By David Williams, ACSS Editor
February 24, 2023

While international leaders prepared their speeches to mark the first anniversary of Russia’s invasion of Ukraine, behind the scenes, anxious compliance officers waited in anticipation of further sanctions and export control measures. US President Joe Biden said in Kyiv he would, alongside $450 million of US military aid, announce additional sanctions against Russia, targeting elites and companies “trying to evade or backfill Russia’s war machine.”

The EU had already detailed its plan for a tenth sanctions package, widening its coverage to include more export bans, further dual-use goods restrictions, additional listings of individuals and new anti-circumvention measures. EU Commission President von der Leyen called on member states to adopt the sanctions swiftly in a concerted effort with G7 partners, “tightening the screws on Russia.”

Politicans’ showboating and rhetoric aside, how encompassing has the Western sanctions program been one year since the invasion? Has the cumulative time spent devising and implementing sanctions programs been worth the effort, the cost to companies and the reduced bottom line of their countries of origin? Have the sanctions regimes altered behavior – the raison d’être of an effective program?

Why Rolls-Royce Stopped Selling to Russia

Participating in a Russian sanctions and export controls program was never an option for some. “By early March, we had decided to end business with Russia because of sanctions and on reputational grounds,” said Spencer Chilvers, head of Rolls-Royce’s export control policy. “As an international company, coping with the differences in the four major sanctions regimes – UK, US, EU and Canada, particularly when it came to asset freeze designations – has been a real headache.

“The luxury goods list was clear in some places but baffling in others, as it also covered items that could in no way be considered luxury goods, such as railway locomotives and multiple unit engines and more mundane automotive products such as car windscreen wipers. Ideally, these items should be moved to a more general transport list that could cover all items associated with road, rail, sea and air transport. Such a move would aid clarity and thus compliance,” Chilvers said.

“Companies like RR have a measure of advantage because we are used to complying with strategic export controls and have the people and tools that help us in our compliance endeavors. But many companies are having to tackle sanctions for the first time.”

Chilvers said the US is the “easiest to navigate” of the main regimes. “It tends to follow its tried and tested model. The EU is second, and the UK has been the most difficult to get to grips with because of the lack of FAQs and the difficulty in engaging with officials to answer questions. This is probably down to the lack of resources, particularly in the first few months when there seemed to be new sanctions somewhere almost daily.”

On where Rolls-Royce finds compliance the most time-consuming, Chilvers said: “For us, as a company, it has been trying to smoke out the beneficial owners of luxury yachts and executive jets – we provide engines for both. This is an area where privacy and secrecy have been the watchwords for years, and breaking that down takes much time and effort. More generally, determining ownership and control of non-listed entities in case they may be controlled by a listed person or entity is far from easy.”

Success in the Financial Arena

Changes in the banking sector have certainly played a significant role in sanctions efforts. Stephen Alsace, global head, economic sanctions, Royal Bank of Canada, singles out SWIFT. “Removing Russian banks from SWIFT has been effective, but also a game-changer. The freezing of the central bank of Russia’s reserve was notable, given that Moscow did not anticipate this move.

“We are seeing some countries pass new asset forfeiture legislation allowing the state to seize and liquidate assets of sanctioned parties, primarily Russian oligarchs, and redirect the proceeds to Ukraine. A recent judgment of a US court has done this, and Canada is in the process of doing something similar. Sanctions evasion, in general, is being more aggressively policed with arrests and charges being filed in jurisdictions beyond the United States.”

Robert Walsh, deputy chief compliance officer of AXA Group, the French multinational insurance company, welcomes the positive approach from the sanctions authorities. “Outreach to industry by OFAC and other Western sanctions authorities over the last year has been superb. Not only have they explained the sanctions but also, and very importantly, discussed with us the design of some of the sanctions to help ensure they achieve their ends.”

Walsh said the collaboration between sanctions authorities to achieve consistency has been “great” and wanted the cooperation between international sanctions authorities to be even more extensive. “Last October, OFAC and OFSI concluded a multi-day technical exchange in London and issued a joint statement on their intention to collaborate. Perhaps we will see other technical exchanges and public statements involving other sanctions authorities.”

Walsh said he had noticed practitioners have had had some difficulty with the 50% rule. “Russia is such a large and complex economy that this is hard to track.”

Comments from the Legal Sector

From a US legal standpoint, Carlton M Greene, partner, Crowell & Moring Washington, DC, said the banking and oligarch blocking sanctions, and the prohibition on new investment, have worked well.

Greene said most issues have concerned the payment restrictions from EO 13662, which raise “tricky, interpretative questions” for US companies, and OFAC’s continued imposition of penalties. “The new prohibitions on trust, corporate formation, and management consulting services likewise have raised many interpretative questions.”

Greene said that OFAC did an “impressive job” of creating a broad, robust and scaled series of sanctions actions. “It also has moved quickly to provide guidance where possible.”

In the UK, Andrew Northage, partner, UK law firm Walker Morris, said Russia’s invasion “kickstarted a new era” in sanctions compliance. “The scale of the sanctions imposed, the speed with which they were implemented, and the level of cooperation globally were unprecedented. With the UK playing a leading role, the Office of Financial Sanctions Implementation – unused to this level of activity – has had to raise its game.

