Alerts & Updates 29th Feb 2024

Sanctions Update: Two-Year Anniversary of Russia-Ukraine War: Heightened Enforcement of Sanctions

Authors

Sanjay Notani Partner | Mumbai
Ambarish Sathianathan Partner | Mumbai
Naghm Ghei Principal Associate | Mumbai

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  • Introduction

    In response to the two-year anniversary of the Russia-Ukraine conflict and the death of anti-corruption activist Aleksey Navalny, Western nations like the U.S. and the E.U. introduced new sanctions concerning Russia starting last week. These sanctions are aimed at denying resources that are necessary for Russia to support its war effort against Ukraine, as well as addressing the circumvention of sanctions by third countries.

    In order to achieve this objective, several entities and individuals, across Russia, Europe, Asia, and the Middle East, and other countries have been sanctioned. By imposing these sanctions, Western nations seem to reinforce that adherence to international sanctions frameworks is non-negotiable,  emphasising the importance of businesses and individuals to adopt strict compliance measures.

  • US Sanctions

    Expanding the Scope of Entities/Individuals subject to SDN

    Since Russia’s invasion of Ukraine, the sanctions imposed by the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) and U.S. Department of State (“State”) have been targeted at the following:

    • Certain Russian entities, individuals, vessels, and aircrafts under the Specially Designated Nationals and Blocked Persons List (“SDN”), and
    • Specific entities from Russia’s financial, energy, and defence sectors etc under the Sectoral Sanctions Identifications List (“SSI”), among others.

    Consequently, the US-based assets of the designated individuals falling under the SDN list are blocked, and U.S. persons are prohibited from engaging in certain transactions with such individuals/entities.[1] In addition, foreign entities/individuals can also be listed under the SDN for significant transactions with such listed Russian individuals/entities despite there being no nexus with the U.S.[2]

    Following the two-year anniversary of the Russia-Ukraine conflict and the death of Aleksey Navalny, the US OFAC and State expanded the scope of entities/individuals subject to the SDN by targeting about 500 parties – which is reportedly the largest number of sanctions imposed by the U.S. since Russia’s invasion of Ukraine.[3] Notably, the targeted entities/individuals are not only from Russia, but also from certain third countries i.e., China, Serbia, the UAE, and Liechtenstein. Such third country entities/individuals were targeted for reasons such as exporting and transhipping of technology, equipment, and parts to Russia; a freight forwarder involved in weapons shipments to Russia; and a transnational money laundering network facilitating the illicit movement of Russian-origin precious metals.

    Listing of an Indian Company under the EAR Entity List

    Upon determining that certain entities were acting contrary to the national security or foreign policy interests by shipping certain U.S. goods to Russia in violation of U.S. export control laws, the U.S. Department of Commerce’s Bureau of Industry and Security (“BIS”) added about 93 entities including one (1) from India i.e., Crynofist Aviation to the Entity List.[4] The US BIS noted that the Indian entity was listed because it repeatedly engaged in dilatory, evasive, or misleading behaviour regarding its importing of U.S. origin goods and also diverted or attempted to divert US-origin items to Russia without prior authorization from BIS.

    Accordingly, the listed Indian entity will be subject to license requirements for all items subject to the Export Administration Regulations (“EAR”). Their licenses application will be reviewed under a presumption of denial.

    Priority Items Posing Heightened Risk of Circumvention

    The US BIS issued an updated Common High Priority Items List[5]. According to the U.S., these items pose a heightened risk of being diverted illegally to Russia through third-party intermediaries or transhipment points, thereby disguising the involvement of sanctioned entities.

    Business Advisory

    Lastly, the U.S. issued a business advisory[6] encouraging companies conducting business in Russia to tighten compliance and due diligence with respect to regulations such as sanctions, export control, import prohibitions, money laundering and corruption. Regarding sanctions and export controls, the advisory enumerated relevant resources providing guidelines to remain compliant with the relevant laws.

  • EU Sanctions

    European Council – Listing of an Indian Company

    The E.U. has deployed an array of sanctions since the Russia’s illegal annexation of Crimea, invasion of Ukraine, and other malign Russian activities. These sanctions include individual restrictive measures, economic sanctions targeting the financial, trade, energy, transport, technology, and defence sectors, diplomatic measures, and restrictions on media, among others. Unlike the U.S., the E.U. sanctions regulations concerning Russia do not have extraterritorial application on foreign entities or their transactions outside the E.U., unless there is a nexus with the E.U. – for instance, an E.U. national/entity, E.U. financial system, vessels carrying goods of such foreign entities to Russia, among other are involved.

