Sanctions risks for businesses continue to increase 9 min read
Following the Russian invasion of Ukraine in February 2022, global sanctions proliferated rapidly. This trend continued in 2023, and the World Trade Organisation estimates that 12% of global trade is now affected by sanctions.1 Given the worsening geopolitical risk environment, we expect further sanctions proliferation in 2024.
In this context, understanding which sanctions may apply to your business is critical. In this Insight, we summarise the major sanctions developments of 2023 and set out our predictions for the year ahead.
- In 2023, Australia and other key jurisdictions continued to strength their Russia sanctions programs. In 2024, this trend is likely to continue, and Australia and other key jurisdictions are likely to impose new sanctions in response to the Israel -Palestine conflict.
- New guidance published by the Australian Sanctions Office in 2023 provides some general indicators of what should be included in sanctions compliance framework. However, further regulatory guidance is needed in 2024 as businesses try to navigate complex and overlapping sanctions regimes.
- Publicly disclosed enforcement activity in Australia was low in 2023, however increased collaboration between the ASO and AUSTRAC may see this change in 2024.
Senior management and financial crime, legal and compliance teams should remain abreast of developments in the sanctions landscape and will need to ensure that sanctions programs are up to date, take into account ongoing changes to sanctions designations and are fit for purpose.
Additionally, teams with frontline sanctions compliance responsibilities (for example, sales and marketing, procurement, and freight and logistics) should receive communications about how developments affect them.
The most notable substantive development of 2023 was the implementation and expansion of the price cap on Russian crude oil and petroleum first adopted by the G7, the European Union and Australia in December 2022. The price cap sought to maintain the stability of the global oil market while reducing Russian revenue. However, concerns about Russia circumnavigating the price cap have led to a spike in sanctions designations for small to medium-sized traders and shipping companies largely based in Asia and the Middle East. Other key Russia-related restrictions included bans on all exports of critical technology and industrial goods as well as the provision of gas storage capacity to Russia by the EU, and Australia's ban on all exports of machinery to Russia.
Outside of Russia, 2023 saw expansions of existing sanctions regimes, such as the Iranian sanctions regime by the US, the UK and the EU. The expanded Iranian sanctions target Iran's drone program and restrict export of drone components. Other sanctions regimes which were expanded throughout 2023 include the EU's Haiti, Niger and Sudan sanctions programs which are intended to promote stability in those countries.
A key sanctions compliance challenge for companies has been the lack of legislative, regulatory and judicial guidance on how Australian and foreign sanctions laws are to be interpreted and apply.
During 2023, we saw instances of courts and regulators clarifying key sanctions law concepts. Most notably, in the recent UK cases of Mints v PJSC National Bank Trust  EWCA Civ 1132 and Litasco SA v Der Mond Oil and Gas Africa SA  EWHC 2866 (Comm) uncertainty regarding the interpretation of the sanctions 'control' test led to the Office of Financial Sanctions Implementation (OFSI) stepping in to clarify its approach to ownership and control. That guidance confirms that when considering whether an entity is owned or controlled by a designated person, OFSI will take a case-by-case approach and not apply a presumption that a private company being based in or incorporated in Russia means it is controlled by a designated public official.
Looking forward, in Australia, judgment in the Federal Court case of Alumina and Bauxite Company Ltd and Rusal Limited v Queensland Alumina Ltd (Rusal) is currently reserved. The case will clarify whether Rusal is subject to sanctions due to the sanctions designations of two oligarchs with interests in the business and the ban on exporting alumina and aluminium ores to Russia. We expect that this decision will provide important clarification for businesses regarding the level of control that is required to enliven sanctions risk for non-wholly owned companies and provide general guidance around the application of sanctions.
A welcome Australian development is the ASO recently publishing guidance on sanctions evasion in the Australian export sector. This marks the first release of such guidance by the ASO. Importantly, the recommendations align with international guidance published by the US Office of Foreign Assets Control (OFAC).
Included in this guidance is a high-level summary of the ASO's expectations regarding sanctions compliance frameworks. This includes maintaining and updating effective, risk-based compliance programs. An effective compliance program will:
- include senior management oversight;
- include assessment of risk faced by the business and employ controls tailored to the key sanctions risks faced by the business – such as conducting customer due diligence.