“The UK, unaffected post-Brexit by EU bureaucracy, quickly introduced changes to its sanctions regime, including a new strict liability test for imposing monetary penalties, an ‘urgent procedure’ to make it easier to adopt sanctions imposed by other jurisdictions, and the ability to ‘name and shame’ those who have committed breaches but where no monetary penalty has been imposed. Lawyers and their clients had to get to grips, practically overnight, with a raft of new measures.”

“Practitioners – whether that’s legal advisers themselves or clients such as financial institutions – have been most successful in the way that they have adapted, and continue to adapt, to an ever-changing situation. There’s a recognition that sanctions compliance has moved up a gear, if not several, and that managing that risk is a top priority for boardrooms everywhere.”

What General Business has to Say

Philip Smith, director of regulatory compliance at Booking.com, one of the largest online travel agencies, has been impressed with the “international coordination” required for “closing off Russia” from international trade and banking systems. “While it has been a grand feat to coordinate the EU and UK with the US, coordination on sanctions from countries like Canada, Switzerland, Japan and South Korea have cornered Russia to work and trade with only a small group of countries, some of which are under increased sanctions themselves, like Iran.”

Smith said practitioners with “active and up-to-date sanctions screening programs will see passive success” when new entities or individuals are added to restricted lists. “Any practitioner with a screening program, typically procured via global vendors, will automatically ingest updates to restricted lists into their screening programs. Conducting ongoing screening will catch any new additions to screening lists without the need for practitioners to action anything on their side with their vendors.”

Room for Improvement

While some lauded the coordination of countries’ sanctions efforts, others said that they didn’t go far enough, or that some counties didn’t make a serious effort in the first place. Branislav Aleksic, head of export control and corporate security department of Fraunhofer-Gesellschaft, said that the Western sanctions program never had support from African countries and that some dual-use products, such as chips, continue to be used in the Russian military. “From our perspective, on the problems practitioners have faced the most,” Aleksic said, “it is the enhanced due diligence with respect to the end-users and potential circumventions of the sanctions.”

Stephen Alsace said variations in sanctions lists between countries have been challenging – “particularly when applying these differences to the same payment transaction that involves multiple jurisdictions.” For example, he said: “A Russian bank may be sanctioned under US law, but not under Canadian or UK law. This presents significant complexity for banks when clearing transactions, as some jurisdictions have provided limited guidance for payment processing.

“As a result, banks may freeze payments while they seek licenses or permits from regulators; however, the wait time can be months – or even approaching a year. For clients who just happen to have assets held by a sanctioned bank and are unable to transfer these assets out of Russia, this may be an unintended consequence of the sanctions regimes,” Alsace said.

Northage said practitioners have had to grapple with keeping on top of sanctions, adapting internal processes accordingly, and having the resources available. “While different jurisdictions have made concerted efforts to coordinate their sanctions measures, differences still exist, further complicating an already complex risk management exercise. This applies not only to the sanctions lists themselves but also to how ‘ownership’ and ‘control’ are defined.

“Licensing has also presented a particular challenge in terms of the time it can take for a license to be issued and the application process itself. There is a lack of guidance around what it takes to make a ‘good’ application. It was only in October 2022 that OFSI issued a general license allowing payment of legal fees owed by sanctioned individuals or entities,” Northage said.

What Happens Next?

Alsace is optimistic moving forward. “All things considered, we have seen significant alignment from Western nations. There are gaps with countries still trying to play both sides, are not electing to deploy and enforce similar sanctions regimes, and are permitting evasion. This is where sanctions targeting Russian oligarchs and their assets have not been effective. We have also seen gaps in beneficial ownership transparency exploited by these oligarchs. This is something that Western nations still need to strengthen to plug holes in sanctions programs.”

Chilvers is wary of the future. “I can’t leave this without raising China where governments and industry are reassessing their position and indeed China is as well. I hope that governments will apply lessons learnt from Russia to any forward planning that they are undertaking on China. Russia had been extremely difficult, but sanctions on China would make the Russia experience look like a walk in the park.”

Aleksic played a harmonious chord, chiming in with the greater authority bestowed on compliance officers. “We still have to wait to see all the positive effects of implementing sanctions against Russia. In general, they have been far-reaching and have changed the awareness of company executives regarding trade compliance and putting trade compliance officers much more in the hot seat when it comes to decision making.”

Smith was strident with his views, saying the first year of Russian sanctions is only the beginning of a multi-year plan. “The US Department of Justice made it clear in May 2022 that sanctions are now its top enforcement priority. In the next few years, we will see an increased wave of sanctions enforcement matters coming from US regulators, which will further push companies and financial institutions from doing business with Russia and further isolating Russian from international trade and commerce.”

In a concilatory tone, as head of more than 1000 sanctions and compliance officers, ACSS Executive Director Saskia Rietbroek praised the work of sanctions and export control teams while commenting on Russia’s invasion. “Russia has become a pariah state and will remain so for many years. In the long run, supply chains will likely permanently adapt toward reduced dependence on Russian products.

“We’ve seen almost heroic efforts by our ACSS members in the private sector. They have worked 20 hours a day and through weekends and holidays if needed to implement the wave of sanctions in their organizations. Sanctions touch many departments in a business, not just payments but also investments, distributor networks, HR, sourcing, and much more. They are very pervasive.”

All sources quoted in this special article on Russia’s invasion of Ukraine have expressed their own views, which are not necessarily those of their organization.