Start of Sanction Restrictions in International Business during Wartime

The tectonic changes in global society that occurred a month and a half ago have certainly had a significant impact on international business, especially in the area of ??transnational financial flows. In addition, the war in Europe could not but reform the functioning of European corporate structures, as well as funds, trusts, holdings in which citizens of Russia and Belarus take part.

As professional participants in the international practice of tax and corporate consulting with many years of experience, we should draw the attention of both clients and fellow consultants to two important things. First, the issues of financial monitoring, professional ethics and tracking changes in national and international law during the global military conflict are the main principles of daily work of Ukrainian lawyers, audience, experts. The second point has a material and ethical aspects. Significant restrictions have been imposed on individuals and legal entities resident in Russia and Belarus, primarily in the banking sector, as well as in participation in the organization of corporate structures in several European countries. Cases have been already reported when they sought help from Ukrainian colleagues directly or through their local lawyers and consultants. However, it is absolutely clear that in today’s information society it does not make sense; moreover, it will have significant implications for Ukrainian providers.

Therefore, we have information from our foreign partners.

British providers report a formal refusal of British notaries to cooperate with them when it comes to clients from the Russian Federation. References to the order of the state regulator are not provided: it may be a private initiative of notaries. At the very least, notaries, as subjects of primary financial monitoring, have the right to determine the risk framework in the context of FATF and OECD recommendations. British authorities also point out the possibility of restrictions on law firms that will provide legal assistance to Russian businessmen who have been sanctioned by the United Kingdom.

Registration of new corporate structures for Russian clients in the member states of the British Commonwealth, mostly in the Caribbean, is currently suspended. Stricter due diligence rules apply to existing companies, trusts and funds, especially during the process of changing the ownership structure.

Trust services aimed at Russian cash flows have been banned in the Netherlands since April 1. At the suggestion of the Minister of Finance Sigrid Kaag, the Cabinet of Ministers approved the bill, which will be submitted to the parliament for approval. It also prohibits the creation of “cross-cutting” companies and the provision of trust services involving high-risk third countries in the field of money laundering or countries that do not cooperate in the field of taxation.
Cross-cutting companies are legal entities that belong to a group of trust offices and are used to “redirect” customer funds, such as dividends or royalties, for tax purposes. As such, it is proposed to completely ban the professional or commercial use of cross-cutting companies by trust offices. This measure was previously announced by the previous Cabinet of Ministers.

The positions of Cyprus and Georgia, whose corporate structures have been actively used by Russian and Belarusian citizens in international business, should be addressed separately. Cyprus, as a member of the EU, must comply with all pan-European regulations, including EU Regulation 833/2014. The country has announced a temporary suspension of the registration of new structures, such as trusts and funds, for Russian citizens. Nevertheless, it should be noted that more than a third of the clients of Cypriot law firms that register and service international business companies are Russian citizens. Georgian authorities have been accused of using their territory and legal entities registered in Georgia by Russian-sanctioned businesses. Georgia has not officially joined the European sanctions against the aggressor state. In turn, Georgian Parliament Speaker Irakli Kobakhidze stressed that “Georgia will not become a mechanism to avoid sanctions.” By and large, attempts to circumvent sanctions by Russian businesses with the help of Georgian companies do no matter that much, since it is cash flows, not just the residence of legal entities, that is being primarily monitored. Meanwhile, all the dollars, one way or another, go exclusively through American correspondent banks.

Finally, a few words about the US. In March 2022, Task Force KleptoCapture, a unit of the US Department of Justice, was established in the United States to impose sanctions on Russian oligarchs in response to Russia’s invasion of Ukraine. Andrew Adams, a veteran prosecutor who had been appointed the chairman of KleptoCapture, said the level of international cooperation to track the property of Russia’s elite was “record high.” And this applies not only to (yet) unsanctioned Russian citizens who are trying to relocate assets and businesses until potential sanctions are imposed.

CEO of KAC Group

Volodymyr Harkusha