The global sanctions web has continued to increase complexity for businesses managing their legal, commercial and reputational risks when operating in or dealing with sanctioned countries. The ever-increasing scope of the co-ordinated Russia/Ukraine-related sanctions, including by Australia and New Zealand, have brought compliance into sharp focus.
Given the increasingly broad nature of the sanctions, they have a wider reach than most would initially realise. Key industries affected are financial services and energy and resources. However, potentially all businesses with financial or supply chain exposure to Russia need to consider the impacts outlined in this note.
Compliance with Australian law
Australia imposes sanctions by mirroring UN sanctions, as well as imposing autonomous sanctions having regard to Australian foreign policy objectives. These include recently passed Magnitsky-style sanctions powers allowing thematic sanctions to be imposed.
The Australian government can impose travel bans, asset freezes, import and export restrictions and trading restrictions to specified areas, entities, or individuals. A person must not make available, whether directly or indirectly, certain goods or services, or help to facilitate the trade of certain goods or services to the sanctioned areas, entities or persons. The laws apply to Australian citizens anywhere in the world, or any other person as long as they are within Australia, on Australian ships and aircraft, or where the results of the conduct occur in Australia.
A contravention of sanctions laws is a strict liability offence. This means that intention is not relevant to determining if a contravention took place, though a due diligence defence is available. Penalties include imprisonment of up to 10 years or up to $2.22m (or three times the value of a transaction) for corporations. The Australian government may require a person to provide information, including under oath, to determine compliance with sanctions laws. It is an offence not to provide such information, punishable by imprisonment of up to 12 months.
New sanctions against Russia
Russia and the Crimea region have been subject of sanctions since 2014. The scope of sanctions against Russia has recently been extended to a wide range of Russian officials, media representatives, financial institutions and other individuals where they are involved in activities that have economic or strategic significance to Russia. This list continues to grow as new persons and entities have sanctions imposed. Most recently, Australia has joined with its allies in banning the import of Russian oil, coal and gas – effective from 25 April 2022.
The Donetsk and Luhansk regions are now subject of the same range of sanctions imposed on the Crimea region, effective from 28 March 2022.
At a minimum, businesses should consider the key issues below:
Does my business need a permit?
Businesses should check all historical and current activities, including checking all arrangements in their supply chains. They should cease any activities subject of Australian and other sanctions laws unless a permit or exemption is available.
Certain sanctions' commencement has been delayed in order for businesses to determine if they require a permit or not. There is a presumption in favour of an application for a permit to allow businesses to continue existing activities to comply with pre-existing legal obligations.
Is the due diligence defence available to my business?
Existing sanctions policies should be reviewed and updated as necessary to reflect changes to the sanctions laws on an ongoing basis. Compliance extends beyond checking DFAT's consolidated list - as this only covers travel bans and asset freezes. There are other entities that can be specified for different types of sanctions, and the sanctions regulations should be specifically checked. A comprehensive sanctions policy (both in form and in substance) includes procedures for checking all contractual relationships, including throughout the supply chain. A system with a clear audit trail should be in place to support a position for the due diligence defence, and a sanctions compliance officer appointed as a central point of contact.
Is my business exposed to sectors affected by sanctions?
The sanctions laws apply to direct and indirect supplies. Businesses that are not directly affected but rely on providers that are subject of sanctions, should consider their supply arrangements – both from a sanctions compliance perspective and a broader business continuity perspective.
Australia & New Zealand position on Russian sanctions
New Zealand, which historically managed its sanctions laws through mirroring UN sanctions, has very recently introduced its own autonomous sanctions laws (see article by MinterEllisonRuddWatts). Australian businesses with operations in New Zealand are now exposed to an additional set of sanctions laws, bringing another layer of complexity to compliance.
While sanctions laws are coordinated in principle – especially as to themes, as seen by the recent sanctions against Russia and certain Ukrainian regions, the implementation of various sanctions measures across multiple jurisdictions means there can be considerable difference in the detail. As an example, the EU generally has 'no claims' provisions that prevent a party from bringing contractual claims arising from the other party's efforts to comply with sanctions laws. Australia has been considering its own position on this issue, but no such provisions currently exist under Australian sanctions laws.
As noted above, Australian laws extend outside of Australia's territorial boundaries as long as the relevant conduct is done by an Australian person, on Australian vessels or where the results of the conduct occur in Australia. Certain defences may be available to non-Australian persons for conduct done outside of Australia if there are not equivalent offences in the relevant place where the conduct occurred. The extraterritorial effect of sanctions laws and the interaction of Australian and New Zealand laws for Trans-Tasman businesses need to be carefully considered.
Next steps for Australian businesses
As businesses continue to examine legal risk, as well as commercial and operational risk, a choice that many businesses face depending on their exposure to Russia is whether or not to exit the Russian market. Such a decision has implications beyond sanctions compliance and interacts with many other laws in Australia - such as directors' duties, contract, employment law, WHS law, privacy, and intellectual property protection. A decision to exit the Russian market also brings potential retaliatory action such as expropriation of property.
The pace of decision making and the constantly changing position means businesses risk making mistakes when committing to a position – potentially exposing them to claims by aggrieved shareholders, counterparties, employees and other affected parties. Rigorous testing of a decision to exit the Russian market should occur at board level with an understanding of the complete cost/benefit analysis.
The effect of additional sanctions, import and export controls and supply chain disruptions from the Russia/Ukraine situation and related world and economic events are constantly changing and will continue to do so. Businesses need to be ready respond to changes in an agile way, with the benefit of lessons learned from previous experiences (including COVID-19) to minimise their potential legal exposure.