Tightening the noose on Russia – Australian sanctions regime update

On 11 February, the Senate Foreign Affairs, Defence and Trade Reference Committee (Committee) presented its Senate Inquiry Report on the Australian Sanctions Regime. The inquiry into the effectiveness of Australia’s sanctions regime was referred to the Committee on 3 July 2024, following which there was a period of consultation between the Committee and relevant stakeholders. 

The Committee’s recommendations are focused on Australia ‘tightening up’ it’s sanctions regime. A key take-away from this Senate Inquiry is that Australian businesses should expect Australia’s implementation of sanctions in response to issues of global security to increase. The Report criticises Australia’s inconsistent use of its sanctions regime and highlights that it could be doing more, particularly with regard to: 

Aligning Australia’s sanctions position with its allies quickly and effectively

It is broadly known that Australia aligns its sanctions regime with that of its allies, particularly the United States, the United Kingdom and the European Union. 

The Committee recommends that Australia do so more quickly and effectively, ensure that gaps are closed, and that there is no delay in Australia’s sanctions regime supporting the effectiveness of its allies.

Hall & Wilcox recommendation: In circumstances where sanctions changes may be rapidly enacted (should the Australian Government heed the Committee’s recommendation), we recommend that businesses ensure all contracts have effective sanctions clauses that will protect the business in case of a risk of breach. 

Closing loopholes that currently allow entities to continue conducting business that should be caught by Australian sanctions

One of the key discussions in the report is that Australia should do more to prevent Australian businesses trading sanctioned goods between third party countries.

The Committee recommends that such potential for sanction evasion is addressed by legislative amendment. The Committee notes that this recommendation has been made twice in two sanction related inquiries without the Australian Government yet addressing known loopholes. 

Hall & Wilcox recommendation: Regularly review existing and new sanctions laws to ensure your business activities have not become subject to sanctions. Ignorance is not a defence, and will not assist with a due diligence defence if a sanctions breach occurs. If there is any doubt, obtain legal advice.

Utilising Magnitsky-style sanctions more effectively with a focus on consistent application based on conduct rather than nationality

In 2021 the Australian Government introduced the Magnitsky-style sanctions that provide for sanctions to be implemented in relation to an individual’s conduct, rather than targeting a nation. Such conduct includes cyber crime, human rights abuses, and serious corruption. 

The Committee recommends that the Australian Government consider its application of thematic sanctions and explore ways to further strengthen consistency where appropriate. 

Hall & Wilcox recommendation: Sanctions due diligence must involve not only the known entities to a transaction, but also ensuring that any parent companies, ultimate holding companies, and all shareholding individuals are not on the consolidated list.

Sanctions evasion relating to Iran and Russia sanctions, and designated persons associated with Iran or Russia

Since 24 February 2022, the Australian Government has steadily increased sanctions pressure on the Russian Government and particular Russian individuals together with its allies. Similar attention is applied to Iran in relation to abuse of human rights, and its continued nuclear missile program. 

The Committee recommends the Australian Government further escalate its imposition of sanctions on Iranian and Russian officials, including seizing assets and increasing the financial impact on Iran and Russia. 

Hall & Wilcox recommendation: Obtain legal advice before dealing with Iran or Russia or individuals or entities from these two countries, as seemingly innocuous business may fall within existing sanctions. Be ready for sanctions on Iran and Russia to expand in scope and plan ahead.

Australian businesses might be relieved to hear there was some discussion of proportionality:

• the Department of Foreign Affairs and Trade (DFAT, which includes the Australian Sanctions Office and administers Australia’s Sanction Regime) acknowledges that Australian businesses potentially lose supply chains and markets with resulting costs to the Australian community. DFAT underscored that the import of sanctions should be weighed against their impact on the Australian community.
• the Committee acknowledged sanctions’ impact on Australian businesses and their supply chain and recognised the need to release clear and timely information on steps businesses can take to remain compliant in an environment where sanctions are changing rapidly. 

In our clients’ experience, clearer communication and guidance as to intended sanctions, and the interpretation of existing sanctions would create greater certainty and decrease risk for Australian businesses.

The recommendations from this Senate Inquiry are two-fold

1. that the Australian Government utilise its existing powers more effectively and swiftly toward having greater impact; and
2. that the Australian Government consider amending the laws to:
   1. provide for a civil penalty regime;
   2. close loopholes in the Regulations regarding purchase, supply, and import related to Russia and Iran; and
   3. create mechanisms by which frozen Russian assets can be transferred for the benefit of Ukraine. 

Recommendations falling into category (a) can be heeded by the Australian Sanctions Office without any Parliamentary action, and may therefore be actioned regardless of the outcome of the upcoming Federal election. Australian business should ensure their sanctions due diligence and compliance protocols are up to date and regularly reviewed. 

Recommendations relating to category (b), however, require legislative amendment by Parliament. Such amendment will not occur this side of the Federal election, and, if it is acted on post-election, Australian businesses will have ample warning as the legislation works its way through Parliament.