The new outbound investment regulations will reshape the world of compliance, necessitating that companies ready themselves for a more volatile global landscape. In this final article of our three-part series, we will delve into how you can best prepare for the coming changes. 

How Can Companies Prepare? 

It is crucial that companies understand that the world of global investments and securities is increasingly becoming politicized. These changes are a long-term reality, and the notion of the separation between business and politics is never going to return. Companies must incorporate national security considerations into their risk assessments when engaging in business activities, both on a local and global scale.

To appropriately incorporate the national security views into business operations requires a clear company risk appetite, a cohesive internal control and decision making infrastructure combined with the right information, both in data and risk analysis support, to make the correct decisions of what is “in” and “out” of our risk appetite.

Risk Appetite and Assessment, Easier Said than Done? 

The first place to start when examining any coming sanctions change is to obtain an overview of your company’s current risk exposure, and to conduct a comprehensive risk assessment of existing exposure against the coming restrictions.

• What is the nature of the exposure? Where is it located? In what sectors?
• How much of the company’s business activity is impacted by these investments? How many employees and fixed capital interests? How much investment/revenue is related to the impacted activity?
• Decide what level of risk the company can stomach. Following the law as written may be possible, but it will constantly change and require substantial investment to ensure lines are not being crossed. Making policy decisions early to limit exposure is an easier approach but means ceding business to the competition.

A company’s risk appetite should incorporate a frank assessment of how much the firm is willing to invest, as well as maintain a comprehensive and uniform internal decision making structure that has the right competency and information to make the right decisions. Sanction Advisory exists because this is the biggest challenge that Nordic companies face and it is not something that is easy to fix internally.

Cohesive Controls and Decision Making

The next step is then to establish a robust controls and decision making framework to be able to conduct thorough due diligence on the current exposure and any future exposure at the pre-investment stage. This is to determine whether the investments are impacted by the regulation or outside of the company’s risk appetite decision.

The program will encompass the comprehensive risk assessment to gauge the political and regulatory dynamics in the short, medium and long term, along with developing possible scenarios and guidelines for the company’s course of action in each specific situation. The aim of the internal framework is to have clear concise and easy-to-implement risk decisions, that adhere to the firm’s risk appetite and don’t result in repeated exemptions and exceptions in the continuous pursuit of new risky business.

Data and Risk Information

The third necessary component is having the right data and risk information to inform the internal controls to ensure your company remains on the correct side of your risk appetite decision.

Your company needs to be able to answer the following questions to prepare and live with the coming world of outbound investment screenings: 

• Is the security/counterparty currently targeted for restrictions? Is it in the cross-hairs of likely future restrictions?
• Is the security/counterparty working with any entity, country, or in the sectors that implementing bodies have deemed a national security risk?  
• Is the security/counterparty owned, controlled, or related to companies that have been targeted by sanctions, are tied to the military or intelligence apparatus of targeted countries or in the sectors that have been deemed a national security risk?

The only way to answer these questions is through having the best data and best horizon scanning risk advice.

• Your company will need the global scope of all ISINs;
• Reliable details of their complete ownerships and control and connections to sanctioned parties, government agencies, and other national security threats and;
• Coverage for the sanctions regimes of the G7 and other locations where your firm has operations.

Finding the right data is a challenge, there are an increasing number of potential data providers in the market but we find that our partners at Kharon have the best solution. Having the right data is only part of the battle, each company needs to know how to use the data, how to implement its use in your company’s screening system and control framework, and also to understand that the political landscape and rules are constantly changing. Having regular tailored horizon scanning advice is also essential to not be caught by surprise.

If you or your company need some help preparing for this complex future of outbound investment screening, from risk assessment support to advice on commercial data providers, contact us via inquiries@sanctionsadvisory.dk, and we can discuss your needs and the right solutions for your small, medium or global firm.

Now that we have seen the EU’s adoption of a slimmed down 10th sanctions package on Russia after months of ambitious discussion of imposing new costs, it makes sense for us in the compliance community to step back and take a wider view of why politicians and officials increasingly impose complicated sanctions measures and what it means for the future. 

So, why do we increasingly see new sanctions measures that are very limited in their intended impact? The simple answer is that there is a belief in sanctions policy making circles that sanctions measures can be precisely tailored to achieve a specifically desired impact on the target with minimal or even zero spillover impact to others.  We see it in the US Treasury’s Sanctions Review and in every paragraph of EU sanctions regulations containing the phrase “the prohibition…shall not apply…” 

And the fervent embrace of complicated sanctions is only growing.  They started with the enactment of sectoral sanctions against Russia following Moscow’s invasion of Crimea in 2014.  But since then have been deemed such a success to have been deployed toward Venezuela and again towards Russia to impose the same restrictions again (See EO 14024 Directive 3 and EO 13662 Directives 1, 2, 3) as well as the much hyped oil price caps.  

