Public International Law Key Insights: Trade Control and Sanctions

December 2023

Two new requirements are announced by the UK government under The Russia (Sanctions) (EU Exit) Regulations 2019 (the "Regulation") in December 2023.

Relevant firms as defined in Regulation 71 of the Regulations are now required to report to the HM Treasury's Office of Financial Sanctions Implementation ("OFSI") if they suspect to hold any funds for Russian entities, including the Central Bank of Russia, Russian Ministry of Finance and Russian National Wealth Fund. Notably, the disclosure requirement extends to individuals or entities owned or controlled directly or indirectly by any of the abovementioned entities. Relevant firms are required to report on or before October 31st of each year, the nature and sum of the funds or economic resources held by that firm. The UK government is expected to make use of the disclosed information to trace assets with a view to immobilize them.

Further disclosure obligations also apply to UK designated persons under the Regulation, whereby they are required to disclose the nature and value of funds and economic resources that they own or has control in all jurisdictions and their whereabout if the assets concerned exceed £10,000. Disclosure obligations also arise when there is a change in the nature and value of the funds and economic resources that UK designated persons possess.

In line with other disclosure obligations under the Regulation, it is a criminal offence for a person to neglect the disclosure obligations without reasonable excuse. A civil penalty will also be imposed for individuals that fail to comply with the disclosure obligations, regardless of whether there is any reasonable excuse for the failure to comply. This reflects the OFSI's proactive and aggressive approach in monitoring assets movement that are subject to sanctions reporting requirements in the UK.

December 2023

The National Economic Crime Centre ("NECC") has issued a Red Alert in December 2023 in response to the latest development of the Russian-Ukrainian war, with an emphasis on the UK's financial sector, including banks, credit card operators, foreign exchange dealers and non-bank payment service providers.

Following earlier discussion among the G7 partners on strengthening the enforcement of their sanctions against Russia, the UK government is highlighting the importance of scrutinizing any indirect trade between the UK and Russia, whereby Russian entities procure sanctioned items, which originated in the UK, from a third countries. UK companies are advised by NECC to conduct due diligence to ensure that the end destination of the sanctioned items is not Russia and encourage UK companies to follow the Common High Priority items list developed by the UK, the US, the EU and Japan, including integrated circuits or electrical and mechanical components likely to be used by Russia in its warfare with Ukraine.

While the Red Alert did not introduce any new obligations or civil and criminal penalty in the case of non-compliance by UK companies, it sets out 14 non-exhaustive red flags whereby illicit activities associated with sanction evasions or terrorist money launderings are likely. UK companies are expected to use these red flags as guidance in fulfilling its due diligence requirement under the UK legal framework.

The Red Alert ends by reminding UK companies of the need to comply with the legal obligations under the Data Protection Act and to report suspicious activity reporting. The Red Alert showcases the UK government's determination to fulfil its obligations and commitment following the G7 partners meeting.

December 18, 2023

The EU released its 12^th sanction package against Russia on December 18, 2023. Apart from strictly prohibiting the sale of tankers to entities in Russia or for use in Russia, the package notably includes new notification obligations for the sale and purchase of tankers.

The new notifications obligations are imposed on nationals of an EU Member State, individuals residing in the EU and companies established in the EU. Sellers are now required to immediately notify authorities upon the transfer of ownership of tankers. The sanction package applies retrospectively and cover sales that are completed between December 5, 2022 to December 19, 2023. Sellers who are involved in transactions within the retrospective period were required to comply with the notification obligations before February 20, 2024. Information to be disclosed by the sellers include the identities of the seller and purchaser, the tanker's IMO number and Call Sign.

Apart from the sellers, the notification obligations also expand to cover the EU Member States. EU Member States are required to report within 2 weeks of any authorization for the sale and purchase of tankers or notifications made by the sellers to other EU Member States and the EU Commission.

The new regime aims at preventing Russian entities from exploiting the loophole of the current sanctions against Russia whereby transportation of Russian crude oil and petroleum products are restricted. The new notification obligations improve transparency for the sale and purchase of vessels within the EU and showcases the EU's proactive and collective approach in preventing any possible circumvention of sanctions targeting Russia.

