Law

Enforcement Trends in Sanctions and the Role of Commercial Law Firms

How have sanctions affected global business, how have law firms responded, and what are the trends for future sanctions regimes?

Khalil Gilders

26 Oct 2023 — 11 min read

Photo by Rob / Unsplash

With the advent of the Russia-Ukraine war came the largest wave of Western sanctions ever imposed. Covering notable Russian individuals, businesses, and payment systems, the scale of the restrictions is unprecedented.

But how have these sanctions affected the global business environment, how have law firms responded to the change in client needs, and what trends can we observe for the future?

What are Sanctions?

Simply put, sanctions are restrictions placed on certain dealings or transactions with targeted countries, entities, and individuals, imposed by national governments or international organisations.

Sanctions are often seen as a valuable tool for organisations and governments to change behaviour with the spread of armed conflict, terrorist threats, human rights violations, etc.

The purpose of sanctions broadly includes:

To change target behaviour
Achieve foreign policy objectives
Punish or prevent illicit behaviour

In an increasingly interconnected political and business world, sanctions provide pressure on targets, without escalating to active involvement (such as military intervention).

Note that there are other ways in which nations and organisations can place pressure on geopolitical issues that are not sanctions. For example, the EU's Forced Labour Regulation proposed in February 2022 (supplementing Directive 2011/36/EU) aims to combat human trafficking and exploitation in supply chains.

Sanctions take many forms, including:

Asset Freezes (preventing dealings of any kind with these assets; may be included under 'smart sanctions' which target specific persons)
Country-based Financial Solutions (including restrictions of raising new equity or debt capital, or bans on specific financial services)
Trade Sanctions (including export/import bans, flight bans, and prohibitions on capital movements and investments)
Sector Sanctions (e.g. on the energy sector)
Comprehensive Sanctions (US only; in contrast to standard, 'targeted' sanctions; applies to dealings within a whole country)
Immigration Sanctions (including visa or travel bans)
Transport Sanctions (including use of aircraft, ships, and railways)
Arms Embargoes (prohibition of trade activities related to military arms)

cargo ships docked at the pier during day — Photo by Andy Li / Unsplash

Why do clients care about sanctions?

Given the breadth of scope that potential sanctions can cover, it should be no surprise that many firms care about how their business is affected by sanctions.

There are three key reasons that clients care about sanctions: (a) business disruption, (b) penalties, and (c) cost of compliance.

Additionally, it is worth highlighting the applicability of these regimes:

In the US, sanctions apply to all US persons, any entity formed under US law, or any person taking or causing action within the US. US sanctions may also apply to non-US persons where there is a sufficient US nexus (a casual link to the US or persons within the US) – e.g. sourcing goods from the US to send to a sanctioned country or person.
Similarly, EU sanctions apply to all EU nationals, including entities incorporated under the law of an EU member state (regardless of whether they are doing business inside the EU or not). They also apply to non-EU persons who are conducting business within the EU.

a. Business disruption

Sanctions primarily apply significant disruption to businesses operating in some part with sanctioned entities or persons:

For example, following the unprecedented wave of sanctions packages in response to the Russia-Ukraine War, many firms were forced to cut ties with suppliers and distributors who were the target of sanctions or impacted by the restrictions imposed – and many more were forced to withdraw entirely from the Russian market due to the increased cost of business.
In much the same way, the exclusion of Russia from the global SWIFT payment system stymied transactions, and the U.S. Treasury Office of Foreign Assets Control's (OFAC) designation in February 2022 of 13 Russia entities under sectoral sanctions prohibiting the issuing of new equity or debt, effectively halted Western business involvement with Russian finance.
Finally, it is worth noting that key Russian individuals and financial institutions (including Russia's two largest banks – Sberbank and VTB) were placed on the Specially Designated Nationals list (SDN list), which involved full freezing of assets, blocking the effective flow of capital outside Russian entities and persons.

b. Penalties

However, sanctions not only vastly increase risk with regards to (i) interruptions from supply chains and the challenges of conducting business with certain entities, but also (ii) from the significant penalties firms can incur if they themselves are found to be in violation of sanctions:

In the US, there are a range of civil penalties, which include fines of at least $300,000 or double the violating transaction's value, and forfeiture of goods or profits.
- The US sanctions regime also includes criminal penalties of up to 20 years in prison, and fines of at least $1 million, or twice the financial gain or loss from a violating transaction.
- Additionally, with regards to the US, those found in violation of sanctions can themselves be placed on the SDN list. This therefore puts them at risk of having their own assets frozen, and having their ties with other persons and entities cut (e.g. denial of US loan facilities and loss of bank accounts).
In the EU, penalties vary from each EU member state, but generally include criminal liability and administrative fines.

c. Cost of compliance

A further reason clients care about sanctions is because of how it affects relations with other, non-sanctioned entities. For example, banks, insurance companies, and other financial institutions have their own sanctions compliance policy requirements that go above and beyond what the law requires.

