Covid-19: Why sanctions screening matters - Aperio Intelligence

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Author: Dmitri Gorelov, Aperio Intelligence

Covid-19: Why sanctions screening matters

Sanctions screening is an increasingly important aspect of due diligence when doing business in Russia or with Russian counterparts. During the global supply chain disruption caused by the Covid-19 pandemic, international sanctions represent a significant compliance challenge. Thus, companies need to ensure they fully understand and mitigate sanctions-related risks.

Russia is currently subject to a number of international sanctions regimes, most notably imposed by the US and EU. These sanctions are related to Russia’s physical or virtual interference in the internal affairs of other states, such as the annexation of Crimea in 2014 and alleged meddling in the US elections in 2016. Some Russian legal and natural persons are also sanctioned in relation to their activities in other countries that are subject to separate sanctions regimes, including North Korea, Syria and Venezuela.


Amid the pandemic, these restrictions have already raised concerns about humanitarian-based exemptions, especially concerning vital equipment for medical treatment of Covid-19 patients. Most notably, in early April, the US government purchased ventilators manufactured by a sanctioned Russian company named the Concern Radio-Electric Technologies (also known as KRET). In its commentary on this deal to the Financial Times, the US Treasury’s Office of Foreign Assets Control (OFAC) said “Treasury has authority to license US persons to engage in transactions that are consistent with US foreign policy and national security interests”.

KRET is listed as a Specially Designated National (“SDN”), the OFAC’s harshest measure against a foreign legal or natural person that virtually bans any interaction with such person by a US national or institution. KRET’s parent organisation, the Russian state defence and technology conglomerate Rostec, is subject to US sectoral sanctions. Whereas sectoral sanctions impose restrictions on access to foreign financing and technologies for certain sectors of Russia’s economy, they do not fully ban doing business with sanctioned entities.


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Not only do sanctions measures vary but they are also becoming an increasingly dynamic and ever-changing foreign policy instrument. Since the Ukraine-related sanctions of 2014, the US has introduced several “packages” of sanctions against Russia, including the Countering America's Adversaries Through Sanctions Act (CAATSA) and the Defending American Security from Kremlin Aggression Act (DASKA), both related to Russia’s alleged interference in the 2016 presidential elections in the US. CAATSA was imposed in 2017, while DASKA is still a draft bill in the US Senate Foreign Relations Committee. The EU has imposed its own sanctions regime against Russia through the adoption of four council decisions and regulations, all dated as of 2014. The UK has already announced the impending introduction of its own separate sanctions regime when it departs the EU at the end of 2020.

Following the outbreak of the Covid-19 pandemic, Russia seemingly launched a foreign policy campaign aimed at promoting the easing of the existing international sanctions as well as a moratorium on introducing new sanctions. Russian President Vladimir Putin first proposed this during the virtual G20 summit in March 2020 and later, in April, this idea was reiterated by Russia's Permanent Representative to the UN Vasily Nebenzya. Russia initiated a proposal in the UN General Assembly, which was nonetheless blocked by the US, the EU, the UK, Ukraine and Georgia. In an attempt to position itself in the post-pandemic world, Russia has also begun sending humanitarian aid to countries severely hit by Covid-19, including Italy and Serbia.

Nevertheless, US and EU officials have insisted on their commitment to sanctions against Russia and do not appear to be considering the lifting of sanctions amid the coronavirus pandemic. On 3 April, 19 members of the European Parliament sent a letter to the EU Commission warning against the easing of any sanctions against Russia unless the country makes progress in resolving its conflict with Ukraine. Moreover, Lithuanian MEP Rasa Juknevičienė threatened further sanctions if Russia does not undertake measures to combat the spread of Covid-19 in the de-facto occupied eastern territories of Ukraine.


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It is also worth noting that, despite the lack of will in the US and EU to lift sanctions regimes, measures against single entities could be reviewed on an individual basis. For example, in June 2017, OFAC added two Russian oil companies to the SDN list in relation to their operations in North Korea. These companies, namely AO Independent Petroleum Company and its subsidiary AO NNK-Primornefteproduct, are owned by Eduard Khudainatov, the former CEO of Russian state-owned oil giant PAO NK Rosneft. Subsequently, both companies ceased their export activities in North Korea and applied for sanctions to be lifted. In March 2020, OFAC acknowledged measures taken by the companies and delisted them.

Another element to add to the complexity is that on at least one occasion, sanctions have been imposed by mistake. In December 2019, OFAC lifted sanctions on three Russian companies that had been previously added to the SDN list in December 2018 for their alleged affiliation with Russian hacker Denis Gusev. The sanctions were reviewed as the three companies turned out to be owned by unrelated individuals also named Denis Gusev.

The above-mentioned examples demonstrate the extent to which sanctions are a dynamic and increasingly complex factor, which requires constant monitoring in order to adequately assess and mitigate risks. At the same time, there is no indication that international sanctions regimes will be lifted or substantially eased any time soon, even during the Covid-19 pandemic.


Bulletin Online

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Bulletin Online

Date Published:

04 May 2020

Author:

DG_Aperio

Dmitri Gorelov, Aperio Intelligence