dealing with the sanctioned country. If a non-US citizen or entity deals with the sanctioned countries on the prohibited business transactions, that non-US citizen or entity may be sanctioned by OFAC.
When dealing with a Russian counterparty or its designated accounts or their related parties, it may be running to a risk being sanctioned by OFAC under secondary sanction whether you are US or non-US individual or entity. You have to assess the sanction risk under OFAC and to avoid dealing with Russian counterparty becoming a subject of U.S. sanctions. You can proactively screen your existing or partners or customers against the Consolidated Screening List, OFAC’s Specially Designated Nationals And Blocked Persons List (SDN List), and other sanction lists, before onboarding or continuing business with them.
3. Anti-sanctions Law In light of political appetite, United States using OFAC sanctions on individuals from China in 2021 proclaiming China undermine Hong Kong’s autonomy. China in response passed the anti-sanctions law to effectively protect businesses from secondary sanctions by foreign countries when dealing with Chinese individuals subjected to foreign sanctions. The law makes it illegal for any individuals or entities to comply with foreign sanctions in China.
In the Russia-Ukraine incident, United States has again under the political appetite warned China not to provide any assistance to Russia, including helping it to bypass sanctions imposed by the United States. Further action has not yet been taken from either side.
This political play will take sanction risk to a new level for entrepreneurs with business partners in China and in U.S. Entrepreneurs have to continuously observe the development to avoid being trapped into the net.
Measures against sanction risk To mitigate operational risk, you have to review your business continuously and regularly. Strategy includes:
1. Each sanction has different scope of sanctioned individuals, entities, goods and services. Clarify with your local authorities if your business activities are within the scope.
2. Evaluate your current business partners and customers and screen your new partners/customers. Evaluation or screening should include the ownership structure with special attention under OFAC 50% ruling as entities owned by sanctioned individuals.
3. Build up a closer relation with your banker and let them know about your business activities. To play safe, let them know when there is a large funds transfer in or out.
4. Diversify your risk by having more than 1 bank account or business account of payment institution.
Whatsapp : (852) 6499 4686 Phone : (852) 2186 6936 Email : info@intershores.hk
Disclaimer: Whilst reasonable care has been taken in provision of information above, it does not constitute legal or other professional advice. INTERSHORES does not accept any responsibility, legal or otherwise, for any error omission and accepts no responsibility for any financial or other loss or damage that may result from its use. In particular, readers are advised to take appropriate professional advice before committing themselves to any involvement in jurisdictions, vehicles or practice. |
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