The rising complexity of counterparty and banking risks, both direct and indirect, in global markets could catch shipping interests unawares, a specialist lawyer from global sector-focused legal firm HFW said recently.
Speaking at a joint Baltic Exchange and Institute of Chartered Shipbrokers’ webinar, Anthony Woolich, a partner at HFW, warned of the repercussions if stakeholders failed
to appreciate the full breadth and depth of recent sanctions and trading restrictions.
He noted that reputational damage, negative adverse effects on business, heavy costs, significant penalties and even being listed as an asset-freeze target could be the consequences of making a mistake.
Woolich said that, with counterparty risk the most common restriction imposed by sanctioned regimes was an asset freeze. If the assets of an individual or entity are frozen, then not only is it not possible to receive a payment from the frozen entity or individual (except in rare limited circumstances), but parties may not make a payment other than into a blocked account. This applies not just to direct counterparties, but also to indirect
(parents of counterparties and other entities higher up in the corporate chain) parties
The chain could also bring banks and insurers into the review mix. If banks and insurers were subject to restrictions, that could prevent them from performing the necessary tasks under a proposed transaction.
Woolich noted that EU and UK sanctions increasingly included the concept of brokering as a prohibited activity, while giving brokering a very wide definition –one which enables authorities to attack not only the parties to a particular transaction, but also those who facilitate it.
Woolich urged thorough screening of counterparties throughout the corporate chain. He said that it was vital to investigate the beneficiary ownership, particularly where there was a connection to a sanctions-relevant jurisdiction. Due diligence was key.
Woolich noted an important recent change in UK legislation which meant that there was now strict liability for civil penalties. This meant that a penalty could be imposed under the UK sanctions regime even if the infringer had no knowledge or reason to suspect that he/she was actually infringing sanctions.
“The knowledge requirement is still essential for criminal penalties, but for civil penalties for breach of financial sanctions, there is strict liability,” Woolich said.
He noted that UK authorities had made it very clear that parties had to ensure to the ‘fullest extent possible’ that there was no direct or indirect benefit to a sanctioned person in the chain, and parties had to do everything that they could to ensure that this was the case.
The EU does make it clear that assessing the beneficial ownership of a counterparty is a due diligence duty, emphasising the importance of EU sanctions compliance programmes.
A recent red alert from the UK authorities said that there were attempts to circumvent sanctions by individuals selling down their interests to family members or other people whom they could manipulate. This, said Woolich, , suggesting that, even if a Russian company announced for example that a particular sanctioned individual no longer held significant interest in the company, a counterparty in the UK could not take that at face
value. “It may well be that that person is still trying to be able to control the company or assets by virtue of who he has transferred those assets to,” Woolich said.
The US also has strict liabilities for civil penalties. “OFAC – the enforcement authority in the US – urges persons considering a potential transaction to conduct appropriate due diligence. So there’s no doubt that conducting appropriate due diligence is essential,” Woolich said.
On trade sanctions, Woolich said that HFW defined these as controls on exports or imports of goods and they can apply to transfer, which includes transport, and can include movements to third countries, not just sanctioned countries. There were also different restrictions in different regimes.
For charterers and brokers advising on how to avoid infringing restrictions, Woolich gave a list of pointers.
Attention must also be paid to measures targeting vessels, for example the restrictions on the supply of vessels to Russia – albeit under the EU and UK sanctions there are provisions which enable normal trade, which does not infringe other restrictions, to go ahead. Port bans must be reviewed as under the UK sanctions, vessels owned, controlled, chartered, operated, registered or flagged in Russia cannot access a UK port. These include fines,
personal liability to individuals involved including imprisonment, and civil monetary payments – sometimes on a no-fault basis.
Added to this, the UK Economic Crime Act enables publicity for infringes and if parties assist an asset-freeze target or infringe sanctions, they risk being listed as an asset-freeze target or as a US specially designated national.
“If that happens, then you will not be able to make or receive payments. It will have an impact on banking relationships and facility agreements,” Woolich said. “There will inevitably be reputational damage and negative adverse effects on the business. And then there are heavy costs of undergoing an investigation and dealing with regulators, including considering whether to self-report as well.”
