When the European Union and United States quickly imposed sanctions against major Russian banks, businesses, and key individuals, companies around the world were left to work out whether they were impacted and how they could legally comply.
While many well-known brands have suspended operations, mothballed facilities, or exited Russia altogether, some foreign companies continue to operate there as normal and will likely do so until their clients/suppliers are specifically sanctioned.
However, once sanctions are imposed, they usually need to be complied with immediately.
Under measures already announced, if a company finds out a person or organization it is dealing with is subject to financial sanctions, it must stop those dealings, freeze any assets it is holding for the affected entity or individual, and inform relevant regulators (the U.K.’s Office of Financial Sanctions Implementation or U.S. Office of Foreign Assets Control, for example).
Breaching sanctions is a criminal offense. In the United Kingdom, violations carry a maximum sentence of seven years imprisonment, maximum fine of at least 1 million pounds (U.S. $1.3 million), or both. A breach of trade sanctions carries a maximum sentence of 10 years imprisonment. Under U.S. law, penalties include a maximum of 20 years in jail and fines of up to $1 million per violation.
“Companies must understand the true ownership of the entities and suppliers they work with—both direct and indirect ownership—and quickly identify associated risks. … It relies on corporations having access to the right data to better map the owners, directors, and managers of the companies they deal with or are connected to and identify and validate a company’s beneficial owners to ensure they stay compliant.”
Ted Datta, Head of Financial Crime Compliance Practice (Europe and Africa), Moody’s Analytics
Other measures also exist to hit companies and directors who flout restrictions. For instance, failure to comply can impact a company’s ability to perform or bid for contracts and affect its current and future funding arrangements.
Since sanctions take immediate effect, companies must ensure they have the means to comply instantly—even if ceasing business dents their financials and puts them at legal risk for breaching contract. Recent changes to Russian law aim to establish exclusive jurisdiction of the Russian courts over disputes involving individuals and entities subject to foreign sanctions against Russia, which does not bode well for foreign companies.
Most long-term contracts will specify the circumstances in which a contract can be terminated early, noted Miles Robinson, litigation partner at law firm Mayer Brown.
An attempt to terminate outside those parameters “is likely to be challenged by the counterparty and could lead to a significant claim for damages, including for loss of profits from the full expected term of the contract. Businesses therefore need to scrutinize contractual terms carefully in order to assess the risks and plan an exit strategy,” he said.
Nick McQueen, partner for commercial dispute resolution and international trade at law firm Walker Morris, said sanctions and their interaction with contractual provisions are a “hugely complex area,” even if there might be specific exceptions and licensing powers within a particular sanction that allow otherwise prohibited transactions and prohibited activity to take place in certain circumstances.
First, he said, companies should check contracts for specific sanctions clauses and related suspension, termination, and other provisions to see if they are protected if forced to stop business through a government order. Even if there is no express sanctions clause, the event impacting performance might be covered by a “force majeure” clause, he said, which typically excuses one or more parties from performing a contract following the occurrence of certain events outside a party’s control.
McQueen said it might also be possible to argue the contract is “frustrated” because it is impossible to perform or should be terminated due to “supervening illegality,” though the bar to prove either is high.
He added contracts might contain provisions or mechanisms that release a party from performing or allow for some form of alternative performance or commercial flexibility/assistance, but it may be terminating in breach of contract—and exposing itself to damages claims—is a company’s “only viable option.”
Before terminating a contract, McQueen said companies should consider the type and extent of the counterparty’s potential losses, the possible legal costs, any applicable clauses limiting or excluding liability, and any mitigation measures that can be taken to minimize the impact.
Ted Datta, head of the financial crime compliance practice (Europe and Africa) at consultancy Moody’s Analytics, said the threat of sanctions enforcement means companies must conduct careful third-party due diligence to ensure they are not transacting with sanctioned individuals or entities, especially as sanctions may be extended to countries supporting Russia.
“Companies must understand the true ownership of the entities and suppliers they work with—both direct and indirect ownership—and quickly identify associated risks,” said Datta. “In practice, however, this can be difficult to determine and monitor. It relies on corporations having access to the right data to better map the owners, directors, and managers of the companies they deal with or are connected to and identify and validate a company’s beneficial owners to ensure they stay compliant.”
Joel Lange, general manager at Dow Jones Risk and Compliance, warned of varying sanctions policies imposed by different countries.
When Russia invaded Ukraine in February, leading governments were very much in sync when they imposed sanctions against specific Russian companies and individuals, said Lange. But as the war has progressed, disparity between sanctions has widened. The European Union, for example, appears to have taken a softer approach than the United States, he said.
Lange believes, generally, “the sanctions regime has forced companies to ask themselves whether they want to continue doing business in Russia, and if so, should they be doing it with the same people.” He said companies have had to conduct in-depth reviews into the businesses they are working with—both directly and indirectly—through their supply chains and carry out “remediation exercises” to assess whether they need to cease their relationships with certain individuals or companies linked to them, depending on whether they have been sanctioned or if they might be in the future.
As a result, said Lange, there is an increased onus on getting third-party due diligence right.
“Compliance with sanctions is paramount,” said Lange. “It is important compliance officers ensure senior management has the correct information to make decisions about whether they continue to operate in Russia with the same firms based there.”