January 2024

The UK National Economic Crime Centre issued an amber alert in January 2024 to companies that work in facilities or space that holds, stores or moves artworks, antiques or collectibles in light of the prevalence of illicit activity involving the art market. The Amber Alert seeks to warn companies engaging in business in the UK against any illicit transfer of art pieces and to enhance the public awareness in mitigating the risk of breaching trade sanctions and identifying potential breaches. Companies are encouraged to adopt a proactive attitude in complying with the legal framework.

Notably, a UK company will be prosecuted under the criminal offence of sanction evasion if it transfers artwork via a route with the aim of circumventing any sanction in place. The offence extends to "associates" or "enablers" of such transactions. Similarly, companies will be prosecuted if they invest in artwork, antiques or collectibles, where the funds are derived from money laundering activities. There is a stringent transparency and due diligence requirement for any transaction of artwork where the value exceeds €10,000. Any acquisition, disposal, importation or exportation of cultural objects that is the target of the Dealing in Cultural Object (Offences) Act 2003 and Cultural Property (Armed Conflicts) Act 2017 will also constitute a criminal offence of cultural property trafficking.

There is a mandatory obligation for companies to report to the Office of Financial Sanctions Implementation where they suspect that the abovementioned offences have taken place. Companies are advised by the UK government to diligently follow the measures outlined by the Amber Alert to mitigate any risk of violating an offence when handling artwork during the course of business.

February 23, 2024

In its business advisory dated February 23, 2024 (the "Advisory"), the US Government warned businesses and individuals of serious legal, financial, and reputational risks entailed in maintaining operations in Russia. By staying in Russia, foreign investors may face penalties – including economic sanctions, export controls and import restrictions – imposed by the United States and its allies and partners, plus risk becoming involved in Russia's military actions against Ukraine and violations of international law.

The Advisory warns of serious risks stemming from operating in Russia, which can exist despite rigorous due diligence. Key among them are:

• Russian legislation (post-invasion) allowing regional governments to nationalize the assets of businesses from "unfriendly states”;
• a March 3, 2023 decree by the Russian President enabling external management by the Russian State in businesses failing to perform State defense contracts during martial law, essentially leading to partial nationalization; and
• other recently enacted legislation restricting dividend payments, fund transfers, and sales of interests in fuel and energy sectors for businesses affiliated with "unfriendly states”.

Non-resident businesses selling their assets in Russia face further burdensome rules, including a requirement for approval from a government commission and the imposition of a discount on assets sold to Russian investors. Recent regulations also require a mandatory asset valuation, a 50% discount on sales, and a 10% contribution to the State budget from the sale proceeds.

While the Advisory appreciates that the choice of whether to continue operations in Russia, suspend such operations, or exit the Russian market is ultimately up to businesses, individuals and organizations themselves, it nevertheless seeks to highlight the operational, legal, economic, and reputational risks associated with Russian business operations and relationships. The Advisory urges heightened compliance due diligence and human rights due diligence, to evaluate potential involvement in violations and identify ways to mitigate associated risks.

March 6, 2024

The Department of Commerce, Department of the Treasury and the Department of Justice of the Biden Administration has issued a tri-seal compliance note, highlighting the importance of foreign companies acting in compliance with the US sanctions and export control laws. It also provides recent examples of enforcement, emphasizing the proactive attitude of the US government in enforcing its sanctions and export controls law.

The US Department of the Treasury's Office of Foreign Assets Control has the power to bring enforcement actions against foreign companies who have caused or conspired with a third party to cause a US person to violate any US sanction laws. Foreign companies which have otherwise engaged in any violative conduct are similarly under scrutiny. The compliance note highlights the priority of the Biden Administration to aggressively conduct investigation and pursue enforcement actions against foreign entities.

Similarly, the US Department of Commerce's Bureau of Industry and Security has the power to enforce US export control laws against foreign companies where items under the Export Administration Regulation are involved. Notably, such prohibition extends to any reexports, meaning that a foreign company is unable to argue that it has complied with the law if it exports any scrutinized items via a third country that is not subject to the US export control law. The law also applies to goods that incorporate a certain percentage of controlled US content and foreign-made items involving US software, technology or production equipment.

The compliance note reflects the no-tolerance attitude adopted by the US enforcement authorities. Foreign companies should be vigilant to any update on US sanctions and export control law to avoid any civil or criminal liability in the US.