The Complicated Compliance of the Price Caps

The oil price caps, which politicians are touting as a great success despite the increasing evidence of their limited impact, are a prime example of measures with disproportionate compliance costs to their actual impact on the target.  

The price caps have been enacted to soften the potential blow to the global oil market from the EU’s import embargo to ensure that Russian oil continues to flow to international markets.  Because the primary focus of the measure is to not impact energy flows, the result is a much more complicated compliance task than what would have been required if the EU’s ban on services had proceeded as originally enacted in June 2022.

Even with the extraordinary guidance and embrace of an “attestation model” from US Treasury’s OFAC, the EU , and UK OFSI to purposely lessen the compliance burden of the price caps, as we in the compliance know, we are now in the position of having to gather and assess a multitude of information against a number of different factors to make a determination if activity is prohibited by sanctions or not.  

If the EU’s original ban on services for Russian seaborne crude and products had proceeded, companies would in most cases only need to ask one question, “is the product of Russian origin” to get to a definitive answer of it being prohibited or not.  But with the price cap, to know if the activity is in compliance with the restrictions, we need to be asking:

• Is the product of Russian origin? 
• Where is the product headed?
• Does the destination have an import ban in place? 
• What is the specific product and which CN code would apply?
• Based on the CN code which price cap applies?
• Was the product purchased for a price below the price cap maximum for the CN code of the product?
• Is there any evidence that the stated purchase price is the true and final purchase price and that there will not be any supplementary compensation to, in effect, have a price above the price cap?
• Are the shipping costs and other related services in line with industry norms and without evidence that they are inflated to, in effect, have a price above the price cap threshold? 
• And more…

The value proposition of the oil price caps, a high compliance burden for market stability and the “right” impact on Russia, is made more perplexing when senior policymakers publicly permit Moscow’s use of its “shadow fleet” to ship oil outside the price cap restrictions.  And this is before we consider the extensive track record of the Russian government and aligned actors to work to evade and circumvent sanctions, exploiting carve outs, exceptions, and general licenses to mitigate the impact of sanctions and make compliance all the more difficult.

What does it Mean for the Future? 

There is a paradox of applying sanctions, the more complicated the measures and more difficult they are to implement, then the more the impact of sanctions is disconnected from the policy intent. Complicated sanctions create more opportunities for evasion and circumvention by design, and they also lead to “over compliance” because the questions and documentation needed to be gathered for compliance and thus the costs of personnel to ensure compliance are too great for the business value when there is enforcement risk for getting the rules wrong. 

But so long as policymakers are able to tout the success of the oil price caps and that sanctions can be narrowly tailored to take greater effect over time, complicated measures are here to stay and will continue to be deployed in future regimes.  Therefore it is important for us in compliance to face reality and build compliance programs that are robust and adaptable to a changing environment to enable company leadership to take decisions on what activity is within or outside of risk appetite. This is where we at Sanctions Advisory are uniquely positioned to support Nordic companies to make sure complying is a business advantage and not a burden.

Feel free to contact us at inquiries@sanctionsadvisory.dk to discuss further how we can help your company best address the complex future of sanctions compliance. 

Today marks the one year anniversary of Russia’s invasion of Ukraine, and we are still awaiting the EU’s long signaled 10th sanctions package, which was pledged to be a key statement of the resolve of the Union and further demonstration of the effort to hinder Russia’s ability to wage aggression.

Pegged by some just last week that the approval process would be smooth sailing to a comprehensive package targeting Russian revenue streams, sanctions circumvention and measures to enhance the ability of the union to implement sanctions, it seems the final result will mostly be more of the same as previous packages rather than a fresh broadside against the Russian economy. As we previously highlighted, previously proposed components of the 10th package would have been marked expansions to the scope of Russia sanctions and included targeting of the nuclear sector, a ban on importing diamonds, and more restrictions on rubber imports, all revenue generators for the Kremlin.  It seems though that all of these proposals won’t make it into the final text.

Why were the most expansive measures removed? The simple answer is out of concern for the economic impact on EU member states and Hungary’s increasing opposition to impose further costs on Putin.  Hungary staunchly opposed any targeting of Rosatom or Rosatom officials even with carve outs for key pain points such as continuing fuel imports, resulting in nixing even very targeted designations related to Russia’s nuclear activity. The asserted disproportionate impact on the European diamond trade resulted in import restrictions removed from the package in favor of G7 pledges to establish a broader track and trace mechanism. And targeting synthetic rubber with a permitted import quota exceeding the unrestricted annual totals for any year in the past decade to protect select firms and industries held up the last minute approval by Poland for being too permissive.

What does this mean for future sanctions? 

The key takeaway for us on the outside from the seemingly intractable negotiations, beyond a slimmed down package, is that for the future we are likely to see the focus of EU and G7 sanctions pivot from imposing additional costs on Russia to holding the line and enhancing implementation through targeting circumvention and evasion efforts. 