    That said, the E.U. has regularly introduced new sanctions packages to expand the covered scope of activities, with specific emphasis on addressing circumvention by third countries. A notable example is the E.U.’s restrictions on third country exports to the E.U. of processed iron and steel incorporating Russian-origin iron and steel inputs.[7] Another notable example is that E.U. operators have to incorporate “no re-export to Russia clause” in contracts involving certain sensitive goods.[8]

    In the 13th sanctions package the E.U.’s emphasis continues to be on enforcement and addressing circumvention by third countries among other things.[9] The E.U. sanctioned 27 entities including an Indian entity, Si2 Microsystems Pvt Ltd under the list of entities associated with Russian military industrial complex. According to the E.U., these entities were involved in circumvention of trade restrictions, and were involved in the trading of electronic components, including of EU-origin to Russian military.[10] Notably, this is the first instance where E.U. has sanctioned an Indian entity.[11]

  • Conclusion

    As anticipated, Western countries have heighted the enforcement of sanctions and sanctions evasions – which is evidently here to stay. It is therefore important for foreign businesses involved in global value chain to remain vigilant of the regulatory developments in multiple jurisdictions as such regulations can impact their businesses.

    Accordingly, the key take aways for foreign businesses are:

    • There is an immediate need for businesses to ramp up their screening of supply/value chain by adopting best practices so businesses don’t inadvertently make commercial decisions that have sanction-related repercussions.
    • Where possible, businesses must undertake reasonable mitigation against future measures, specifically to protect themselves from spillover effects of other companies’ violations (like upstream suppliers/distributors/end-users etc).
    • It is expected that the compliance cost of doing business will increase, as the regulators, insurance agencies, and banks will heighten the use of their compliance procedure and take more time to clear consignments – thereby, businesses should expect that these agencies/banks/organizations would seek more information concerning the transactions, end use, end user, goods or technology involved in the transaction.
    • Consequently, compliance costs need to be weaved into commercial decisions of the businesses.

    Economic Laws Practice (“ELP”) has been assessing sanctions and export control-related regulations in multiple jurisdictions and regularly advising clients of any potential exposure to such regulations on account of their potential business engagements in restricted items and/or certain sanctioned countries. ELP also has a reach that extends to multiple markets across the globe through its extensive network of foreign lawyers and consultants, who in turn work closely with regulators and authorities in their jurisdictions.

    We trust you will find this an interesting read. For any queries or comments on this update, please feel free to contact us at insights@elp-in.com or write to our authors:

    Sanjay Notani, Partner – SanjayNotani@elp-in.com

    Ambarish Sathianathan, Partner – AmbarishSathianathan@elp-in.com

    Harika Bakaraju, Principal AssociateHarikaBakaraju@elp-in.com

  • References

    [1] The sanctions prohibiting US persons from engaging with the listed persons/entities are called primary sanctions.
    [2] The U.S. has also introduced secondary sanctions against foreign individuals and entities under the CAATSA  for “Significant Transactions” with such listed Russian individuals/entities.
    [3] See URL: https://home.treasury.gov/news/press-releases/jy2117 (Accessed – 27 February 2024)
    [4] See URL: https://public-inspection.federalregister.gov/2024-03969.pdf (Accessed – 27 February 2024)
    [5] See URL: https://www.bis.doc.gov/index.php/2011-09-14-14-10-06/russia-export-controls (Accessed – 27 February 2024)
    [6] See URL: https://www.state.gov/russia-business-advisory/#:~:text=To%20curtail%20the%20Government%20of,provision%20of%20certain%20services%2C%20and (Accessed – 27 February 2024)
    [7] See URL: https://finance.ec.europa.eu/system/files/2023-10/faqs-sanctions-russia-listed-goods_en.pdf (Accessed – 27 February 2024)
    [8] Article 12 g of the EU Regulation 833/2014 read with its amendment, see URL: https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=OJ:L_202400745 (Accessed – 27 February 2024); See also FAQ’s concerning Article 12 g of the aforementioned regulation, URL: https://finance.ec.europa.eu/document/download/7f54341b-2bf1-4142-b5d4-b1b09c93d03e_en?filename=faqs-sanctions-russia-no-re-export_en.pdf (Accessed – 27 February 2024)
    [9] See URL: https://ec.europa.eu/commission/presscorner/detail/en/ip_24_963 (Accessed – 27 February 2024)
    [10] Annex IV of the EU Regulation 833/2014 read with its amendment, see URL: https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=OJ:L_202400745 (Accessed – 27 February 2024)
    [11] See URL: https://thewire.in/diplomacy/indian-company-among-recipients-of-eu-sanctions-for-alleged-aid-to-russia-report#:~:text=Three%20companies%20in%20mainland%20China,be%20subject%20to%20EU%20sanctions. (Accessed – 27 February 2024)