Over the past two months, there has been an unprecedented rise in the scope and scale of UK, EU and US restrictive measures targeting Russia in response to the war in Ukraine.
By some measures, Russia has now overtaken North Korea as the most heavily sanctioned country. For example, prior to 22 February 2022 the UK had frozen the assets of approximately 230 persons under the Russian sanctions regime; that number has now increased to almost 1,400 persons, with a similar scale of increases in the EU and US.
Trade restrictions illustrate a similar escalation, going from affecting a limited range of military, dual-use and oil and gas product exports, to covering hundreds of categories of critical industry goods, luxury goods and (at least in the case of the EU) a wide range of Russian-origin imports.
Given the nature of its work, the insurance industry generally has a sophisticated approach to mitigating the sanctions risks involved in its business. Further, sanctions against Russia are by no means new, with at least some restrictions, such as limited asset freezes, trade restrictions and sectoral sanctions, having been in place since the 2014 annexation of Crimea.
However, these new Russian sanctions create novel risks that will test insurers’ policies and procedures in an unprecedented manner.
The impact of these Russian sanctions is compounded by: (1) the historic reliance of Russian business on the UK (re)insurance market in certain sectors, and (2) the fact that, prior to these events, Russia had significant interaction with the Western world through its exports and imports.
The compliance challenges now faced by insurers are further affected by four factors:
Increased divergence between UK, EU and US sanctions regimes
While previously relatively closely aligned, over the past few months there have been increasing divergences between the lists of asset-frozen individuals – known as ‘Specially Designated Nationals’ in the US – under the UK, EU and US sanctions regimes.
Again, this is not new, except in the case of Russia some of these divergences can have outsized impact on what can and can’t be done in the Russian market. For example, Sberbank, Russia’s largest bank, is asset-frozen in the UK and US but not the EU.
The differences in which Russian businessmen have been targeted can also mean that major industrial entities (which often have multiple touchpoints with UK insurers) may be sanctioned in one jurisdiction but not the others. These jurisdictions have also taken very different approaches to the concept of licensing and exemptions to these restrictions.
Insurers must develop increasingly tailored approaches to their sanctions screening processes to account for these divergences and reconsider whether it remains practical to maintain a “one-size-fits-all” approach to sanctions compliance. Further complications arise due to UK, EU and US sanctions compliance obligations arising on the basis of citizenship, which means that insurers may need to not only consider its own obligations, but also those of its employees.
Asset freezes affecting Sogaz
The EU and UK applied asset freezes to Sogaz, the largest insurer in the Russian corporate sector, on 28 February 2022 and 15 March 2022 respectively. This move had significant repercussions across the global insurance market as insurers moved to test the scope of any existing (re)insurance coverage with Sogaz and understand the impact of the asset freeze on those obligations. Notably, Sogaz is not asset-frozen under US’s sanctions regime.
Impact of new Russian trade restrictions on (re)insurance coverage
The UK, EU and US have introduced a broad range of trade restrictions on Russia and the breakaway regions. These do not just impact the Russian shipping and aviation industries (the previous focus of the trade sanctions) but also apply to a wide range of individual goods, from advanced technologies to luxury goods and alcoholic beverages.
The trade restrictions extend to a range of activities involved in the sale and transportation of these items, including providing insurance coverage.
Insurers will, therefore, likely need to undertake additional diligence before providing cargo insurance for Russian-destined freight, or freight coming from Russia (or carrying goods of Russian origin).
Incoming strict liability for civil breaches of UK sanctions
In March 2022, the UK introduced legislation which will enable the Office of Financial Sanctions Implementation (OFSI) to impose civil fines for breaches of UK financial sanctions on a strict liability basis – i.e. without having to show that the person “knew, suspected or believed” that they were breaching financial sanctions. This will make it easier for OFSI to prosecute financial sanctions breaches, especially as businesses look to navigate the current complex Russian sanctions landscape.
The power will come into force once HM Treasury passes certain implementing regulations; it is currently unclear when this will happen. Uncertainty also remains over when and how OFSI will use these strict liability civil fines instead of the pre-existing criminal law penalties that exist for financial sanctions breaches.
Konstantin Bureiko is an international counsel based in Debevoise & Plimpton’s London office. He is a member of the firm’s white collar and regulatory defence group.
His practice focuses on white collar defence and investigations, with deep experience of conducting international anti-corruption investigations and advising on compliance matters for large multinational companies.
Martha Hirst is an associate in the litigation department based in Debevoise & Plimpton’s London office. She is a member of the firm’s white collar and regulatory defence group and the data strategy and security practice.
She has experience conducting international anti-corruption investigations for large multinational companies. Her practice has a particular focus on multijurisdictional matters covering, amongst other things, anti-corruption legislation, cybersecurity and data protection matters and economic sanctions.