UK financial institutions undertaking due diligence to comply with sanctions against Russian companies and oligarchs have discovered counterparties have become “more opaque” as a result of new layers added to their corporate structures.
The news comes from lawyers fielding enquiries from clients keen to ensure they abide by sanctions imposed this week on Russia following its invasion of Ukraine.
The news suggests Russian entities could have been adding extra layers of complexity to corporate structures in anticipation of sanctions aimed at both banks and wealthy individuals. New layers could potentially obscure the identity of beneficial owners.
According to Sona Ganatra, a financial services expert at law firm Fox Williams, clients have been unearthing added complexity in recent weeks.
“Suddenly they [UK institutions] are finding there are more entities entering into the corporate structures. They’re finding special purpose vehicles being set up, and things like that, when they weren’t necessarily there before,” she said.
The news means it may take UK companies and institutions much longer to undertake the due diligence needed to ensure compliance with newly bolstered UK sanctions.
Due diligence on sanctions
Along with the US and European Union, the UK imposed tough sanctions on Russian interests on Thursday following the launch of widespread hostilities against Ukraine.
As bombs dropped on cities across the country, including the capital Kyiv, UK foreign secretary Liz Truss announced sanctions against 120 institutions and oligarchs. The measures freeze the assets of all Russian banks, including the country’s second largest bank VTB; prevent Russian companies from raising capital on UK markets; and introduce a power to block designated institutions from “accessing Sterling and clearing payments”.
The UK also banned a range of electronic, telecommunications and aerospace equipment and components from being exported to Russia.
A fresh list of billionaires were also named as subject to UK sanctions. These include Kirill Shamalov, said to be Russia’s youngest billionaire and a former husband to Vladimir Putin’s daughter Katerina Tikhonova. Shamalov is also a former economic adviser to the Russian government.
The European Union also announced sanction as did the US. Brussels revealed measures targeting Russian banks and blocking oligarchs from depositing money in the EU. There is also an export ban targeting energy companies and a ban on the sale of aircraft and spare parts. Brussels also blocked Russia from buying semiconductors and other leading technology.
The US has sanctioned Russia’s two largest banks and the country’s wealthiest oligarchs. There are also policies blocking Russian institutions from raising new debt or equity on US markets.
Experts anticipate Russia will react with its own measures. In a blog post yesterday, Jonathan Wood, deputy global research director at Control Risks, writes: “Russia is likely to retaliate for Western sanctions with countervailing measures, potentially including limiting energy and minerals exports, targeting Western companies and assets in Russia, imposing restrictions on moving money out of Russia by Western companies or using asymmetric means (like cyber attacks and visa bans for expatriates).”
‘Complex’ corporate structures
However, news that Russian corporate structures may have recently become more complex will make it harder for UK companies to comply with sanctions. Ganatra advises firms to maintain their efforts to establish beneficial ownership. Though the onset of war, she adds, may deepen the difficulties of accessing the right documentation.
“You’ve got to keep trying,” says Ganatra, “so that you can at least show that you have sought to get the information.” She these efforts, successful or not, would then give institutions a basis on which to gauge the risk of doing business with their Russian counterparts.
Elsewhere there are warnings that some detail in the sanctions have yet to be revealed. In his own comments the prime minister Boris Johnson indicated there was more to come next week, putting some businesses in a holding pattern.
“Unfortunately for business,” says Stacy Keen, a sanctions expert with law firm Pinsent Masons, “we are still waiting until next week to see if they [sanctions] are as impactful as they seem to be.”
Last week Keen warned that UK companies and institutions should be undertaking due diligence on Russian partners to clarify whether they will be caught by sanctions. She said that companies “really need to be getting their ducks in a row so that they’re in a good position to be making strategic decisions on an informed basis, and actually being able to make decisions quickly.”