Even if a wealthy Russian investor is not sanctioned, companies should look closely at compliance issues.
Companies that may have accepted investments from wealthy Russians, whether they are sanctioned or not, need to take a close look at where that money came from and be prepared to divest of it if they think the authorities might be eyeing their investors after Russia’s unprovoked invasion of Ukraine.
Luciano Racco, counsel and co-chair of the trade sanctions and export controls practice at law firm Foley Hoag, told TheStreet in an interview that even companies with unsanctioned Russian investors need to take a closer look at all their investors.
He said that the first step is to assess the risk that your investors will be sanctioned.
That includes doing due diligence that includes understanding where an investor is from, how they made the money they have invested, who the “ultimate beneficial owners” of the investment are, and how politically connected that investor might be.
If any of them are considered national security threats by the United States and its allies, including the European Union and the United Kingdom, which have their own sets of sanctions, then now is the time to take action.
“The next step is to look for ways to remove those investors from your cap table,” Racco said.
That means that a company needs to very carefully review their investment agreements with the potentially problematic oligarch, and look at several ways to exit equity held by investors who pose a sanctions risk.
“Of course, there could be tax or other consequences that would have to be carefully evaluated as well,” Racco said.
“The good news, from a company perspective, is that the level of anxiety among investors who are potential sanctions targets is rising meaning such investors might be more willing to entertain a deal to reduce or eliminate their holdings than they might have been in the past.”
Risks And Compliance Issues May Vary
Racco said that while it may seem like an oligarch investor who is not yet sanctioned by the United States still remains a safe stakeholder, it is important to remember that the way sanctions are being rolled out in the Russian/Ukrainian conflict is happening very quickly and leaves little room for error.
“The list of oligarchs targeted by the U.S., EU, UK, and other countries is growing by the day so, in general, the risks are quite high in all of these jurisdictions,” Racco said.
“The level of coordination between the U.S., EU, and UK on sanctions against Russia is unprecedented as is the scope of the sanctions.”
Thus far, the UK, EU and the U.S. have already sanctioned more than 400 people, including most of the Russian parliament, the Duma, but that is estimated to be only half of Russia’s billionaires.
For now, complying with American sanctions, and keeping an eye on how rapidly the situation can change, should inform how a company deals with complying.
“U.S. sanctions typically have a much broader impact, and thus cause more compliance issues for companies in the U.S. and around the world,” Racco said. “As a result, companies will often choose to align their compliance programs with the most stringent sanctions, which are usually those imposed by the U.S.”
Does it Matter Where You Are Incorporated?
Where a company has been incorporated also matters, though not as much as it once did.
But Racco said it is best not to take any risks in trying to dodge potential scrutiny or have a false sense of security because your company is domiciled in a more lax locality.
“The U.S. often does seek to impose its sanctions on companies located outside the U.S. by threatening them with so-called ‘secondary sanctions,’ meaning if you don’t comply with U.S. sanctions your company itself could be sanctioned,” Racco said.
“Secondary sanctions are a major cause for concern for Chinese banks, for example, and one of the reasons many of them, and other companies in China and elsewhere, choose to comply with U.S. sanctions. They don’t want to end up in the crosshairs themselves.”
Racco said that while EU and UK sanctions do not have extraterritorial application to entities incorporated outside of the EU or UK, they still apply to EU or UK citizens “wherever they are located.”
American sanctions are similar, in that they apply to anyone citizen or lawful permanent resident wherever in the world they are located.
“[They also apply to] entities organized under the laws of the United States or any jurisdiction within the United States, including foreign branches), or any person (regardless of citizenship, physically located in the United States,” Racco said
“It is not so easy, though, to say that companies can avoid U.S. sanctions by incorporating outside of the U.S.,” Racco said.
