In an era of escalating geopolitical tensions, Asian companies find themselves navigating an increasingly complex sanctions landscape and experiencing an urgent need for robust compliance programmes.
- Extraterritorial sanctions impact Asian businesses globally
- Tech and finance sectors require advanced compliance tools
- Asian firms face complex global sanctions landscape
Global economic relationships have grown increasingly complex, with companies across the Asia Pacific often finding themselves in the middle of an ever-changing sanctions landscape driven by simmering geopolitical tensions.
Asian financial institutions, in particular, have had to dramatically ramp up their sanctions’ compliance programs, according to Leigh Hansson, a partner in the Global Regulatory Enforcement group at Reed Smith.
“A few years ago, we rarely received inquiries from Asian financial institutions about sanctions compliance, but in the past couple of years those inquiries have significantly increased,” Hansson says.
The impact has been particularly dramatic for businesses with a global footprint or operations across borders.
The war in Ukraine has led to a spiderweb of sanctions that impact a broad swath of operations. In a June 2024 briefing, international law firm Clifford Chance noted: “These sanctions are complex, multilateral and continue to change incrementally in real-time in response to the situation on the ground in Ukraine.”
The U.S. has imposed both sanctions and export controls, and the UK and European Union (EU) have imposed sanctions as have Poland, Japan, Singapore and Australia. In turn, Russia has imposed countermeasures.
Japan, for instance, has imposed asset freezes that prohibit payments and capital transactions by Japanese residents or entities to cover individuals and entities from Russia and Belarus along with a range of sanctions and export controls. Singapore imposed export controls in March 2022 along with a range of financial measures that prohibit Singapore financial institutions from dealing with designated banks or other entities. Australia has put in place a broad sanctions regime that puts restrictions on assets dealing with designated persons or entities, exports of certain goods, imports or purchases and a series of services. As of December 2023, Australia’s sanctions list includes more than 1,000 persons and over 100 entities from Russia, Belarus and Iran, noted Clifford Chance.
New Russian sanctions have been largely driven by the EU and the UK. As a result, companies from across Asia that previously relied on European products or tech to sell to Russia have had to address significant business challenges and overcome considerable hurdles in obtaining goods.
What’s worse, “blocking statutes” that states have passed in order to nullify the extraterritorial effect of foreign laws and U.S.-imposed sanctions have also put companies at risk of being caught between conflicting legal requirements.
China’s Ministry of Commerce, for instance, instituted Blocking Rules that could allow Chinese nationals to bring lawsuits in China to claim damages against persons who comply with banned foreign sanctions laws.
“No foreign law has officially been targeted yet, but there is always a concern that they are stuck between a rock and a hard place,” Hansson added.
Sanctions have also impacted areas related to financial crime and have made anti-money laundering (AML) and know-your-customer (KYC) requirements that much more stringent and expensive to meet.
The financial crime space has seen massive new changes that would require covered investment advisers to implement risk-based AML programmes as well as programmes to counter any potential financing of terrorism.
NEW ENVIRONMENT
Financial institutions in Asia are quickly adapting to this new environment, with compliance frameworks aimed at addressing the increased focus on sanctions evasion and circumvention.
“As part of increasing their sanctions compliance, we are seeing more Asian companies embrace screening and due diligence tools,” Hansson said.
One potential silver lining may be that the sanction-related risks Asian companies now face are largely the same as the ones faced by companies in other regions.
However, the extraterritorial reach of U.S. sanctions has meant that even businesses with limited direct exposure to the U.S. market may find themselves subject to secondary sanctions if they engage in certain transactions with sanctioned entities.
U.S. President Joe Biden’s Executive Order 141141 expanded the authority of the Office of Foreign Assets Control to allow it to impose sanctions on foreign financial institutions that engage in transactions involving Russia’s military-industrial base. The executive order has exposed these institutions to secondary sanctions risk, Hansson said, including placement on the Specially Designated Nationals list and total exclusion from the U.S. dollar-based global financial system, a major risk.
The extraterritorial reach of EO 141141 and other rules like it means that companies must now carefully consider the potential implications of their business activities, even when those activities occur entirely outside U.S. jurisdiction, as the U.S. government becomes increasingly willing to use its economic leverage to pursue foreign policy objectives.
The UK and EU have also imposed extensive sanctions on Russia, including asset freezes on numerous Russian individuals and entities, financial restrictions on major Russian banks, and prohibitions on dealing with certain Russian securities and money-market instruments. While many of these sanctions were imposed when Russia first invaded Ukraine — such as a ban from the global SWIFT inter-bank messaging system and measures targeting Russian oil exports — they remain complex, constantly evolving and require careful navigation.
“It is critical for Asian companies to stay up to date on the rapidly evolving sanctions and export controls that could impact their business. They should also develop and implement robust compliance programs that include screening and counterparty due diligence to ensure that they are not inadvertently doing business with sanctions entities.”
- Leigh Hansson, Reed Smith
FLEXIBLE PROVISIONS
Hansson suggested firms have put in place flexible provisions with counterparts so that if rules change, they would be able to modify or exit existing agreements with minimal impact.
“It is critical for Asian companies to stay up to date on the rapidly evolving sanctions and export controls that could impact their business,” Hansson added. “They should also develop and implement robust compliance programs that include screening and counterparty due diligence to ensure that they are not inadvertently doing business with sanctions entities.”
Adding to the layers of complication, Russia has imposed a series of countermeasures, including foreign direct investment (FDI) reviews of transactions involving “unfriendly” countries. This regime was originally put in place in March 2022 and was expanded through the rest of that year and in 2023. A concern related to this regime is that any transactions that are not cleared may be at risk. As Clifford Chance noted: “In October 2022, Russian procedural legislation was amended to authorise prosecutors to bring legal action in order to invalidate transactions made in violation of the countermeasures introduced in response to Western sanctions or to protect the Russian economy.”
The technology sector has emerged as a particular area of concern, with export controls on advanced technologies becoming an increasingly important tool in the sanctions arsenal.
“Many of these sanctions and export controls restrict access to some types of technology by many Asian entities,” Hansson said. This has had a chilling impact on access to certain products or technology, she said, which has hindered development.
As part of increasing their sanctions compliance, more Asian companies are embracing screening and due diligence tools. Companies are also increasingly turning to advanced technology to enhance sanctions compliance efforts and hiring experts in the region to address all risks.
However, the implementation of these technologies is not without its challenges. Companies must ensure that their compliance systems are accurate, explainable, and aligned with regulatory expectations, and address all applicable risks with an up-to-date compliance program.
Said Hansson: “It is vitally important to stay on top of the constantly changing sanctions so that you are not caught out.”
