On 15 March 2022, the EU imposed a fourth package of economic and individual sanctions in response to Russia’s military activity in Ukraine. The new measures include, inter alia, a prohibition on all transactions with certain state-owned enterprises and investment activity relating to the Russian energy sector, trade restrictions for iron, steel and additional miscellaneous goods (referred to in the regulation as “luxury” goods), and additional asset-freeze designations.
In the UK, the Economic Crime (Transparency and Enforcement) Act received Royal Assent on 15 March 2022. The Act reforms the basis upon which UK authorities can issue financial penalties for breaches of financial sanctions, which can now be issued on a strict liability basis, and introduces a new “urgent procedure” allowing persons designated under the sanctions regimes of the EU, U.S., Australia or Canada to be designated more quickly in the UK. The UK Government has also announced further economic sanctions measures targeting Russia, including an export ban in relation to luxury goods, which have not yet come into force.
New EU Targeted and Sectoral Sanctions
On 15 March 2022, the EU adopted additional sanctions measures, as summarized below.
Additional Asset-freezing Designations
Council Implementing Regulation (EU) 2022/427 adds 15 individuals and 9 entities to the EU Sanctions List. The newly listed individuals include prominent Russian business leaders Roman Abramovich and German Khan as well as other individuals involved in key economic sectors, such as the iron and steel, energy, banking, media and military sectors. The new designations also include companies in the aviation, military, shipbuilding and machine building sectors.
Measures Targeting the Energy Sector
The EU implemented a broad range of new energy sanctions pursuant to Council Regulation (EU) 2022/428, which amends Council Regulation (EU) No 833/2014 (Regulation 833 has been amended several times since the beginning of the Russian military action in Ukraine). Those measures include the following restrictions:
- Export restrictions on equipment, technology and services for the energy industry: The Regulation extends pre-existing restrictions on the supply of certain key oil and gas exploration and production equipment, as listed in Annex II, to Russian persons or for use in Russia, together with associated services (subject to certain limited exceptions). Restrictions on Annex II items/services had been a feature of the EU-Russia sanctions since 2014. However, the revisions to the Regulation substantially reduce the scope of Annex II activities that would be eligible for EU licensing in the future. EU operators seeking a license must demonstrate that any licensable activities are necessary for "ensuring critical energy supply within the Union," or are "intended for the exclusive use" of entities owned, or solely or jointly controlled, by entities established in the EU.
Those restrictions are subject to a grandparenting provision, temporarily exempting from the new restrictions contracts concluded before 16 March 2022, which expires on 17 September 2022.
- Restriction on energy sector investments: The Regulation prohibits (among other activities) the following with regard to any entity “operating in the energy sector in Russia”: (1) acquiring or extending new interests in any entity operating in such entities, (2) granting or being part of arrangements to make new loans or credits available, or otherwise providing financing (including equity capital), to such entities; (3) creating a new joint venture with such entities; or (4) providing investment services directly related to the foregoing activities.
This prohibition has immediate effect, with no grandparenting provision. It is subject to licensing provisions that allow EU Member States to issue case-by-case licenses for transactions that are "necessary for ensuring critical energy supplies within the Union, as well as the transport of fossil fuels . . . from or through Russia into the Union[,]" or a transaction that "exclusively concerns" entities owned by parties established in the EU.
- Prohibition on transactions with certain state-owned enterprises: The Regulation also prohibits EU persons from directly or indirectly engaging in "any transaction" with: (1) parties listed in Annex XIX to the Regulation, (2) their non-EU majority-owned subsidiaries, or (3) any party acting on behalf or at the direction of any of the foregoing. Entities in Annex XIX include major Russian energy companies Rosneft, Transneft and Gazpromneft, and well as other companies operating in various sectors of the Russian economy.
The foregoing prohibition is subject to a wind-down exemption for the execution, until 15 May 2022, of contracts pre-dating 16 March 2022. The prohibition is also subject to narrow exclusions for: (1) transactions that are "strictly necessary" for the purchase, import, or transport of fossil fuels from or through Russia into the Union, or (2) transactions relating to energy projects outside of Russia in which restricted parties hold minority interests.
- Tightening restrictions on dual-use items and other critical technology: The Regulation narrows, with regard to activities concerning the Russian energy sector, the scope of transactions relating to dual-use goods, goods and technology listed in Annex VII of Regulation 833, or associated services that are eligible for case-by-case licensing.
Additional Trade and Service Restrictions
- Import ban on steel products: The Regulation introduces a prohibition on the import, purchase, or transportation of steel products listed in Annex XVII from Russia, or the provision of technical assistance, brokering services, financing or financial assistance, as well as insurance and re-insurance with regards to these activities. These restrictions do not come into force until 17 June 2022 for contracts concluded before 16 March 2022, or ancillary contracts necessary for the execution of such contracts.
- Export ban for “luxury goods”: The Regulation introduced export restrictions on “luxury goods” as listed in Annex XVIII of the Regulation. Annex XVIII lists a broad range of product categories, including alcoholic beverages, watches, cigars, leather products, electronic equipment and jewelry. Such restrictions apply to goods with a value in excess of EUR 300 per item.
