As the crisis in Ukraine continues, further international sanctions have been enforced against Russia. Also for Swiss companies the identification of the complex ownership structures of the sanctioned entities and the different jurisdictions and languages involved are challenging.
The Swiss Federal Council decided in April 2014 not to apply EU Sanctions directly, but will take actions to prevent circumvention of EU sanctions. Many companies, Financial Intermediaries or others, consider OFAC and EU sanctions in any case. Switzerland has extended the list of Russian sanctioned entities subject to sanctions on 4 August 2014. The Swiss Measures to avoid the circumvention of such international sanctions apply to an additional 26 targeted persons and 18 companies (including persons acting on behalf of or instructed by such Targeted Persons and companies owned or controlled by such persons). To date, the Swiss measures are relevant only in respect of Financial Intermediary (“FI”) services.
US authorities have imposed sectoral sanctions against seven Russian companies following recent events in the Ukraine. The expanded sanctions name five large banks, as well as an oil producer and an energy company.
These sanctions are targeted at restricting these companies’ access to medium- and long-term debt and equity markets. In short, the sanctions prohibit US persons from transacting in, providing financing for, or otherwise dealing in new debt with a maturity of longer than 90 days for all four. US persons are also prohibited from dealing in new equity for the respective banks.
OFAC has specifically stated, in answers to Frequently Asked Questions issued along with the sanctions order, that these restrictions apply equally to subsidiaries in which the sanctioned entity owns more than 50%. The KPMG Forensic team has identified over 300 subsidiaries held by the seven sanctioned companies alone. Of these, about half are owned 50% or above, including companies registered in UK, Luxembourg, Belarus, the Netherlands, Ukraine, Ireland, Cyprus, Switzerland, Armenia and Hong Kong.
Further export restrictions
In addition to these sectoral sanctions, the US has issued further export restrictions trade with Russian companies (primarily manufacturers of military equipment). Finally, it added asset freezes against these companies and further individuals.
In total, US and EU authorities have added asset freezes and visa bans against more than 200 individuals and companies. The KPMG Forensic team has identified more than 1,400 entities, in which these sanctioned entities have an interest and therefore could be subject to trade restrictions. A number of the entities are located in the UK, Austria, Germany, Finland, Cyprus, Hong Kong, India and other jurisdictions – and would therefore not be obviously identifiable as being potentially sanctioned.
Questions to consider for Swiss companies
- How do your screen procedures take into account complex ownership structures and beneficial ownership?
- How will you identify debt and equity that may indirectly benefit the seven Russian companies subject to sectoral sanctions, including joint ventures, consortia and syndicated loans?
- How do your screening procedures take account of amendments or changes to existing debt and equity agreements?
- Where financing is being provided, consider additional complexities: joint ventures and consortia for the four Russian companies, and non-transparent holding structures for sanctioned other companies and individuals.
- Train the teams responsible for updating or amending your debt and equity agreements, to help them identify contract changes that may be subject to sectoral sanctions.
- Consider risk rating customers for potential connections and adopting a risk-based approach to additional due diligence for certain customers and transactions.