Russia Sanctions: Obligations for Reporting Entities

The Russia Sanctions regulatory system has now been in place for two years. As stewards of the system, the Sanctions Unit at the Ministry of Foreign Affairs and Trade (MFAT) continues to remind New Zealanders of the importance of complying with the sanctions. In line with the MFAT reminder, this post focuses on the Russia Sanctions.

Failure to comply with the Russia Sanctions regulatory system can have harsh consequences, with penalties for individuals of up to seven years imprisonment or a fine of up to $100,000; and for entities, a fine of up to $1 million. This post sheds light on your obligations as an AML/CFT reporting entity.  

Economic Sanctions

Economic sanctions are a way to influence the behaviour of states and non-state actors by financially isolating them as the ‘target’. In doing so, countries use economic pressure instead of military force as an instrument of foreign policy. Sanctions can be:

• Targeted sanctions, which are aimed at specific, named individuals, and they include the freezing of assets and travel bans.

• Sectoral sanctions, which are aimed at key sectors of an economy to prohibit a very specific subset of financial dealings within those sectors to impede future growth.

• Comprehensive sanctions, which prohibit all direct and indirect import/export and services with a country that is responsible for serious international law breaches.  

Most often, countries impose sanctions regimes to comply with United Nations (UN) sanctions, or with other international organisation sanction regimes, e.g., with the European Union. The UN Security Council committees manage UN sanctions, under Article 41 of the UN Charter. But because Russia is a permanent member of the UN Security Council, with veto power, after the Russian invasion of Ukraine on 24 February 2022, no economic sanctions were issued by the UN. However, many states - cumulatively involving countries with economies accounting for more than half of the world’s economic activity - have issued economic sanctions in an internationally coordinated effort to influence the conflict. Among these countries, there is also New Zealand.

Russian Sanctions Act

In March 2022, the New Zealand Parliament passed unanimously the Russian Sanctions Act, which gives the MFAT the ability to impose target economic sanctions in response to threats to the sovereignty or territorial integrity of Ukraine. Sanctions:

• ensure that New Zealanders do not support, inadvertently or not, Russia’s illegal invasion of Ukraine; and

• prohibit New Zealand individuals and entities from having dealings with sanctioned persons, assets, services and/or securities.

Since March 2022, sanctions have been placed on over 1,600 individuals and entities of strategic or economic importance to the Kremlin (e.g., political or military people/companies, oligarchs, major Russian-owned banks, Russian armed forces, and a variety of state-owned enterprises). You can consult the full list here.

Reporting entities under the AML/CFT Act are also duty holders under the Russia Sanctions Act 2022. As a duty holder, you have freezing, reporting and due diligence obligations. These are discussed in turn below.

Freezing Obligations

If you have a sanctioned asset under your control, you must cease all activity by freezing the assets. Frozen assets can be cash, shares, bank accounts, bullion, art collections, real estate and so on. It is important to note that asset freezes are not the same as asset seizures. There is no ability to seize assets in the Russia Sanctions Act. Similarly, if you are currently providing services to a sanctioned individual or entity, you must stop any transactions or services involving them.

If you are freezing someone’s asset or you are stopping to provide them with a service, you may wish to provide a justification to the customer of your actions. Informing a customer that the actions are taken due to sanctions concerns arising under the Russia Sanctions Act 2022 is not considered a prohibited disclosure under section 46 of the AML/CFT Act (so-called ‘tipping-off’). However, you still cannot inform the person about any suspicious activity reports (see here).

Reporting Obligations

If you have reasonable grounds to suspect that you are in control of a sanctioned asset, or are providing services to a designated person, you must report this to the Financial Intelligence Unit (FIU) of the Police as soon as practicable, but no later than three working days. You can do so via the goAML portal. 

When sending a report to the FIU you should include the following information, when possible and applicable:

• Your name and your organisation’s name;

• Names and contact information of your customer (or prospective customer);

• What assets or services subject to sanctions are involved; and

• Information on the nature and purpose of the business relationship (or proposed business relationship) with the customer.

Due Diligence Obligations 

You are responsible for undertaking the customer due diligence (CDD) checks necessary to ensure that your customers (persons or entities) are not subject to targeted financial sanctions. You are also responsible for undertaking CDD to ensure no assets or services are indirectly provided to any sanctioned individual or entity through opaque beneficial ownership, for example, through complex trust and company structures. Understanding who has effective control of a legal structure is a key part of your CDD obligations and you should make every effort to determine who the beneficial owners of your customers are (refer to here for further reading).

Exceptions

There are some exceptions to the sanctions that allow you to do some activities with sanctioned persons. The exceptions apply for example, for humanitarian purposes, personal or household needs, legal services in connection with the sanction regime, and facilitating diplomatic functions. If you are unsure whether an exception applies, you are encouraged to seek independent legal advice.

Practical Applications and Examples

In practice, you will need to consider the Russia Sanctions when:

• You on-board new customers and conduct CDD.

• A material change in the business relationship with your customer has occurred and you conduct ongoing CDD.

• You conduct account and transaction monitoring.

Examples of prohibitions include:

• Dealing with assets that are owned or controlled by a sanctioned person.

• Dealing with assets that would result in a benefit to a sanctioned person.

• Providing any financial, legal or accounting services in respect of the above mentioned dealings.

• Providing any service to, or for the benefit of, a sanctioned person (e.g., company or trust creation, and acting as a director or trustee).

• Dealing with a service provided by, to, or for the benefit of, a sanctioned person.

 The FIU has published a full list of red flags relating to Russia Sanctions, which is available here.

Conclusion

The Russia Sanctions regulation regime expires at the close of 17 March 2025, and with no resolution of the Russian-Ukrainian conflict in sight, the practical application of the sanctions to the ordinary course of business of New Zealand duty holders remains a crucial topic. New Zealand, as a country, had played its part in the international concerted effort to influence the Kremlin. Compared to other countries, New Zealand had a small commercial dealing with Russia pre-sanctions. However, the New Zealand sanctions on Russia ensure that targeted individuals and entities do not exploit the New Zealand economy to circumvent the sanctions imposed by bigger international players.

As New Zealand has played its part, New Zealand duty holders need to comply with the Russia Sanctions regulatory regime to ensure its success.

If you have any questions on the Russia Sanctions and how they may apply to you, get in touch.