[co-authors: Adina Ezekiel, Julie Bermond]
Since last February, Russia’s invasion of Ukraine has led to a series of restrictive measures against Russian and Belarusian individuals and companies, as well as sectoral measures some of which date back to 2014. The implementation of these restrictive measures is hampered, however, by the difficulty of identifying the assets held by the oligarchs, who hide them in different jurisdictions through increasingly complex legal and financial structures.
As Russian aggression continues, the states feel compelled, sometimes under pressure from civil society, to ensure that the restrictive measures put in place are effective by sanctioning any evasion of them. In that context, initiatives in France, the EU, and the UK are worth noting. We describe each of these jurisdictions in sequence below, and offer key takeaways for companies in view of the ongoing focus on sanctions enforcement.
- France: Transparency International files a lawsuit against ill-gotten assets
On May 24, 2022, the French Branch of Transparency International announced it had filed a lawsuit against unnamed persons over allegations of “money laundering and failure to justify financial resources” with the Parquet national financier. The NGO denounced a “system of capture of the Russian state and national wealth by businessmen and senior officials close to Vladimir Putin”. The complaint targets the conditions under which certain oligarchs and those close to Vladimir Putin’s regime built up significant property assets between 2003 and 2018 in the Côte d’Azur, the Basque coast, western Paris, and ski resorts in the Alps.
According to a press release issued by Transparency International France: “based on registers recently made available to the public, such as the register of beneficial owners and the land registry, and on open sources (investigations by investigative journalists, legal proceedings initiated abroad, parliamentary reports, etc.), we have been able to draw up an inventory of the real estate holdings in France of several oligarchs and those close to the Russian regime, to identify the chains of ownership set up for this purpose, and to gather a set of clues as to the illegal origin of the resources that made it possible to acquire these holdings. We intend to continue this work on other emblematic cases. It is now up to the French justice system to determine the origin of the funds that allowed the acquisition and embellishment of these properties in France, and to draw all the consequences of the assistance given by unscrupulous or negligent French intermediaries to the realization of these operations”.
The complaint of TI France is based on an unprecedented mechanism for the restitution to the populations concerned of assets seized in so-called “ill-gotten gains” cases, set up in August 2021. The aim is to redistribute, in the form of development aid, funds confiscated by the French justice system following a definitive criminal conviction in a case of corruption, embezzlement, money laundering or other illegal taking of interest by a person holding public authority in a foreign country, entrusted with a public elective office or a public service mission. This mechanism was used for the first time against Teodorin Obiang, Vice-President of Equatorial Guinea, who was definitively convicted on July 28, 2021 for corruption and misappropriation of public funds.
On the same day, Transparency International issued a report entitled “Up to the task?”, which underlines weaknesses of the anti-money laundering frameworks in eight countries that sanctioned Russian kleptocrats (Australia, Canada, France, Germany, Italy, the Netherlands, the United Kingdom and the United States). In particular, the report deplores (i) the lack of information on the real owners of limited companies and trusts that are used by oligarchs to acquire villas, jets or yachts, (ii) the lack of regulation of the intermediaries best placed to identify and report criminals or sanctioned persons (lawyers, bankers, real estate agents…), and (iii) the insufficient powers, resources and tools of the authorities in charge of freezing, seizing and confiscating illicit assets.
These two simultaneous actions clearly indicate the intention of TI to put the pressure on governments.
- European Union: New proposals on the criminalisation of sanctions evasion and on the confiscation of assets.
Making the violation of EU restrictive measures an EU crime
On May 25, 2022, the European Commission proposed to add the violation of EU restrictive measures to the list of EU crimes, which would establish a common basic standard on criminal offences and penalties across the EU. Although Member States are already required to introduce effective, proportionate and dissuasive sanctions for breaches of restrictive measures, some Member States apply much broader definitions than others, so that this heterogeneity of national legislation allows those subject to restrictive measures to circumvent them.
These common rules would thus facilitate the investigation, prosecution and punishment of violations of restrictive measures in all Member States.
Accompanying the proposal, the European Commission also set out how a future Directive on criminal sanctions could look like in a Communication with an Annex. The potential criminal offences could include:
- engaging in actions or activities that seek to directly or indirectly circumvent the restrictive measures, including by concealing assets;
- failing to freeze funds belonging to, held or controlled by a designated person/entity; or
- engaging in trade, such as importing or exporting goods covered by trade bans.
As stated by Didier Reynders, Commissioner for Justice and Consumer, “We must ensure that persons or companies that bypass the EU restrictive measures are held account. Such action is a criminal offence that should be sanctioned firmly throughout the EU. At present, divergent criminal definitions and sanctions as regards the violation of the restrictive measures can still lead to impunity. We need to close the loopholes and provide judicial authorities with the right tools to prosecute violations of Union restrictive measures”.