The term “luxury goods” is something of a misnomer, as Annex XVIII includes a number of items - such as certain kitchenware, electronic equipment, sporting goods, and vehicle parts/components - that are not customarily understood to be “luxury” items.
- Prohibition on the provision of credit rating services: Finally, the Regulation prohibits the provision of credit rating services, and access to any subscription services in relation to credit rating activities, to any Russian national or natural person residing in Russia, or any entity established in Russia.
Reforms to UK Sanctions Rules through the Economic Crime Act 2022
The Economic Crime (Transparency and Enforcement) Act 2022 received Royal Assent on 15 March 2022 (the “Act”). The Act includes provisions intended to strengthen the enforcement powers of the UK Office of Financial Sanctions Implementation (“OFSI”), and to more easily allow for persons to be designated as sanctioned under UK sanctions legislation more quickly.
OFSI’s Powers
Following changes (to the Policing and Crime Act) introduced by the Act, OFSI will have the power to impose financial penalties (which can range from 50 per cent of the value of a breach up to £1 million) for breaches of sanctions on a “strict liability” basis, meaning the intent or knowledge of the person on whom a penalty is to be imposed are no longer relevant to OFSI’s power to impose a civil financial penalty for a breach of UK sanctions. Previously, OFSI needed to be satisfied, on the balance of probabilities, that the person in question “knew or had reasonable cause to suspect” that a person’s conduct amounted to a breach of sanctions before a financial penalty could be imposed.
This shift to strict liability for civil financial penalties—which is generally in line with the standard applied under the U.S. sanctions—reduces the evidentiary burden for OFSI to impose such penalties for breaches of sanctions. However, in exercising its discretion to pursue enforcement actions, OFSI may continue—consistent with its current enforcement guidelines—to place weight on overall quality and reasonableness of a given company’s sanctions compliance program.
The Act also gives HM Treasury (of which OFSI is part) the power to publish reports detailing cases in which a monetary penalty has not been imposed but where HM Treasury is satisfied, on a balance of probabilities, that a person has breached UK sanctions.
Sanctions Designations
The Act also amends the rules governing the designation of persons under UK sanctions (as set out in the Sanctions and Anti-Money Laundering Act 2018), by introducing a new “urgent procedure” through which persons may be designated (and therefore subjected to asset freezes and travel restrictions) under the UK regime where they have already been similarly designated by the U.S., EU, Australia, Canada or any other specified country under a broadly equivalent process, provided the Government is satisfied such designation is in the public interest.
Where a designation is made under the urgent procedure, it will expire after 56 days unless the Government is able to certify in the intervening period that the standard procedural threshold has been met. The standard procedural threshold requires “reasonable grounds” to suspect that a person is an “involved person” (i.e., a person connected to the underlying purpose of restrictions imposed under a particular sanctions regime).
The UK Government made use of this new power shortly after the Act came into force, designating 361 individuals and 8 entities under the new urgent procedure on 15 March 2022.
Further Measures Announced by UK Government
On 15 March 2022, the UK Government announced that it would be introducing economic sanctions measures targeting Russia, including:
- Banning exports from the UK to Russia of "high-end luxury goods" (including luxury vehicles, high-end fashion and works of art);
- Denying Russia and Belarus access to the World Trade Organisation "Most Favoured Nation" tariff for exports; and
- Imposing new import tariffs (which represent a 35 percentage point increase on current rates) on a wide range of products of Russian origin when imported from Russia or Belarus, (including Russian vodka and fish, as well as wood, iron and steel). The full "initial list" of items that will be impacted by the increased import tariffs can be accessed here.
As has been the case with previous announcements of new UK sanctions measures over recent weeks, the Government announcement precedes the relevant secondary legislation required to bring the measures into effect, which is expected to follow in due course in the coming days or weeks.
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We are closely monitoring developments concerning the U.S., UK, and EU sanctions against Russia, and will issue further updates in the event of material developments. In the meantime, we would be happy to address any questions you may have.
Covington’s International Trade Controls team—which includes lawyers in the firm’s offices in the United States, London, Brussels, and Frankfurt—regularly advises clients across business sectors, and would be well-placed to provide support in connection with the emerging Russia sanctions.
Our trade controls lawyers also work closely with Covington's Global Public Policy team which consists of over 120 former diplomats and policymakers in the United States, Europe, the Middle East, Latin America, Africa, and Asia. Many of the members of the Public Policy team have had substantial government experience in sanctions and export controls matters, and regularly advise our clients on emerging sanctions policy matters and related engagements with government stakeholders.
Covington is therefore exceptionally well-positioned to assist clients in navigating their most complex challenges, drawing on our trade and public policy teams as well as our additional multidisciplinary teams in areas including international arbitration and disputes, cybersecurity, anti-money laundering, corporate restructuring, finance, and insurance.
As the Ukraine crisis evolves, we will continue to monitor developments including regarding U.S., UK, and EU sanctions against Russia, and will issue further updates in the event of material developments.
Our teams would be happy to address any questions you may have.
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