Sanctions update: a quick-reference guide to Australian sanctions in respect of Russia and Ukraine
By Chris Sacré and Kendall Messer
In this update, we offer information on both the latest expansion of sanctions affecting the supply of machinery to Russia and provide a broader overview of the Russian sanctions regime.
The sanctions team at Hall & Wilcox can help advise and guide you through the issues discussed so you can properly understand your risks and how to manage them appropriately.
Over the past few years, we have assisted many clients from different industries and in different geographical locations. We have advised on a range of potential breaches from employment of crew on a Russian-owned yacht to accepting reinsurance payments from Russian reinsurers.
Expansion of Russian sanctions to machinery and related goods
On 26 October 2023, it became an offence to supply, sell, or transfer machinery and related goods to Russia, for use in Russia, or for the benefit of Russia, without having authorisation to do so. The machinery or related goods are those falling within Australian Harmonized Export Commodity Classification (AHECC) categories 8207, 84, or 85.
We recommend all entities involved in the supply of any tools or machinery to Russia under new or existing contracts review whether its goods fall within AHECC categories 8207, 84 or 85.
An Australian business may be affected by these sanctions even if it does not have a direct contractual relationship with a Russian entity. A body corporate can commit an offence:
- directly; or
- indirectly, if it has effective control over the actions of another body corporate or entity, and that entity makes a sanctioned supply, regardless of where that entity is located or registered.
The Minister for Foreign Affairs may, on application, issue permits to authorise the supply of these machinery or related goods to Russia. Such an application must be made to the Australian Sanctions Office and will generally take six to eight weeks to be considered.
Machinery and related goods:
AHECC 8207 – interchangeable tools for hand tools, whether power-operated or for machine-tools (for example, for pressing, stamping, punching, tapping, threading, drilling, boring, broaching, milling, turning or screw driving), including dies for drawing or extruding metal and rock drilling or earth boring tools.
AHECC 84 – nuclear reactors, boilers, machinery and mechanical appliances; parts thereof.
AHECC 85 – electrical machinery and equipment and parts thereof; sound recorders and reproducers, television image and sound recorders and reproducers, and parts and accessories of such articles.
AHECC – Australian Harmonised Export Commodity Classification Code, available on the Australian Bureau of Statistics website.
Australian sanctions relating to Russia
Australia has imposed autonomous sanctions in relation to Russia, Crimea and Sevastopol in response to the Russian threat to the sovereignty and territorial integrity of Ukraine since 2014 and 2015.
However, from 24 February 2022, the Australian Government has steadily increased those sanctions to bring about an end to the war in Ukraine.
Australia’s autonomous sanctions regime applies to:
- Australian citizens, whether engaging in conduct in Australia or internationally;
- Australian companies, whether engaging in conduct in Australia or internationally; and
- conduct engaged in by any person in Australia.
The Australian autonomous sanctions regime restricts the:
- import, export, supply, purchase, or transport of certain goods;
- provision of certain services and commercial activities; and
- providing or dealing with the assets of designated person or entities and their travel to Australia.
Import/export/supply quick reference guide
It is an offence to:
- import an import sanctioned good from Russia or specified Russian controlled areas of Ukraine (Crimea, Sevastopol, Donetsk, and Luhansk)
- export or supply an export sanctioned good to, for use in, or for the benefit of, Russia or specified Russian controlled area.
Russia |
Specified Russian controlled areas of Ukraine (Crimea, Sevastopol, Donetsk, and Luhansk) |
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Risk of indirect supply
Australia has a relatively small trading relationship with Russia. However, there remains a risk that Australians and Australian entities may unwittingly breach the Australian autonomous sanctions regime. Australia’s sanctions apply to direct and indirect supply to sanctioned individuals and entities, or certain categories of goods. This means if supply unintentionally ends up with a sanctioned end-user, a breach may have occurred.
China is Australia’s largest two-way trading partner and China is maintaining its trade relationship with Russia. Therefore, while Australia has significant trade with China, and China with Russia, this poses a risk to Australian businesses, particularly those engaged with the import, supply, or export of items listed in the above table.
It is important for Australian companies to implement sanctions due diligence procedures to avoid sanctions breaches. Additionally, a company that can demonstrate it took reasonable precautions and exercised due diligence to avoid sanctions contravention will have the benefit of the statutory due diligence defence.
Sanctioned services
In relation to sanctioned supply (see the sanctioned export/supply summary above) a sanctioned service is the provision of:
- technical advice, assistance or training; or
- financial assistance; or
- a financial service; or
- another service,
if it assists with or is related to the sanctioned supply.
