Australian Sanctions Briefing: Russia, Ukraine and Belarus

Key Takeaways

• Australian financial sanctions and travel bans currently target Russian and Belarusian persons and entities;
• The Australian Government will no longer proceed to specify four (4) banking entities for investment restrictions as announced on 25 February 2022. However, these four (4) banking entities have been designated for financial sanctions by the Minister for Foreign Affairs;
• The Australian Government has supported the removal of selected Russian banks from the SWIFT global payments messaging system; and
• From 28 March 2022, Australian sanctions will target various goods and sectors in ‘a specified Ukraine region’.

Current Sanctions (in force)

The Australian Government has issued numerous sanctions regulations and instruments targeting various Russian and Belarusian persons and entities as well as certain sectors in response to the Russian invasion of Ukraine.

Australian Financial Sanctions and Travel Bans

Between 24 February 2022 and 3 March 2022, the Acting Minister for Foreign Affairs, Simon Birmingham and Minister for Foreign Affairs, Marise Payne, designated the following Russian and Belarusian persons and entities for targeted financial sanctions and travel bans:

• Eight (8) persons who are members of Russia’s National Security Council;
• Twenty-five (25) persons and entities responsible for formulating and executing security-related policies and providing weapons and strategic advice;
• Four (4) banking entities assisting the financing of Russian activity in the Russian-occupied territory of Crimea, and which are responsible for, or complicit in, the threat to the sovereignty and territorial integrity of Ukraine;
• Three hundred and thirty-nine (339) persons who are all Members of the State Duma of the Federal Assembly of the Russian Federation;
• Thirteen (13) persons and entities with close links to the Belarusian Armed Forces or Russian military, or that provide software that supports the use of surveillance and facial recognition technology for the identification, apprehension, and persecution of protestors by the Belarusian and Russian governments;
• Five (5) persons holding senior positions in the Russian Government, including the current President and Foreign Minister of the Russian Federation; and
• Seven (7) Russian banks or investment funds, including the Central Bank of the Russian Federation and an export credit agency.

The above persons and entities are currently listed under the Autonomous Sanctions (Designated Persons and Entities and Declared Persons – Russian and Ukraine) List 2014 (Cth) (List). Persons and entities designated under the List are also listed in the Department of Foreign Affairs and Trade’s (DFAT) Consolidated List here, updated as of 3 March 2022.

Businesses should continue to monitor sanctions developments relating to Russia and Belarus and consider obtaining legal advice given the changing and complex nature of the restrictions in place.

Incoming (not yet in force)

Russia Sanctioned Commercial Activity

On 25 February 2022, the Australian Sanctions Office announced on the DFAT website that the Minister for Foreign Affairs intended to specify an additional four (4) banking entities, for investment restrictions under regulation 5B of the Autonomous Sanctions Regulations 2011 (Cth).

On 3 March 2022, these four (4) banking entities were four (4) of seven (7) banking entities designated for financial sanctions by the Minister for Foreign Affairs. As a consequence, the Australian Government will no longer proceed to specify these four (4) entities.

Russia and SWIFT Global Payments

On 28 February 2022, the Prime Minister, Scott Morrison issued a joint media statement with the Treasurer, Josh Frydenberg, the Minister for Foreign Affairs, Marise Payne and the Minister for Defence, Peter Dutton in relation to the Australian Government’s support on further restrictive economic measures against key Russian banks, institutions and individuals.

Notably, this included the removal of selected Russian banks from the SWIFT global payments messaging system. The Australian Government is expected to take ‘complimentary steps as required’ in relation to SWIFT.

Such a measure would directly impact Australian banking and financial institutions who maintain correspondent banking arrangements with targeted Russian banks. The inability to transact and facilitate payments through SWIFT will present a major challenge for Australian businesses with interests and projects connected to Russia, Ukraine or Belarus.

Ukraine-Based sectors and goods

From 28 March 2022, Australian sanctions under the Autonomous Sanctions Regulations 2011 (Cth), will sanction the following:

• Sanctioned Supply in a Specified Ukraine Region: Items (goods), of a kind specified by the Minister for Foreign Affairs by instrument, relating to the creation, acquisition or development of infrastructure in one or more of the following sectors, including transport, telecommunications, energy and the exploitation of oil, gas and mineral reserves in the specified Ukraine region;
• Sanctioned Service in a Specified Ukraine Region: the manufacture, maintenance or use of an export sanctioned good for the specified Ukraine region or engagement in a sanctioned commercial activity for the specified Ukraine region; and
• Sanctioned Commercial Activity – Specified Ukraine Regions: granting by a person of any financial loan or credit or the establishment by a person of a joint venture relating to the creation, acquisition or development of infrastructure in any of the following sectors in a specified Ukraine region, including transport, telecommunications, energy or the exploitation of oil or gas, or of mineral resources specified by the Minister for Foreign Affairs by instrument under this regulation, in a specified Ukraine region.
  
  Sanctioned commercial activity also means the acquisition or extension by a person of an interest in an enterprise that was established in a specified Ukraine region and is engaged in an activity related to energy or the exploitation of oil or gas, or of mineral resources specified by the Minister for Foreign Affairs in an instrument under this regulation, in a specified Ukraine region.

From 28 March 2022, the Autonomous Sanctions Regulations 2011 (Cth) will define a specified Ukraine region as:

• Crimea;
• Donetsk;
• Luhansk;
• Sevastopol; and
• A region of Ukraine specified by the Minister for Foreign Affairs under regulation 3B.

Responding to Sanctions

There are far reaching implications for businesses. We have focussed on four of these for the purposes of this update.

