This article was originally published by Corporate Secretary on February 16, 2022.
This is a challenging moment for companies anticipating potential new or expanded sanctions targeting Russia. Although exactly what might happen – which sanctions might be imposed, who might be targeted – is still very much up in the air, there are steps companies can take to be prepared if sanctions are imposed. Now is the time to take stock and get organized, so you can act quickly if changes are made. These steps can be helpful even if sanctions are not imposed in the near future.
What is your exposure to the major sanctions regimes?
An initial key question is: which sanctions regimes and regulators are relevant to your business? The main ways businesses can be exposed to sanctions are through territorial presence, products and services and employees and business partners.
US, UK or EU touchpoints. This can help you consider the risk of a particular sanctions regime applying to you:
- Are your operations only in the US? Are you active in the UK? Do you have an EU subsidiary? Knowing which set of sanctions to focus on can be helpful and understanding which other sanctions regimes may be relevant is also important
- Keep in mind potentially hidden interconnections: do your European operations use US-based back-office services? This can create US sanctions exposure. Are decisions related to UK sales made in the US? US persons will be facilitating those non-US sales
- Do you conduct business in US dollars, pounds or euros? Do you have bank accounts in the US, UK or EU, or with US, UK or EU-headquartered banks?
Products and services. Sanctions and export controls often attach to the sale, purchase, transfer, import or export of products, and the provision of services, technical assistance and financing linked to these transactions:
- Knowing the full range of products and services your business sources and provides, as well as their applications, will help you identify potential exposure, particularly if sanctions or export controls restrictions are imposed on certain types, categories or applications of products
- Knowing the export jurisdiction and classification of goods, software and technology involved with your company’s business in advance will facilitate quicker analysis, decision-making and protective steps in case the US, UK or EU imposes export control restrictions on Russia
- Understanding your end-customers will also be important, as both sanctions and export controls can turn on end-users and end-uses.
Employees. Your employees can be subject to additional sanctions obligations due to their nationality or location and could potentially expose you to sanctions risk as a result. For example, consider whether you have any US citizens or permanent resident employees, officers or directors who are located outside the US. US sanctions will apply to them. You should be aware of where they are so that once sanctions are imposed, you and they can understand what they can and can’t 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 sanctions applicable to you when acting on your behalf:
- Business partners can create sanctions risk if they breach sanctions in connection with your business – and can create risk if they are targeted by sanctions themselves
- Inventory your business partners, particularly those that are potentially higher-risk for sanctions exposure (whether as a result of geographic exposure, distribution territories or sensitive industries), and seek to understand their approach to sanctions compliance – and communicate your own
- Make sure your business partners are aware of sanctions restrictions and confirm that they will comply with sanctions when acting on your behalf.
What are your contractual obligations – and your contractual rights?
In addition to legal compliance exposure, companies often make commitments to third parties that go above and beyond compliance with applicable law. Banks, insurance companies and other contractual counterparties often insist upon sanctions-related representations and undertakings that align with their policies and minimize sanctions risk related to financing or otherwise facilitating business with sanctioned persons or territories.
Before new sanctions are imposed:
- Review finance agreements, insurance contracts, and other agreements that may contain sanctions-related representations, warranties and undertakings
- Understand the potentially relevant restrictions and when such representations or undertakings are made. Are you planning to make a drawdown on a credit facility and will you need to repeat your sanctions representations?
- Consider the steps the company may take if a repeating representation is no longer accurate, or an undertaking can no longer be given, as a result of changes to sanctions. This can include, as appropriate, outreach to the relevant bank or third party
- Review termination clauses in commercial or other contracts with counterparties that may be targeted by sanctions or could be negatively impacted by sanctions, to consider potential next steps
- Consider seeking contractual protections (such as termination clauses or sanctions force majeure language) in contracts that are potentially high risk from a sanctions perspective.
What is your exposure to Russia?
Take stock of potential exposure to Russia, Ukraine, Belarus and other countries that could be impacted by sanctions in the near future. In addition to legal entities, do you have sales or exports to Russia? Are any of your products or raw materials from Belarus? Are you operating in a sector that may be targeted by sanctions (which have historically included the banking and financial sector, energy, defense and technology)? Understanding your exposure can help you respond quickly if sanctions change.
Review contracts related to these territories and consider steps that can be taken to help ensure your company can either continue its business under the agreement or exit the contractual relationship in compliance with applicable sanctions.
An exit or termination right alone might not suffice if sanctions are imposed that would prevent your company from any dealings related to the agreement. Prohibitions often prevent companies from recovering investments, receiving payments, providing anything of value or, in the case of most US blocking sanctions, even terminating an agreement. Consider following up on any outstanding receivables, unpaid invoices and other pending transactions before sanctions are imposed.
How are your compliance policies and procedures?
Right now – before sanctions change – can be the best time to take stock of your company’s compliance policies and procedures:
- What do you have in place? Do your policies need updating or recirculating? Are your policies dynamic enough to capture changes to sanctions?
- Consider whether 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?
- Take this time to open lines of communication and remind officers, directors and employees who they should reach out to if they become aware of a potential sanctions exposure.
Click here to access a recording of a recent Corporate Secretary webinar featuring a discussion of these and other current compliance issues.