As EU, US and other officials have highlighted, in the last year exports to Russia from the EU, UK and US have dropped, however exports to Russia’s neighboring countries have increased. Exports to Russia more than halved between May and July last year, whereas exports to Armenia and Kyrgyzstan increased by more than 80% and in turn their exports to Russia doubled in the same period, raising calls to do more on sanctions evasion and workaround. 

As a result, we will see increased designations against individuals and companies engaging in circumvention and evasion, both in Russia’s neighbors and around the world, as well as increasing calls for applying punitive measures to countries that are permissive jurisdictions for such activity.  These broader targets of countries would likely include expanded export control prohibitions towards those countries, and in the future, potentially limiting trade access to the EU single market and other G7 markets. 

Increased focus on circumvention and evasion efforts likely also means increased scrutiny and, importantly, requests for information and explanation from local and international enforcement and regulatory bodies as well as the press over activities that are seemingly not in line with the letter, or the spirit, of the sanctions on Russia. 

Pushed by hawkish member states of Poland and the Baltic states, the EU has begun working on the 10th sanctions package with an expectation that it will be ready to enact in time for the one year anniversary of Russia’s invasion of Ukraine on 24 February. The discussions yet again mention banning the import of diamonds in to the EU, reducing nuclear cooperation with Russia including potentially designating the state nuclear agency and often arm of foreign policy ROSATOM, and banning more Russian propaganda outlets and banks from SWIFT. As this package is expected to come after EU alignment on extending the same restrictions on Russia sanctions to Belarus and agreeing on oil products price caps for next weeks EU-Ukraine summit, the real question is, will the anniversary of Putin’s invasion be enough of a catalyst for Europe to target thus far protected industries?

Reduce nuclear cooperation

Diplomatic sources have stated in press that reducing nuclear cooperation between the EU and Russia will be a focus of the next round of sanctions.  Earlier in January this year, Ukrainian Prime Minister Denys Shmyal said he expects Russian nuclear energy company Rosatom to be included in the next round of sanctions. The move comes after Ukrainian nuclear power station Zaporizhzia was occupied by the Russians and Putin transferred the plant’s ownership to a subsidiary of Rosatom. The nuclear plant is considered to be stolen from Ukraine and Rosatom is a leading actor in this by facilitating the seizure and stationing employees at the plant. Additionally, Rosatom develops nuclear weapons for Russia and has been found to aid the arms industry in Russia. 

The nuclear sector has not been targeted by sanctions until now, a reason being that 20% of the world’s nuclear power plants are Russian-designed and sanctions are feared to cause more energy price volatility in an already volatile time for energy prices. Additionally, Hungary’s foreign minister Peter Szijjarto has said that the country will not support any sanctions targeting or restricting nuclear cooperation between Hungary and Russia as the country is dependent on nuclear power, arguing it would be more damaging to the EU than Russia. For similar reasons the US has thus far not targeted the Russian nuclear industry either.

Ban on the import of diamonds 

A ban on the import of diamonds from Russia has been discussed as part of multiple sanctions packages the past year without becoming part of any of them. Trade restrictions on luxury goods were included in the fourth sanctions package in March 2022, but diamonds were excluded. A key reason for the lack of sanctions thus far is that Belgium has opposed a ban on diamond trade arguing it would be more damaging for Europe, particularly Antwerp, than for Russia and due to a fear of job losses. But for how long can Europe continue to justify the continued import of goods providing important profit for Putin, particularly when other G7 members have taken strides to target the same trade?Russia’s largest diamond miner, Alrosa, is sanctioned by the US, Canada and the UK.

Diplomats from EU member countries, particularly Poland and Lithuania, have endorsed a complete ban on diamond import- or at least, an Alrosa designation, though thus far they have been without success as they have not been able to secure the unanimity required for enacting EU sanctions. However this time may be different, as Belgium’s prime minister Alexander De Croo has repeatedly said he will not veto a ban if it is supported by a majority of members, but there are still a lot of negotiations before getting to that point.

Other proposals

Diplomats from the EU’s hawkish states propose banning more propaganda outlets and cutting off more banks from using SWIFT, and expanding the restrictions on imports of rubber products and compounds. In contrast to the highly debated and controversial proposals of reducing nuclear cooperation or banning the import of diamonds, achieving alignment on banning additional media outlets and non-strategic imports should be easier. On banks, Poland wants a strict new package with more banks including Gazprombank and Alfa Bank cut off from SWIFT. This seems like a strong negotiating position from Poland that once the dust settles will likely result in additional smaller banks cut off from SWIFT, but not major players like Gazprombank to preserve continuing business with Russia in energy and other industries important to world markets.

We will see how the negotiations play out and what proposals will come to fruition, but as always, preparation for what can come can save a lot of cost and heartache rather than getting caught by surprise.