If the EU Member States were to agree to the Commission’s initiative to extend the EU list of criminal offences, the Commission will present a legislative proposal based on the accompanying Communication and Annex.
Facilitate asset recovery and confiscation
On the same day, the European Commission put forward a proposal for a Directive on asset recovery and confiscation, applicable to the violation of restrictive measures, which aims to ensure that crime does not pay, by depriving criminals of their ill-gotten gains and limiting their ability to commit further crimes.
Annual revenues of criminal gangs in the EU are estimated at 139 billion, of which only 2% is frozen by the authorities. Only half of the frozen assets would then be confiscated. Member States are not sufficiently equipped to deal with the complex modus operandi of criminal organisations and national authorities have limited capabilities to swiftly trace, identify and freeze assets.
The purpose of the proposal is to:
- extend the mandate of Asset Recovery Offices to swiftly trace and identify assets of individuals and entities subject to EU restrictive measures. These powers will also apply to criminal assets, including by urgently freezing property when there is a risk that assets could disappear;
- expand the possibilities to confiscate assets from a wider set of crimes, including the violation of EU restrictive measures, once the Commission proposal on extending the list of EU crimes is adopted; and
- establish Asset Management Offices in all EU Member States to ensure that frozen property does not lose value, enabling the sale of frozen assets that could easily depreciate or are costly to maintain.
Harmonisation of legislation would thus accelerate the identification, tracing, freezing, and confiscation of assets generated by criminal activities before the perpetrators manage to divert these funds or conceal their criminal origin.
- The United Kingdom
The UK now operates an autonomous sanctions regime under the Sanctions and Anti-Money Laundering Act 2018 (“SAMLA”), under which the UK can impose its own sanctions in addition to implementing UN sanctions. The Office of Financial Sanctions Implementation (“OFSI”) is the body primarily responsible for the implementation and enforcement of UK and UN sanctions. Established in 2016, OFSI had imposed only 6 fines as of February 2022, and had been subject to criticism for being “toothless” because of its lack of enforcement activity and the resulting lack of a deterrent for breaches of sanctions. The Russian invasion of the Ukraine has led to a significant increase in the number of designations and the pressure for greater enforcement activity. These events contributed to the expedited enactment of the Economic Crime (Transparency and Enforcement) Act 2022 (“the Economic Crime Act”) which seeks to tackle some of the concerns. The Economic Crime Act sets out (i) a framework for the registration of overseas entities which own or buy property in the UK, although these provisions are not yet in force, (ii) changes to the unexplained wealth order (“UWO”) regime designed to encourage greater use of the power to demand information about the source of wealth, and (iii) changes to the UK sanctions framework. The changes to the sanctions framework include provisions for streamlining the designation process, including the introduction of a power quickly to designate individuals or entities where the EU, US, Australia, Canada, or another specified country has designated that individual or entity. A significant change in the Economic Crime Act, although it is not yet in force, is the introduction of a civil monetary penalty for financial sanctions breaches on a strict liability basis. Instead of requiring a showing that the person in breach knew or had reasonable cause to suspect that they were in breach, OFSI will only be required to show that it is satisfied, on a balance of probabilities, that the person was in breach of a sanction or had failed to comply with a sanctions obligation. The power to bring criminal proceedings remains but the strict liability monetary penalty will give OFSI greater flexibility to impose penalties. On 8 June 2022, OFSI published new guidance on its approach to enforcement and monetary penalties, which entered into force on June 15, 2022.
The Financial Conduct Authority (“the FCA”) is the regulator for financial services firms and financial markets in the UK. On 17 May 2022, it published a web portal specifically for the reporting of sanctions evasions relating to a regulated firm. The intention is to encourage such reports and to provide reassurance that any reports will be treated confidentially. In particular, the FCA wishes to be informed about poor sanctions controls, suspected or actual breaches, or any methods it is believed are being used to breach the sanctions regime. This is another indication that regulators are keen to clamp down on sanctions breaches.
- Key takeaways
Given the continuing pressure for countries in Europe and the EU to toughen their sanctions regimes, companies would be well advised to fully take into account the following points:
- Enforcement is not only a US matter
- Sanctions evasion will stay high on the political agenda of States and of civil society organisations
- Being involved in sanction evasions does not only entail legal risks, but also huge reputational ones
- Third party due diligence and KYC is therefore a must with respect to all forms of business partners
 Proposal for a Council Decision on adding the violation of Union restrictive measures to the areas of crime laid down in Article 83(1) of the Treaty on the Functioning of the European Union (available here).