Navigating Current Sanctions

Lisa Kinroy & Katie Love, Brodies LLP

EU sanctions have been in place against Russia since 2014 in respect of Russia's annexation of the Crimea, and sanctions and export controls were imposed by the UK, on exit from the EU, as set out in the Russia (Sanctions) (EU Exit) Regulations 2019 ("the 2019 Regulations").

Following Russia’s invasion of Ukraine, a broader range of sanctions and export controls has been imposed by the US, EU, UK, Japan, Singapore, Australia and Ukraine. The UK Government has named additional natural persons and legal entities as subject to asset freezes and travel bans ("designated persons") on a rolling basis since 24 February, with the current list available online.

The UK Government has strengthened its powers to make additions to the UK Sanctions List via the enactment of the Economic Crime (Transparency and Enforcement) Act 2022 ("the 2022 Act") on 15 March 2022. Amongst other things, the 2022 Act creates a new expedited procedure that enables the UK Government to move more quickly in naming additional persons as subject to UK financial sanctions measures

But what does this expanded scope mean for those in the UKCS oil and gas industry?

UK sanctions: basic scope

Following the 2019 Regulations, UK sanctions apply to conduct undertaken within the UK and to all UK persons whether acting in the UK or acting globally. UK sanctions are also applicable where a designated person, directly or indirectly, holds more than 50% of the shares or voting rights in an entity, or can remove a majority of the board of directors, or had the means or ability to achieve the result that the affairs of the entity are conducted in accordance with that designated person's wishes.

Ensuring compliance with UK sanctions therefore requires thorough due diligence of supply or sale chains (including ongoing monitoring) where there are concerns that a designated person may have an ownership or controlling interest.

Impact of the Economic Crime (Transparency and Enforcement) Act 2022 – expanded scope

On 6th April, the further additional measures were announced, including:

• asset freezes against Russian Banks (Sberbank and Credit Bank of Moscow),
• an outright ban on all new outward investment to Russia,
• the end of UK dependency (by the end of 2022) on Russian coal and oil and a ban on imports of gas as soon as possible thereafter,
• a ban on imports of products of key strategic importance to Russian industries and state-owned enterprises, including iron and steel products, and
• ongoing additional designations of Russian oligarchs.

These restrictions are already impacting on the UKCS oil and gas industry, from expedited green-lighting of new developments to project timelines being affected through the availability of raw supplies such as steel. One approach to addressing these issues is to utilise letters of intent or exclusivity, or obtain rights of first refusal, in order to secure the supplies or materials as much as possible while other approvals or financial arrangements are still being settled. These early contracting measures can also ensure that supplies are ring-fenced while fuller diligence can be carried out to ensure no sanction breaches will occur.

Repercussions of dealing with sanctioned entities

A breach of a sanctions prohibition is a criminal offence that carries with it the threat of a financial penalty and / or custodial sentences for individuals. In certain cases, sanctions contraventions may be capable of resolution by way of a civil (financial) penalty as an alternative to prosecution, provided certain criteria are met.

Analysis of all relationships, whether indirect or direct should be undertaken by companies where there is a concern that there could be engagement with designated persons, or entities controlled by designated persons. In particular this can be of relevance to transporters of natural gas liquids who may require to engage with third party buyers on behalf of their pipeline users and such buyers have connections with designated persons. Once enacted, the additional trade measures summarised above are also likely to increasing challenges to the availability of raw materials.

The rapidly evolving nature of the UK's sanctions regime against Russia warrants a careful and considered review of any operations and supply chains which include, or may include, a Russian nexus.

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