Mergers, Acquisitions and Joint Ventures

In light of the evolving situation in Ukraine, challenges will inevitably emerge when acquiring, merging or transacting with potentially sanctioned persons and entities, including state-owned enterprises, public-private partnerships, joint ventures, subsidiary companies, intermediaries and agents. Fulsome risk assessments and contractual provisions/arrangements should be in place in order to identify and appropriately escalate sanctions issues before the commencement or conclusion of an acquisition, merger or transaction.

For example, a compliance measure may involve ensuring suitable or additional controls are in place to comply with the proposed Australian sanctions targeting various goods and sectors in ‘a specified Ukraine region’ coming into effect on 28 March 2022.

Once these proposed sanctions take effect and with other existing sanctions, auditing and testing will be critical for a business to demonstrate awareness and performance of their internal sanctions controls and performance.

Supply Chain Due Diligence

Businesses can expect supply chains to be a key focal area for them to assess as a result of the current Russia, Ukraine and Belarus sanctions in place. This will involve limiting exposure, whether directly or indirectly, to sanctioned persons, entities, goods and sectors.

Screening for sanctions should include identification and ongoing monitoring of:

• Officers, directors, employees, agents and shareholders employed or affiliated with a sanctioned person or entity;
• Investment portfolios, operating agreements and procurement stakeholders;
• Computers, servers, networks and data storage and processing centres;
• Transactions, inventory, equipment and other assets captured under a sanctioned sector; or
• Jurisdictions where you operate or deal with third parties.

Governance and Accountability

On 23 February 2022, the Australian Prime Minister, Scott Morrison also flagged the role of other Australian regulators including AUSTRAC and APRA in responding to the situation in Ukraine.

Importantly, Australia’s sanctions laws apply to activities in Australia, and to activities undertaken overseas by Australian citizens and entities incorporated in Australia, Australian-registered body corporates and Australian flagged vessels. As a consequence, businesses should consider at least the following:

• Management Information: monitoring updates from regulators and government agencies including DFAT, AUSTRAC, APRA, ASIC and the RBA. The rapidly evolving situation requires businesses to ensure they remain alert to ongoing developments and are relying on up to date information;
• Chain of Command: maintain a clear and supportive governance framework for allocation of responsibility and escalation channels. Boards and senior management should ensure they have clear oversight of these responsibilities;
• Information Technology and Systems: ensure these systems are sufficiently resourced and properly maintained to account for evolving sanctions developments and risks;
• Reporting: managing the internal and external reporting requirements relating to sanctions escalations. Where uncertain, legal advice should be obtained before making a voluntary disclosure;
• Licensing and Permits: Businesses should also have internal controls that determine the circumstances and appropriateness of obtaining sanctions permits and licenses where they are exposed to sanctions risk;
• Auditing and Testing: adequate record keeping of controls, decisions, escalations and their rationale; and
• Tone from the top: senior management reiterating the importance of compliance and leading from the front through conduct.

Cross-Border Disputes

The impact of sanctions will also be felt in cross-border commercial and investment disputes, where international arbitration is the dispute resolution mechanism of choice.

Sanctions have the potential to affect disputes at multiple stages, depending on the nature of the business relationship and the identity of the parties.

• New disputes: In some cases, the imposition of sanctions will make it uneconomical or impossible to continue to perform contractual obligations. Performance may also be impacted where payment flows or supply chains are disrupted or where a business decides to exit a sanctioned country. In these situations, new disputes can be expected to arise. Businesses need to consider whether their contract or the applicable law offers relief from performance in response to changed or unforeseen circumstances.
  
  Businesses affected by the invasion of Ukraine and resulting conflict should also consider whether there are any investment protections available to them under investment or trade agreements, which might result in investor-state claims being brought against Russia.
  
  
• Arbitration clauses and ongoing arbitrations: Where new disputes arise and the contract contains an arbitration clause, or where an arbitration is already on foot, parties need to consider the impact of sanctions on the arbitral process. For example, if a dispute involves a sanctioned entity, the arbitrator or arbitral institution may not be able to accept fees for services provided as part of the process. The same concern might prevent lawyers representing a sanctioned person or entity.
  
  There have already been high-profile withdrawals by international lawyers representing Russia or Russian entities from current matters. Travel bans or visa restrictions may impede attendance at physical hearings, raising procedural fairness concerns. These are all issues which could frustrate an arbitration or result in substantial delay. Also, a Russian sanctioned party may now be permitted as a matter of Russian law to refer contractual disputes to Russian courts notwithstanding a dispute resolution clause providing for a different forum.¹
  
  
• Enforcing arbitral awards: Even after a tribunal has rendered its award in a dispute impacted by sanctions, questions can arise around challenges and enforcement. For example, a court at the seat of arbitration might be inclined to set aside an award that deals with sanctions in a manner inconsistent with that country’s own position.
  
  Alternatively, the losing party might resist enforcement of an arbitral award on the basis that enforcing it would be contrary to the public policy of the country where enforcement is sought. Different problems arise for a party that is successful in arbitration and seeks to enforce its award against the foreign assets of a sanctioned entity that are frozen in the place of enforcement.

Australian businesses should remain alert to other countries’ sanctions regimes including those of the US, the UK, the EU, Canada, Singapore and Japan, and consider whether legal advice is also required in order to comply with those regimes.

Going forward, businesses need to carefully consider any new contracts to ensure they are compliant with relevant sanctions regimes, contain appropriate provisions to manage risk and include an enforceable and practical dispute resolution clause.

Future Developments

It is important to note that current and proposed sanctions considered in this briefing are subject to frequent change in light of the evolving situation concerning Russia, Ukraine and Belarus.

Businesses should continue to monitor sanctions developments relating to Russia, Ukraine and Belarus and consider obtaining legal advice given the changing and complex nature of the restrictions in place.