This is a difficult time for companies anticipating possible new or expanded sanctions targeting Russia. While exactly what might happen — what penalties might be imposed, who might be targeted — is still highly uncertain, companies can take steps to prepare if penalties are imposed. Now is the time to take stock and get organized, so that you can act quickly if changes are made. These measures can be useful even if sanctions are not imposed in the near future.
What is your exposure to the main sanctions regimes?
A first key question is: what sanctions regimes and regulators are relevant to your business? The main ways in which companies can be exposed to sanctions are territorial presence, products and services, employees and business partners.
Points of contact in the US, UK or EU. This can help you assess the risk that a particular sanctions regime applies to you:
- Are your operations only in the United States? Are you active in the UK? Do you have a European subsidiary? It can be useful to know which set of sanctions to focus on and to understand what other sanctions regimes may be relevant.
- Keep in mind potentially hidden interconnections: do your European operations use US-based back-office services? This can create exposure to US sanctions. Are UK sales decisions made in the US? American people will facilitate these non-American sales
- Do you do business in US Dollars, Pounds or Euros? Do you have bank accounts in the US, UK or EU, or with banks based in the US, UK or EU?
Products and services. Sanctions and export controls often relate to the sale, purchase, transfer, import or export of products, and the provision of services, technical assistance and financing related to these transactions:
- Knowing the full range of products and services your company supplies and supplies, and their applications, will help you identify potential exposure, particularly if export control sanctions or restrictions are imposed on certain types, categories or applications of products.
- Knowing in advance the export jurisdiction and classification of goods, software and technology involved in your business operations will facilitate faster analysis, decision-making and protective action in the event that the United States, the UK or EU would impose export control restrictions on Russia.
- Understanding your end customers will also be important, as sanctions and export controls can backfire on end users and end uses.
Employees. Your employees may be subject to additional sanctions obligations because of their nationality or place of residence and could therefore put you at risk of sanctions. For example, consider whether you have U.S. citizens or permanent resident employees, officers, or directors who are located outside of the United States. US sanctions will apply to them. You need to know where they are so that once the penalties are imposed, you and they can understand what they can and cannot do.
Business partners: Your business partners – such as vendors, service providers, sales agents, distributors and even your customers – can be a source of sanctions exposure if they fail to comply with the sanctions applicable to you when acting in your name :
- Business partners can create sanctions risk if they breach sanctions in relation to your business – and can create risk if they themselves are subject to sanctions
- Take inventory of your business partners, especially those with potentially higher risk of sanctions exposure (whether due to geographic exposure, distribution territories, or sensitive industries), and seek to understand their approach to sanctions compliance – and communicate yours
- Make sure your business partners are aware of the sanctions restrictions and confirm that they will abide by the sanctions when acting on your behalf.
What are your contractual obligations – and your contractual rights?
In addition to exposure to legal compliance, companies often make commitments to third parties that go beyond compliance with applicable law. Banks, insurance companies and other contractual counterparties often insist on sanctions-related representations and covenants that align with their policies and minimize the risk of sanctions associated with financing or facilitating business with individuals. or sanctioned territories.
Before new sanctions are imposed:
- Review financing agreements, insurance contracts and other agreements that may contain representations, warranties and covenants related to sanctions
- Understand potentially relevant restrictions and when such representations or undertakings are made. Are you considering drawing on a credit facility and will you need to repeat your representations regarding sanctions?
- Consider what action the company can take if a repeat statement is no longer accurate, or a commitment can no longer be given, as a result of changes to sanctions. This may include, where appropriate, contacting the bank or third party concerned
- Review termination clauses in commercial or other contracts with counterparties who may be subject to sanctions or may be adversely affected by sanctions, to consider potential next steps
- Consider looking for contractual protections (such as termination clauses or penalties force majeure language) in potentially high-risk contracts from a sanctions perspective.
What is your exposure to Russia?
Provide an update on potential exposure to Russia, Ukraine, Belarus and other countries that may be affected by sanctions in the near future. In addition to legal entities, do you have sales or exports to Russia? Do any of your products or raw materials come from Belarus? Do you operate in a sector susceptible to sanctions (which have historically included banking and finance, energy, defense and technology)? Understanding your exposure can help you react quickly if penalties change.
Review contracts related to these territories and consider steps that can be taken to ensure that your business can either continue to operate under the agreement or terminate the contractual relationship in accordance with applicable penalties.
A right of exit or termination alone may not be sufficient if penalties are imposed that would bar your business from any transaction related to the agreement. The bans often prevent companies from recouping their investments, receiving payments, providing anything of value or, in the case of most US blocking sanctions, even terminating a deal. Consider tracking all unpaid receivables, unpaid invoices, and other pending transactions before penalties are imposed.
What are your compliance policies and procedures?
Now — before the penalties change — is the best time to take stock of your company’s compliance policies and procedures:
- What do you have in place? Do your policies need to be updated or redistributed? Are your policies dynamic enough to accommodate changes to sanctions?
- Determine if employees understand their obligations under your policies. Is it time to schedule training to refresh employees on sanctions procedures? Do your employees know who to contact with questions or concerns?
- Use this time to open lines of communication and remind officers, directors and employees whom they should contact if they become aware of a potential exposure to sanctions.
Click on here to access a recording of a recent Corporate Secretary webinar featuring a discussion of these and other current compliance issues.
Stephanie Brown Cripps is a lawyer at Freshfields Bruckhaus Deringer