There has been much activity in relation to economic sanctions in the last few months. Amongst those more substantive changes, new sanctions were issued in relation to Yemen, and existing sanctions were amended and extended in relation to Russia, Crimea and Sevastopol in March 2015, existing sanctions in relation to Iran, Syria, Zimbabwe and South Sudan were amended in April and May 2015 and further amendments were made to existing sanctions in relation to Libya and, again, Syria, in June 2015.
This environment provides an opportunity to examine some of the more significant sanctions currently in effect, and remind ourselves of the obligations under Cayman Islands and British Virgin Islands ("BVI") law restricting dealings with, or making funds or economic resources available to, sanctioned persons or regimes.
The Russia, Crimea and Sevastopol (Sanctions) (Overseas Territories) (Amendment) Order 2015 (the "2015 Order") came into force in the Cayman Islands and BVI in March 2015, and considerably extends the existing economic sanctions in relation to Crimea and Sevastopol, arising from the civil unrest in Ukraine.
Such Cayman Islands and BVI economic sanctions apply to anyone in those jurisdictions, British subjects ordinarily resident there, as well as to companies and partnerships established within them. Liability for non-compliance can result, on conviction, in fines and/or imprisonment.
In October 2014, the UK extended to the British Overseas Territories the restrictive measures adopted by the EU targeting sectorial cooperation and exchanges with Russia. Those measures were aimed at limiting access to EU capital markets for Russian state-owned financial institutions, an embargo on arms trading, an export ban for dual use goods, and restrictions on access to certain sensitive technologies (particularly those in the oil sector).
From 11 March 2015, these restrictive measures, as originally set out in The Russia, Crimea and Sevastopol (Sanctions) (Overseas Territories) Order 2014 (the "2014 Order"), were significantly extended.
The main amendments made by the 2015 Order are as follows:
(a) A significant extension of restrictions on the sectors already covered by the 2014 Order (such as infrastructure development and oil, gas and mineral exploration), and an extension to new areas (e.g. to real estate and tourism services);
(b) New restrictions on certain dealings with "entities in Crimea or Sevastopol", widely defined as "any entity having its registered office, central administration or principal place of business in Crimea or Sevastopol, its subsidiaries or affiliates under its control in Crimea or Sevastopol, or branches and other entities operating in Crimea or Sevastopol"; and
(c) An extension of the prohibited goods and technologies, made by reference to an amended (and amalgamated) Annex II to the underlying EU Regulation.
The 2014 Order imposed investment restrictions on infrastructure in the transport, telecommunications and energy sectors in Crimea and Sevastopol. The 2015 Order extends these and it is now an offence for a person to:
(a) acquire or extend any participation in real estate located in Crimea or Sevastopol;
(b) acquire or extend any participation in ownership or control of an entity in Crimea or Sevastopol;
(c) grant or be part of any arrangement to grant any loan or credit (or otherwise provide financing) to an entity in Crimea or Sevastopol;
(d) create any joint venture in Crimea or Sevastopol, or with an entity in Crimea or Sevastopol; and/or
(e) provide "investment services" (widely defined) directly related to any of the above.
These new restrictions do not apply to (i) legitimate business with entities outside Crimea or Sevastopol, where the related investments are not destined for entities in Crimea or Sevastopol (i.e. where entities in Crimea or Sevastopol do not receive the investment funds or benefit), or (ii) the execution of an obligation arising from a contract concluded before 11 March 2015, provided that the Governor (of either the Cayman Islands or BVI, as applicable) has been informed of the obligation five working days in advance of its execution.
The 2014 Order prohibits the knowing sale, supply, transfer or export of goods and technologies to (i) any entity in Crimea or Sevastopol, or (ii) "for use in Crimea or Sevastopol". The 2015 Order now refers to the same prohibitions on an extended list of equipment and technology contained in a new Annex II to the underlying EU Regulation.
The 2015 Order adds an offence to knowingly provide (directly or indirectly) technical assistance, brokering, construction or engineering services directly relating to infrastructure in Crimea and Sevastopol in the transport, telecommunications, energy or oil, gas and mineral sectors. This prohibition is subject to the same limited grandfathering provisions as the amended Article 6 (described in the paragraph above).
There is also a new restriction on providing services in relation to "tourism activities in Crimea or Sevastopol". Despite "tourism activities" not being defined, the prohibitions specifically apply to the activities of cruise ships.
The prohibitions under the 2014 Order against providing direct or indirect assistance to the sale, supply, transfer, export, maintenance, use or manufacture of restricted and/or dual-use goods and technologies to any person in Russia are now extended to include such assistance to any person elsewhere (i.e. outside of Russia) if such assistance concerns items for use in Russia.
Perhaps the most important amendment under the 2015 Order relates to the key prohibitions under the 2014 Order which precluded investment services for, or dealing with, certain transferable securities and money-market instruments issued by a selection of well-known Russian state-owned banks (including Sberbank, VTB Bank, Gazprombank, VEB and Rosselkhozbank), or their subsidiaries, or persons acting on their behalf.
The 2015 Order varies the 2014 Order and the prohibitions will now no longer apply to:
(a) loans or credit that have a specific and documented objective to provide financing for non-prohibited imports or exports of goods and non-financial services between the Cayman Islands or BVI and a third state, including expenditure on goods and services from another third state necessary for executing the export or import contracts;
(b) loans that have a specific documented objective to provide emergency funding to meet solvency and liquidity criteria for legal persons established in the Cayman Islands or BVI, which are owned by more than 50% by any of the targeted Russian state-owned banks; or
(c) drawdowns or disbursements made under a contract concluded before 11 March 2015, provided that they meet the following terms and conditions:
(i) they were agreed before 11 March 2015;
(ii) they have not been modified on or after that date; and
(iii) before 11 March 2015 a contractual maturity date has been fixed for the repayment in full of all funds made available and for the cancellation of all the commitments, rights and obligations under the contract.
Helpfully, the European Commission has published guidelines on the principal EU Regulation underlying the 2014 and 2015 Orders, namely EU Regulation No. 833/2014. Whilst these guidelines would not technically be binding on any determination by the Governors of either the Cayman Islands or BVI, they would likely be seen as persuasive and helpful in setting out the Commission's views on some of the more frequently asked questions received following the imposition of economic sanctions relating to Russia, Crimea and Sevastopol.
There are now 24 jurisdictions in relation to which financial sanctions are in effect in the Cayman Islands and BVI. Clients with business interests, investments, counterparties or interest holders in any of these jurisdictions should be aware of their obligations under the Cayman and BVI sanctions regimes and the criminal penalties that attach to non-compliance.
Given the broad scope of sanctions applicable under the 2014 and 2015 Orders, as well as similar expansive sanctions imposed in other jurisdictions such as Iran, Egypt and Libya, it is extremely important for those responsible for controlling fund or finance vehicles with investment interests in those jurisdictions (or equally with investors from those jurisdictions) to review the sanctions lists regularly.
Not only are the definitions of "dealing with", "making available to", "funds" and "economic resources" very extensive under sanctions legislation, but many of the offence provisions include both direct and indirect dealings, or making funds or economic resources available "for the benefit of" a sanctioned person. As such, transactions with intermediate parties, where it is known or suspected that a sanctioned person may be the ultimate counterparty, could be an offence.
Sanctions legislation includes the ability to seek either a specific or general licence in certain circumstances from the Governor of the Cayman Islands or BVI, in order to be authorised to continue with legitimate business dealings. We have assisted a number of clients with licence applications under different sanctions regimes and would be pleased to advise further on the process if required.