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Clifford Chance

Regulatory Investigations and Financial Crime Insights

Russian sanctions post-Brexit: Further risks

As at the date of publication, leaving the EU without a deal seems an increasingly realistic outcome.  To prepare for this eventuality, the Government has put into place various regulations to implement sanctions into UK law that will apply from "Brexit Day".

Whilst intended to ensure that existing sanctions will continue to operate effectively after the UK leaves the EU, the manner in which these sanctions have been "on-shored" has left some gaps. One area in which this is potentially most acute is in relation to Russia, where UK and EU persons may be denied some of the current protections allowing them to deal with the UK and EU subsidiaries of targeted entities; inadvertently exposing them to criminal law risks.

Since March 2014, the EU has imposed economic sanctions aimed at encouraging Russia to cease actions destabilising Ukraine or undermining or threatening the territorial integrity, sovereignty or independence of Ukraine.

Current sanctions are implemented in the UK through directly applicable EU Regulations, meaning EU Member States (including the UK) and those subject to their jurisdiction are automatically bound by the sanctions without the need for the Member States to enact their own implementing legislation.

These EU sanctions have taken various forms, including asset freezes and travel restrictions on listed individuals and entities, prohibitions on making funds or economic resources available to these listed individuals and entities, and broad restrictions on trade with and investment in Crimea and Sevastopol.

The EU has also adopted a sector-focused package of economic sanctions targeting certain entities in Russia's financial, energy and defence sectors. EU Persons (defined to include, amongst others, EU nationals and EU incorporated companies wherever located) are prohibited from directly or indirectly dealing with certain transferable securities or money market instruments issued by listed entities within the Russian economy. There are also restrictions on making new loans or credits available to such persons. The restrictions apply not only to these listed entities but also to their subsidiaries (where owned for more than 50%), or anyone acting on their behalf, or at their direction. There is an exception, however, for subsidiaries of listed entities that are incorporated within the EU.

Come "Brexit Day", by definition, subsidiaries of the listed entities incorporated in the UK will no longer be exempted from the EU prohibitions.

Further, within the UK, the EU regulations will be revoked and replaced by the Russia (Sanctions) (EU Exit) Regulations 2019.

Largely, but not entirely, mirroring the current EU sanctions, the UK provisions will impose similar prohibitions. This time, however, the exception will be limited to the subsidiaries (where owned for more than 50%) of listed entities which are incorporated in the UK, and not (as before) anywhere within the EU.

The risk is that unsuspecting EU and UK Persons alike may find themselves falling between the cracks of the two regimes; with arrangements that are perfectly legal today being automatically criminalised on "Brexit Day".

As we approach "Brexit Day", we recommend that businesses check to determine the extent to which they may have relationships that fall in this gap between the two regimes; restructuring the arrangements accordingly. Failure to do so could expose such companies (and their employees) to criminal penalties.