- be subject to testing and auditing; and
- include training for employees and senior management.
The guidance also sets out common red flags of sanctions evasion in the export sector, which are broadly applicable across industries, namely:
- use of shell companies and other legal arrangements to:
- obscure ownership, source of funds, or countries involved, particularly sanctioned jurisdictions; or
- conduct international wire transfers, often involving financial institutions in jurisdictions distinct from company registration.
- operation of complex and/or international businesses using residential addresses or addresses common to multiple closely-held corporate entities;
- use of aliases, reluctance to share information or use of personal email addresses (rather than company email addresses) in the context of business dealings.
Further guidance from the ASO to industry on key compliance topics would be welcomed.
Looking overseas, in addition to the aforementioned OFSI guidance, UK and US regulators have published other regulatory guidance that companies of various sectors should be aware of, including price cap guidance from the US and UK on Russian origin petroleum products, and UK guidance on key indicators of trade sanctions circumvention by Russia.
Another welcomed Australian development is that the Department of Foreign Affairs and Trade has publicised a number of general sanctions permits that were issued in 2022.
The Minister for Foreign Affairs is empowered to grant permits authorising activities which would otherwise be subject to sanctions. 'General permits' act as a blanket authorisation to all persons who would otherwise be subject to Australian sanctions jurisdiction for the relevant activities, subject to any specified conditions.
The publicised permits relate to the following issues.
Authorises the provision of financial assistance and financial services relating to Russian oil; and the transport by ship of Russian oil and refined petroleum products, provided that these products are purchased at or below a price cap.
Authorises Australian citizens and bodies corporate to pay taxes required by Russian laws.
Authorises payments to the Russian IP agency for the purpose of obtaining, renewing or maintaining intellectual property rights under Russian law or the Eurasian Patent Convention.
Authorises dealings with controlled assets for the purpose of obtaining and providing legal advice and representation.
The continued proliferation of sanctions has come hand in hand with an increase in challenges to sanctions designations worldwide, including in Australia. To date, although some challenges are ongoing, courts have generally been unwilling to interfere with sanctions designations – reflecting the considerable latitude sanctions laws give to governments.
The overall trend internationally appears to be in favour of governments exercising sanctions designation powers, for example:
In March 2022, a US appeals court in Oleg Deripaska v Secretary of the United States Department of the Treasury rejected a bid by Russian aluminium tycoon Oleg Deripaska to lift sanctions imposed on him by the US in 2018. The court rejected Deripaska's argument that he was no longer operating in the energy sector because he only holds non-controlling stakes in two Russian energy companies and found that ownership and operation are distinct concepts with operation capturing a broader scope of conduct, of which Deripaska was involved in.
In August 2023, the High Court in Eugene Shvidler v Secretary of State for Foreign, Commonwealth and Development Affairs  EWHC 2121 (Admin), rejected a challenge to British citizen, Eugene Shvidler's sanctions designation. Shvidler was designated on the grounds of his association with Roman Abramovich, a Russian oligarch and politician, and his having carried on business in a sector of strategic significance to the Russian government. The High Court considered that 'personal hardship' caused by the designation was insufficient to outweigh the community interest in the maintenance of sanctions.
In September 2023, a decision which reaffirmed the significance and unique status of sanctions as a political tool to give effect to foreign policy, the Federal Court in Alexander Abramov v Minister for Foreign Affairs (No 2)  FCA 1099 (Abramov) upheld the decision to reimpose sanctions against Russian billionaire businessman, Alexander Abramov, finding that:
- the Minister may declare and designate a person even if the person has ceased the relevant activity or function, providing the Minister is satisfied that activity or function is still of economic or strategic significance to Russia; and
- the Minister is under no duty to afford procedural fairness in deciding to designate a person as subject to sanctions.
High profile prosecutions have occurred, particularly in the United States, including:
- a US$508 million settlement with British American Tobacco, a multinational tobacco company, for violations of North Korean sanctions in April 2023 — this is the largest ever settlement to date with a non-financial institution;
- a US$968 million settlement with Binance Holdings, a global cryptocurrency exchange company, for over 1.6 million alleged violations of multiple sanctions regimes;
- a US$30 million settlement with Wells Fargo, a multinational financial services company, for alleged breaches of Iranian, Syrian and Sudanese sanctions
In comparison, despite sporadic prosecution of individuals for sanctions breaches, there has been limited sanctions enforcement activity in Australia. According to the Office of the Director of Public Prosecution's 2023 Annual Report, there were no referrals or prosecutions under the Australian sanctions regimes in 2023 and, to date, no publicly disclosed corporate investigations or prosecutions in Australia.