March 18, 2024

The international community, including the U.S., Australia, Canada, Costa Rica, Denmark, France, New Zealand, Norway, Sweden, Switzerland, the U.K., Finland, Germany, Ireland, Japan, Poland and South Korea have vowed to increase their scrutiny on exportation of spyware technology and equipment during the third Summit for Democracy in March 2024.

While the U.S. has been at the forefront of combating illicit use of spyware technology, the latest commitment from countries such as Poland, Japan and South Korea is likely to lead to a change in the landscape of the domestic spyware market. For instance, spyware technology was previously abundant within the Poland commercial market, with the government being one of the biggest purchasers. Following the commitment from the Poland government, it is expected that there would be greater restrictions on the use and sale of spyware technology within Poland.

On the other hand, countries such as South Korea and Japan, who are also new to the alliances in combating illegal use of spyware technology, have yet to release updates on their domestic regulations. It is expected that these countries will similarly enact regulations that provide for a more restricted use of spyware technology at a domestic level, and to impose heavier civil and criminal penalties on violations of these regulations.

The commitment within the international community to limit the use of spyware technology is expected to create a trade barrier for spyware software and equipment, with a view to prevent such technology from being used for human rights abuses. With countries such as the U.S. continuing to push for international cooperation, it is expected that the international community will continue to put forward measures to further limit export controls on spyware technology in future.

April 24, 2024

The Biden Administration has passed the 21st Century Peace Through Strength Act (the "Act") on April 24, 2024, aiming to impose another round of sanctions on Russia and Iran.

New sanction programs against Iran cover Iranian petroleum products, missile productions, and drone sale and foreign direct products, meaning products manufactured by a third country that make use of US technology or software. The Act gives President Biden greater power to sanction persons whom the President is of the opinion that he or she knowingly engaged in prohibited activity concerning the abovementioned items. The new sanction programs under the Act seeks to increase the enforcement action taken by the Biden administration and the risk of individuals and companies being scrutinized under the sanction programs, with a view to discouraging trade on Iranian petroleum and oil products and hampering economic and military development in Iran.

In terms of sanctions program against Russia, the Act includes the Rebuilding Economic Prosperity and Opportunity for Ukrainians Act, which freezes blocked assets held by any US financial institutions (discussed further in the section on “Sovereign Immunity and State Responsibility”) and gives the Biden Administration the power to liquidate such assets for supporting Ukraine in its warfare against Russian through the Ukrainian Support Fund.

In line with the previous sanctions against Russia and other adverse countries, the latest round of sanctions signals a strong message from the US government in scrutinizing and enforcing sanctions against adverse countries. Following the enactment of the Act, it is expected that increased enforcement actions will take place. Companies that are related to Russia and Iran are advised to be vigilant to the latest sanctions (and future) developments.

May 23, 2024

The Russian President has issued a Decree No. 442 on May 23, 2024 ("Decree") providing for retaliatory confiscation of assets linked to the US, should the US authorities "unjustifiably" deprive the Russian State or the Russian Central Bank ("RCB") of their property rights. Under the Decree, confiscation can take place without any wrongdoing by the owner of the assets within the scope of the new measure.

The measure is published as the G7 ministers negotiate a joint approach on how to best utilise around USD 300 billion of frozen Russian assets to support Ukraine and following the US Congress’ enactment of the REPO Act (discussed in the prior entry in this section and in the “Sovereign Immunity and State Responsibility” section) and the EU’s Council Regulation 2024/1469, both aimed at using frozen Russian assets to aid Ukraine.

Under the Decree, the Russian State and the RCB have the right to apply to Russian courts, and the courts can order compensation, if the US State or judicial authorities cause the Russian State and the RCB to suffer an "unjustified" deprivation of property rights. The compensation is to be effected by confiscating the assets held within the Russian jurisdiction by the US, foreign persons connected to the US (including persons who are citizens or residents of the US, or persons registered in the US, or persons for whom the US is the primary place of business or the country where they primarily derive their profits) or other persons under the control of the above-listed persons. The Decree directs the Commission on Control over Foreign Investments to identify and list the qualifying assets that may be confiscated. The categories of assets covered by the Decree are broad and include: (a) real property and other tangible property located in Russia; (b) securities and shares in Russian companies; and (c) other property rights.

The scope of the Decree appears to be very wide and, depending on how it is implemented by the Russian authorities, it can create serious risks for Russian assets of foreign persons, even if they are only tangentially connected to the US.