The Ukrainian Sanctions Regime - An Update

European sanctions relating to misappropriation of Ukrainian state funds

The European Council agreed on 3 March 2014 to introduce restrictive measures on persons it identified as responsible for the misappropriation of Ukrainian state funds and persons responsible for human rights violations in Ukraine. Regulation (EU) No. 208/2014 of 5 March 2014 freezes all funds and economic resources belonging to, owned, held or controlled by any natural or legal person, entity or body listed in Annex 1 of the regulation. It also provides that no funds or economic resources shall be made available, directly or indirectly, to or for the benefit of natural or legal persons, entities or bodies listed in Annex 1.

The regulation also includes a broad ‘catch all’ prohibition against participation, knowingly and intentionally, in activities which have the object or effect of circumventing the measures referred to.

Annex 1 lists designated Ukrainian individuals to which these sanctions apply. The initial list has been expanded by Council Implementing Regulation (EU) No. 381/2014 of 14 April 2014 and currently stands at 22 individuals.

European sanctions relating to violation of Ukrainian sovereignty

On 17 March 2014 the European Council decided to impose travel restrictions and asset freezes on the individuals who in its view were responsible for actions which undermined the territorial sovereignty and independence of Ukraine. It therefore implemented Regulation (EU) No. 269/2014 of 17 March 2014Council Implementing Regulation (EU) No. 284/2014 of 21 March 2014Council Implementing Regulation (EU) No. 433/2014 of 28 April 2014Council Regulation (EU) No. 476/2014 of 12 May 2014Council Implementing Regulation (EU) No 753/2014 of 11 July 2014. This regulation imposes the same form of financial restrictions as those implemented on 5 March, applying these to a list of individuals set out in Annex 1. Throughout the weeks that followed, the Council considered it necessary to add additional individuals and entities to the list of those sanctioned. These additions can be found in , , and . The number of persons sanctioned under this regime now stands at 72 individuals and 2 sanctioned Crimean entities.

European import restrictions

On 23 June 2014 the Council considered that the import of goods originating in Crimea or Sevastopol into the European Union should be prohibited, with the exception of goods having been granted a certificate of origin by the Government of Ukraine. Regulation (EU) No 692/2014 of 23 June 2014 was passed restricting both the import of goods from Crimea and Sevastopol and the provision of financial assistance, insurance or reinsurance in relation to the import of those goods.

There are limited exceptions provided for contracts concluded before 25 June 2014 granted until 26 September 2014, which allows for import provided that the individual or entity notifies the contracting authority where they are established at least 10 working days in advance of the transaction.

UK developments

In the UK the Ukraine (European Union Financial Sanctions) Regulations 2014 and the Ukraine (European Union Financial Sanctions) (No. 2) Regulations 2014 have been enacted, providing specific domestic measures relating to matters such as offences and penalties for breach of the European rules.

The UK regulations provide that failure to comply with financial sanctions legislation or to seek to circumvent its provisions is a criminal offence. The penalties for breach will be:

• on conviction on indictment, imprisonment for a term not exceeding two years, or a fine, or both;
• on summary conviction, imprisonment for a term not exceeding three months, or a fine not exceeding the statutory maximum, or both.

In addition, on 18 March 2014 the Foreign Secretary issued Notice to Exporters 2014/06 stating that the UK would with immediate effect suspend all extant licences and application processing for licences for direct export to Russia for military and dual use items destined for units of the Russian armed forces or other state agencies which could be or are being deployed against Ukraine. Following this Russia was also added to the list of prohibited destinations for a number of Open General Export Licences on 22 March 2014 and 11 June 2014 particularly in relation to military goods.

All licences for exports to third countries for incorporation into equipment for export to Russia where there is a clear risk that the end product will be used against Ukraine have been suspended.

Who do the sanctions apply to?

The sanctions imposed under the three European regulations are particularly broad in their application. Any individual or entity that falls within one of the following categories will be required to comply with the restrictions:

• All individuals, entities and bodies (of any nationality or incorporated anywhere in the world) within the territory of the EU, including its airspace, or on board any aircraft or any vessel under the jurisdiction of a Member State;
• All nationals of EU Member States, whether inside or outside the territory of the EU (e.g. EU nationals anywhere in the world);
• All EU incorporated or constituted entities or bodies, whether inside or outside the territory of the EU (e.g. EU incorporated businesses operating anywhere in the world);
• All individuals, entities and bodies (of any nationality or incorporated anywhere in the world) doing business in whole or in part within the EU.

The broad scope of the sanctions means that particular caution must be taken in undertaking commercial dealings with a company where any of the controlling shareholders of the entity are sanctioned individuals.

What do the sanctions mean?

The impact of the sanctions regime is potentially very wide. The prohibitions make it an offence to deal with the funds or economic resources of any designated person or entity and also makes it an offence to make any funds or economic resources available, both directly or indirectly, to or for the benefit of a designated person/entity (emphasis added). These elements of the prohibition mean that particular care has to be taken when dealing with third parties. Under the UK Regulations, it has been confirmed that where a sanctioned individual or entity would receive a ‘significant financial benefit’ (there is no set threshold for this) from funds made available to a third party then this is would satisfy the indirect benefit element of the offence.

The definition of ‘funds’ includes financial assets and benefits of every kind and ‘economic resources’ includes assets of every kind, whether tangible, intangible, moveable or immovable which may be used to obtain funds, goods or services. The extremely broad scope of the definitions means that all types of trade must be looked at in light of the sanctions regime.

What you must do

HM Treasury provides the following guidance as to the steps that must be taken by those within the UK to ensure compliance with the legislation in its Financial Sanctions Notices on Ukraine:

• check whether you maintain any accounts or hold any funds or economic resources for the persons set out in the Annexes to the regulations;
• freeze such accounts, and other funds or assets;
• refrain from dealing with the funds or assets or making them available to such persons unless licensed by the Treasury;
• report any findings to the Treasury, together with any additional information that would facilitate compliance with the Regulation;
• provide any information concerning the frozen assets of designated persons that the Treasury may request. Information reported to the Treasury may be passed on to other regulatory authorities or law enforcement.

For permitted exceptions from the sanctions regime a licence must be obtained from HM Treasury providing written authorisation of the activity which would otherwise be prohibited. The European legislation sets out the circumstances where it is possible to deal with the funds and assets of sanctioned individuals under licence, such as in circumstances where the funds are necessary to satisfy the basic needs of the individual, are intended for the payment of reasonable professional legal fees, or where the payment is due under a contract concluded prior to the date of the sanctions provided that the payment is being made by that sanctioned individual or entity and does not breach the general prohibitions by resulting in funds or economic resources being made available to or for the benefit of any individuals/entities listed in the Regulations.

Commercial judgement should be used to assess whether any ongoing transactions have a link to a sanctioned individual or entity. This should include an assessment of whether a sanctioned individual is a shareholder in a company with which you have commercial dealings. Where there is an element of doubt it is always prudent to seek legal advice.

Useful detailed general guidance on financial sanctions issued by HM Treasury can be viewed here.

Future measures?

With the recent signature of the EU-Ukraine association agreement, a partnership agreement which goes to the origins of the Ukrainian crisis, the potential for greater expansion of the restrictive measures continues to be an ongoing possibility. Following a European Council meeting on 27 June 2014 the published Conclusions on Ukraine noted that the European Council underlined its commitment to reconvene at any time for further significant restrictive measures. This was followed up on 12 July 2014 with the addition of 11 individuals to the list of sanctioned persons.

It is understood that the first opportunity for the European Council to consider imposing wider penalties on Russian industry, investment or trade will be at a European summit on 16 July 2014.