Sanctions against Russia mean greater due diligence, risk management

Sanctions against Russia mean greater due diligence, risk management
For now, the sanctions against Russia don’t represent a major barrier to doing business but they could escalate. Shamil Zhumatov/Reuters

Canadian companies with new and existing operations in Russia face a heightened level of business risk and need for greater due diligence following recent sanctions imposed by Ottawa, say lawyers.

For now, the sanctions against Russia don’t represent a major barrier to doing business but they are targeted and consist of an asset freeze only from the perspective of dealings with about 43 individuals within the Russian government.

“I don’t think it’s going to slow new business, but it certainly introduces a new level of business risk that needs to be considered when entering into new deals with Russia,” says Vincent DeRose, national leader with the defence and security industry group at Borden Ladner Gervais LLP in Ottawa.

“The sanctions do not prohibit business with Russia but Canadian businesses looking to enter into transactions with Russian entities have a heightened level of vigilance they need to undertake now.”

Responding to Russian president Vladimir Putin’s annexation of Crimea, Canada, in conjunction with its allies in the European Union and the United States, last week imposed economic sanctions on a list of Russian and Ukrainian officials and one entity, all considered to bear responsibility for the ongoing crisis in Ukraine, and specifically Crimea. The steps were taken on top of Canada’s earlier measures targeting former leaders of Ukraine and their associates and family members.

“Canada has sanctioned more than the EU and the United States so I think it’s sending a signal that [Prime Minister] Harper is going to be pretty aggressive. I wouldn’t be surprised if we see an escalation,” says John Boscariol, head of McCarthy Tétrault LLP’s international trade and investment law group.

“I would hope the Canadian government is carefully considering the impact of something like a ban on financial services or ban on trade or measures that attack certain sectors.”

Sanctions against Iran started small in 2007 and expanded over three years from designated persons to include oil and gas, mining, shipbuilding, and finally a complete trade embargo last May. However, Iran represents different political circumstances and a complete trade embargo on Russia would be unlikely according to Boscariol, who says the government can be more “surgical” with sanctions on Russia in the next few weeks.

“A month ago this was unfathomable. Now look at how it has started to escalate. I think Canadian companies who are active in the region should be looking carefully at their operations and the companies they are dealing with and who is involved in those companies,” he added.

The designation of individuals can be challenging for financial institutions, as they will need to be screening records and accounts on a regular basis to ensure there is no involvement in transactions with these designated people.

“What we’re telling our clients is that those doing business or having any activities in the Eastern European region should not only be scanning and screening activities but doing enhanced due diligence around those activities and taking a close look at who you’re doing business with and whether there is any connection to these designated persons,” says Boscariol who has been fielding calls from clients in the financial sector wondering about what steps to take next.

“They are the ones first and most directly affected by this but it’s now come from others in natural resources — mining, oil and gas.”

Companies currently doing business with Russia will likely be seeking advice on how to ensure they maintain compliance with Canadian laws, says DeRose, whose work is also focused on the energy and oil and gas markets. “It’s business as usual to the extent your business does not involve any of the individuals named.”

As it currently stands, DeRose doesn’t see the sanctions as a barrier to new business although they do “impose a new level vigilance” for Canadian companies looking to do business in Russia.

He suggests additional due diligence include the following:

1.    Establishment of screening processes to ensure companies are not doing business on behalf of or with the identified individuals;
2.    Obtaining end use statements for contracts, purchase orders, or agreements, and include representations by those you are doing business with abroad that they are not acting as an agent or otherwise on behalf of any of the prohibited entities.

“Ultimately you need to look at it on a transaction-by-transaction basis and assess the risk,” says DeRose. “That’s difficult because as it stands right now all we have is a list of individuals.”

The United States has said if any of the individuals identified have a 50-per-cent ownership interest or more in a company then U.S. companies are prohibited from doing any business with those companies. It has also sanctioned Bank Rossiya — thought to be the personal bank of senior officials of the Russian Federation.

“It’s a pretty big step when you designate a bank,” says Boscariol. “Putting out a designated persons list doesn’t seem as drastic as a trade embargo or ban on financial services — the types of things we have for Iran but for a company doing business in the region involved in a transaction involving one of these guys it’s a very big deal.”

Canadian sanction requirements include notifying the RCMP if you know about a transaction involving those named and freezing any assets they have.

“It’s all very unsettling for business people who would like an ease of dealing across borders as opposed to tensions that look like they are going to escalate,” says Scott Jolliffe, chairman and CEO of Gowling Lafleur Henderson LLP, which has had an office in Moscow for 22 years. “I think there will be a serious pause in new business activity in Russia from Europe and North America.”

Gowlings employs about 40 Russians at its office in Moscow but at the moment there are no concerns about safety.

Jolliffe says the firm has spoken with Canada’s ambassador to Russia, who has been called home, to “caution against over-reaction” and to “follow Canadianized standards of objectivity and diplomacy as opposed to escalating tense relationships.”

“Frankly that’s not simply because of our business interests or our client interests but because there have been situations in the past where diplomacy could have avoided world wars,” says Jolliffe, pointing out that annexation of territory in pre-war Europe led to the First World War.

While he sees the situation that prompted sanctions on Iran as very different from what is happening with Russia, Jolliffe says if allowed to go on without “inserting objective diplomacy” sanctions could evolve to a more serious level.

“Look where that has got us — I would suggest nowhere,” he says.

While sanctions don’t always result in the intended impact there can be a balance, says DeRose.

“There is political value in sanctions and it’s important the government balance business interests of Canadians abroad with the obligations it has to the broader international community,” he says. “In our experience the Canadian government does do its best, even when sanctions are imposed, to work with Canadian businesses to try and ensure their business is not hindered or mitigate that encumbrance that economic sanctions bring.”

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