This is because financial institutions who lend to businesses can be implicated in violations, on the grounds of 'facilitating' business with sanctioned entities (e.g. lending to a business, which then has a supply agreement with a SDN).
As a result, many financial institutions have a very low risk tolerance relating to sanctions, and so require clients they are engaged in business with to complete expensive and time-consuming due diligence investigations, even for perfectly legal activities.

city buildings during night time — Photo by Miquel Parera / Unsplash

What is the role of commercial lawyers?

As you may imagine, with such significant scope and effects of sanctions packages on persons and entities, commercial law firms play a pivotal role in ensuring clients are compliant with the current stipulations of different jurisdictions.

The role of commercial lawyers can be classified into:

Advising clients: This involves informing and advising the client on the relevant jurisdictions' sanctions regime, and how they should act to comply.
Due diligence exercises: This includes whether the client currently has connections, contracts, or dealings with sanctioned entities or persons.

Additionally, whether the client has sanctions policies or screening already in place.
This takes the form of reviewing documents the client has disclosed in the 'data room', and asking questions via a Q&A process.

Aiding in Reporting Obligations: Clients are obligated to report to sanctions regulators under certain circumstances, which lawyers may aid in.

In the US, clients are subject to mandatory and voluntary reporting, when a potential breach is detected (of which failure to submit is taken as an aggravating factor, and often leads to more severe penalties).
- US persons are required to file a report with OFAC when either a transaction is 'blocked' (asset freeze) or rejected.
- Voluntary self-disclosures can result in up to a 50% mitigating of civil penalties if a breach is confirmed, as well as potential non-prosecution.
In the EU, reporting is mandatory in the case of asset freezes or suspicious changes of ownership (in addition to member state-specific requirements).
In the UK, reporting is mandatory when conducting business with 'relevant firms/institutions', which may be required to submit to the Financial Conduct Authority (the FCA) in addition to the Office of Financial Sanctions Implementation (OFSI).
- Note that regulators here have information-gathering powers, in addition to the standard whistleblower awards for individuals reporting breaches to regulatory authorities.

Litigation and Prosecutions: Although less common, there is also a role for lawyers in the defense or prosecution of persons and entities accused of violating sanctions regimes.

woman signing on white printer paper beside woman about to touch the documents — Photo by Gabrielle Henderson / Unsplash

How have sanctions regimes changed after the Russia-Ukraine War?

As previously mentioned, the sanctions packages implemented by the EU, US, and UK in the wake of the Russia-Ukraine war, were unprecedented in terms of both scope and depth.

These new sanctions represent a turning point in both the wider use of sanctions (as the primary means of achieving foreign policy objectives), but also the more aggressive role of regulators in enforcement.
Sanctions circumvention, in particular, has risen to the top of the agenda for G7 governments – who now turn their attention to pressuring jurisdictions such as Macau, Hong Kong, and Turkey, who are at the heart of the circumvention of sanctions.

Enforcement Trends in the US

Since the Russia-Ukraine War began, the US government has increased resources towards sanctions enforcement. This has included the increased hiring of prosecutors, increased support for whistleblower programmes, and the creation of certain intra-agency task groups – such as KleptoCapture Task Force and the Disruptive Technology Strike Force.

There is also the growing trend of inter-agency guidance and coordination in enforcement actions.

As of 2023, OFAC enforcement has further increased, notably in enforcement actions with large impacts. This includes issuing 12 public enforcement actions to date, which total $560 million – 26 times the amount issued in 2021.

Since its establishment, the KleptoCapture Task Force has seized more than $500 million worth of assets, including superyachts and personal jets of Russian oligarchs.

Enforcement Trends in the EU

In the EU, there has been further focus on anti-circumvention measures stated previously; in particular, the 11th EU sanctions package has introduced enhanced reporting obligations.

Prior to the Russia-Ukraine War, in France Russian-targeted sanctions faced mostly on financial services – now, there is renewed focus on sanctions packages in line with other Western powers.
The German government has announced it will step up investigations into sanctions evasion and has established the new Central Office for the Enforcement of Sanctions in Germany.

Enforcement Trends in the UK

Since the Russia-Ukraine War, the OFSI has become significantly more aggressive in enforcing new sanctions packages.