In relation to sanctioned import (see the sanctioned supply and export summaries in the above table) a sanctioned service is the provision of:
- financial assistance; or
- a financial service.
In relation to a sanctioned commercial activity, a sanctioned service is the provision of an investment service.
Insurance and financial services
By way of example, insurance providers may not be directly involved in the trade of goods within the scope of sanctioned supply, import or export. However, the Australian Autonomous Sanctions also prohibit the provision of insurance and reinsurance services if it assists with, or is provided in relation to a sanctioned supply, import or export. This is known as a sanctioned service.
Sanctioned service also includes the provision of insurance or reinsurance if it assists with or is provided in relation to:
- the manufacture, maintenance or use of an export sanctioned good for a Specified Ukraine Region;
- engagement in a sanctioned commercial activity for the Specified Ukraine Region; or
- military activity in Russia or the manufacture, maintenance or use of arms or related material for Russia.
- even though certain services, such as reinsurance, can be quite distant from the sanctioned supply, import or export, it may be a sanctioned service and at risk of committing an offence.
Sanctioned commercial activity
It is a sanctioned commercial activity to directly or indirectly:
- purchase or sell, or have any other dealing with, bonds, equity, transferable securities, money market instruments or other similar financial instruments issued by a Specified Entity (see list below) with maturity period of more than 30 days; or
- make, or be part of any arrangement to make, loans or credit to a Specified Entity and has a maturity period of more than 30 days.
The following are presently Specified Entities:
- Sberbank
- VTB Bank
- Gazprombank
- Vnesheconombank (VEB)
- Rosselkhozbank
- Rosneft
- Transneft
- Gazprom Neft
- OPK Oboronprom
- United Aircraft Corporation
- Uralvagonzavod
Designated persons or entities:
The Minister for Foreign Affairs may apply targeted financial sanctions or a travel ban to:
- a person or entity they are satisfied is, or has been, engaging in activity or performing a function that is of economic or strategic significance to Russia;
- a person or entity who is a current or former Minister or senior official of the Russian Government; or
- a person who is an ‘immediate family member’ of a person listed under paragraphs (a) or (b),
And has used these powers to designate 1,906 people and 650 entities (at the date of this article).
It is an offence to:
- directly or indirectly make an asset available to, or for the benefit of, a designated person or entity, or to
- hold an asset owned or controlled by a designated person or entity and allow or facilitate the use of that asset.
Examples of those on the designated persons and entities list are:
- Gazprom;
- Sovcomflot;
- Ruselectronics;
- Russian Railways;
- Oleg Boyko, President of Finstar Financial Group;
- Mikhail Poluboyarinov, CEO of Aerflot, the largest airline in Russia; and
- Andrey Bokarev, President of Transmasholding, Russian’s leading railway supplier.
Due diligence defence
There is a defence available to a body corporate if it can prove it took reasonable precautions, and exercised due diligence, to avoid contravening a sanctions law.
What will be considered reasonable precautions will depend on the nature of the breach and the body corporate itself. We recommend all companies that have any risk of sanctions breach implement sanctions risk management policies.
Penalties
A person who engages in conduct in contravention of a sanction law can be convicted of an offence. The maximum penalties for an individual person are imprisonment for up to 10 years, or the greater of $555,000 or three times the value of the transactions.
A corporation who engages in conduct in contravention of a sanction law will be strictly liable and penalised by a fine limited by the greater of $2.22 million or three times the value of the transactions. A corporation may avoid strict liability by raising the statutory defence that it took reasonable precautions and exercised due diligence to avoid contravening the sanction law.
Companies may also be exposed to enforcement action by ASIC for breaches of directors’ and officers’ duties in relation to contravention of a sanction law.
What can you do?
Due to the variation and complexity, any activities or commercial agreements of concern require individual assessment to ensure compliance with the sanction regimes.
Australians and Australian entities should immediately review their risk in relation to Russia and the specified regions of Ukraine. We recommend:
- identifying any current contracts or activities that relate to Russia, Crimea, Sevastopol, Donetsk or Luhansk;
- reviewing all contracts for existing sanctions clauses to ensure that the risk of breach of contract if minimised, including insurance policies;
- reviewing the cancellation and force majeure provisions of existing contracts;
- conducting due diligence to understand exactly how products and services are being used, for what purpose, by who, and for whose benefit;
- reviewing the use of offshore clearing processes, particularly in jurisdictions that may impose different sanctions causing delay in payment;
- reviewing the DFAT consolidated list to assess the risk of indirect supply; and
- reviewing the DFAT Russia and specified regions of Ukraine sanctions regime websites to inform the assessment of risk.
If you would like to discuss these issues further, please reach out to us for assistance.