The lack of civil liability mechanism within the Australian autonomous sanctions framework may be partially to blame for our low enforcement activity. Currently, the only enforcement options available to prosecutors are to take 'no action' or launch a criminal prosecution. We see that a middle ground civil option, similar to that in place in the US and the UK, may be of value as it will allow regulators latitude to take a more proportionate response to breaches as a consequence of systems failures and other similar circumstances of non-compliance.
That being said, we expect increased collaboration between AUSTRAC and the ASO in issuing notices following AUSTRAC's establishment of a dedicated intelligence team to monitor and triage financial reporting about Russian sanctions. As a result of this collaboration, we may see an increase in sanctions-related enforcement activity.
Key to shaping the sanctions landscape for 2024 is the review of the autonomous sanctions regime, which has been ongoing and is expected to conclude soon. One of the matters under review is the potential introduction of civil penalties — which would allow the ASO to utilise non-criminal enforcement mechanisms for less serious sanctions breaches. If this were to be implemented, we would likely see an uptick in ASO enforcement activity. Further, the Autonomous Sanctions Regulations are due to sunset in April 2024. It remains unclear whether they will be remade in similar terms or subject to reform following the outcomes of the autonomous sanctions review. However, the scheduled sunsetting does mean that the Government will need to engage with sanctions regulation in the first half of the year.
More broadly, as global conflict continues to unfold, we expect to see sanctions proliferation continue in the short to medium term. For example, over the past few months we have seen the US, the UK and Australia impose targeted financial sanctions in respect to the Israel / Palestine conflict and expect further sanctions will be imposed as the situation develops. Related conflict in the Red Sea has also begun to trigger sanctions activity with the US imposing sanctions on money exchange services from Yemen and Turkey alleged to have helped provide funding to Houthi rebels launching attacks on commercial shipping vessels in the southern Red Sea. We suspect further sanctions activity will occur likely targeting drone manufacturing and components.
A noteworthy development occurring in the early days of 2024 is the Australian Government making its first use of its significant cyber incidents sanctions regime to impose targeted financial sanctions Aleksandr Ermakov, a Russian citizen involved in the Medibank Private data breach.
Finally, we expect sanctions enforcement risk to start to crystallise in 2024 as regulators increase cooperation and intelligence sharing. Domestically, collaboration between AUSTRAC and the ASO is likely to lead to increased identification of potential sanctions breaches. Internationally, the formation of cross-border sanctions taskforces and Australian participation in monitoring operations (such as Operation Argos targeting breaches of nuclear proliferation sanctions in North Korea) may increase diplomatic pressure on the ASO to take enforcement action.
In light of increased sanctions enforcement risk and rapid changes in sanctions designations, businesses should take the following actions to minimise exposure and risk:
- Understand what sanctions laws apply to you — conduct a risk assessment to identify your areas of exposure and identify triggers which will prompt the business to refresh that risk assessment, such as an increase in designations or classes of sanctions affecting your industry or legislative change. Understanding risk will allow you to put in place proportionate and effective controls;
- Establish processes to monitor changes in the sanctions landscape — we recommend establishing regular monitoring of news and guidance regarding sanctions to allow your business to stay on top of developments in the evolving sanctions landscape. Sanctions offences are strict liability offences for bodies corporate which means your business can contravene sanctions laws even if you are unaware that a counterparty has been made subject to sanctions. Accordingly, it's key for businesses to stay up to date on sanctions; and
- Embed sanctions compliance as part of your broader regulatory compliance processes — such as anti-money laundering and counter-terrorism financing or anti-bribery and corruption programs and procurement or contracting procedures, to create synergies and a culture of compliance. Whilst there is a tendency to consider compliance issues in siloes, companies that integrate sanctions compliance as part of their business-as-usual compliance activities will be better placed to prevent sanctions risk materialising across the whole spectrum of their operations.
https://www.wto.org/english/res_e/booksp_e/wtr23_e/wtr23_e.pdf, page 50 (Figure C.3).