The OFSI has introduced a new strict liability offence for sanctions breaches. In short, this means there is no longer a requirement to establish prior knowledge or reasonable suspicion on the part of the person or entity that breached the sanction to impose penalties.
Since 2019, OFSI has brought eight penalties, ranging from £5,000 to £20.5 million – a significant rise on the previous decade.

Furthermore, HM Revenue & Customs has focused largely on UK export controls, offering civil penalties of up to three times the value of the good exported.

Since May 2022, they have issued 20 penalties up to nearly £2 million, and are increasingly exceeding £100,000 each.

Potential future developments:

Whilst the future remains uncertain – especially with regards to geopolitical conflict – it is clear that the West's response to the Russia-Ukraine War was a marked departure from means of intervention of the past.

Perhaps as a lesson against the zealous interventions in Iraq or Libya – or against the flimsy sanctions following the annexation of Crimea in 2014 – the West has adopted a new, coordinated strategy of comprehensive sanctions and military aid, in pursuit of their foreign policy objectives.

Given this – alongside the continued additions of sanctions packages every few months – there is no reason to believe that such a geopolitical strategy is going anyway any time soon.

We can expect the response to future conflicts from strategic allies to follow a similar pattern, especially when a high degree of financial and economic interdependence (as is the case in Russia) makes the sting of sanctions particularly strong.
Thus, clients ought to reflect on their dealings with persons and entities related to current and future threats as identified by the EU, US, and UK, with the very real thought of a similar sanctions regime being implemented in mind.

(Again, no-one can predict the future, but there are seemingly growing risks of engaging with other persons or entities involved in China – given the growing tensions over Taiwan, the South China Sea, and Xinjiang – as well as Iran – given their growing involvement in both Ukraine and suspected involvement in the Israel-Palestine conflict).

a large military ship in the middle of a body of water — Photo by Vidar Nordli-Mathisen / Unsplash

What are commercial law firms doing?

The key for law firms – as in any practice area – is to find the ways in which changing commercial risks can provide new opportunities to provide value to clients.

In general, this is why most London City law firms are full-service firms; they extend their services to all areas of a particular client's business (e.g. financing with banks, raising of capital, mergers or acquisitions, potential litigation over disputes, commercial contracts, intellectual property or copyright issues, etc.), and so consolidate their trust and loyalty with the client.
With regards to sanctions, this involves lawyers both identifying areas which may require compliance investigations under current laws, and anticipating future changes to sanctions regimes which may affect clients' current dealings.
- This means tailoring existing contracts to account for potential changes in sanctions regimes (e.g. in case parties need to withdraw from the contract to comply with new laws).
- It also means paying close attention to geopolitical developments, and how these may indicate future policy direction (e.g. rising US-China tensions).

There are some notable law firms that have risen to the challenge of this new, changing risk environment. These pertain both to sanctions-specific departments, but also share overlap with the International Capital Markets (ICM), Public International Law, and Litigation teams;

Allen & Overy: An Allen & Overy team within the ICM department was involved in the Credit Derivatives Determinations Committee's (CDS) decision that the invasion of Ukraine was a technical default by the Russian Federation on their securities positions. In a tense sanctions environment, this had huge ripple effects in the financial markets.
- For this, Allen & Overy won the Law Firm of the Year Award, from Risk.net.
- (Note that Allen & Overy sits on various other institutional panels, such as the Loan Market Association (LMA) and International Capital Market Association (ICMA)).
White & Case: White & Case has maintained Tier 1 strength in both the Public International Law practice area, as well as being awarded the Committee on Foreign Investment in the United States (CFIUS) Team of the Year Award, from the International Financial Law Review Americas. With increasing pressure of Chinese- and Russian-targeted sanctions and foreign direct investment restrictions, White & Case has demonstrated agility and expertise in providing client value.
Freshfields Bruckhaus Deringer: Freshfields also maintains Tier 1 strength in Public International Law according to Chambers Global, and – under the growing sanctions scrutiny of Western nations – was awarded the Government and Public Policy practice award, from the China Business Law Awards, in 2022.
Akin Gump Strauss Hauer & Feld: Akin Gump has maintained Tier 1 for international trade and sanctions, and was recognised in the Financial Times' Innovative Lawyers report 2022, for their Overruled interactive sanctions platform. The platform enables users to search for and analyse US sanctions and export controls, guidance offered by regulators, and estimated penalties for suspected violations.

(Note that there are many other strong sanctions teams from a variety of law firms not mentioned here. There are also a wide array of sanctions trackers updated on a weekly basis, from a number of high-level firms).