October 2014 – On 16 October, Kinstellar’s Prague office hosted another in its series of Compliance, Risk and Sensitive Investigations Breakfast Seminars, which this time focused on the impact of international sanctions on Czech financial institutions. Among the expert panellists was Martin Pros, Czech Deputy Minister of Finance responsible for international relations.
The discussion focused on the international sanctions currently applied by the European Union and the United States in response to the political situation and tensions between Ukraine and Russia. Punitive measures introduced by the European Union and the US include the imposition of travel restrictions and asset freezes on those who have been blacklisted.
This white paper sets out the key findings from the seminar, with recommendations for Czech banks and financial institutions to ensure compliance in this complex and fast-changing area. Understanding and adhering to sanction requirements and implementing of adequate compliance processes is necessary to prevent any possible criminal liability.
Which list? Which sanction?
The sanction blacklists issued by the EU and the US differ, and both are quite detailed and specific. Therefore banks and financial institutions must follow a precise checklist to ensure they adhere to sanction enforcement:
- To check whether a particular person is covered by a specific blacklist,
- Restrictions on access to capital markets and credit facilities,
- Restrictions on military-use goods and technology exports, technical assistance and financing,
- Restrictions on exports of dual-use goods and technology,
- Restrictions on technology for oil production in the Russian Federation.
European sanctions also ban key-sector investment in Crimea and Sevastopol and imports of any goods from these areas.
Be sure to read the fine print
- Specific punitive measures adopted by the European Union regarding access to capital markets and credit financing include a ban on the provision of investment services related to transferable securities and money market instruments, which currently applies to five banks established in the Russian Federation, three defence-industry corporations and three energy companies.
- As far as the financing of certain types of goods and technologies is concerned, a ban is in place on the financing of military goods for entities in Russia or for use in Russia, while dual-use technology export has been forbidden for certain specifically named entities. In light of the current situation in Ukraine, the investment ban also applies to the annexed areas of Crimea and Sevastopol.
- Sanctions are accompanied by the prospect that blacklisted borrowers or guarantors will have their assets frozen, affecting the credit facilities provided by banks.
- Sanctions also touch on the possibility of enforcing the recovery of credit from blacklisted borrowers by means of a repayment schedule or the option of activating a sanctioned borrower’s credit guarantees and security.
- It is important to note that Czech and other European entities may also apply US sanctions if international payments are made in US dollars. These payments necessitate the involvement of banks that are part of the US payment system and, as such, must heed international sanctions introduced by the US.
- If dollar payments concern persons who are not blacklisted by the European Union but are blacklisted by the US, the US sanctions will apply because of the involvement of banks in the US payment system and therefore any such payment will not be processed.
Sanctions in practice
One of the areas covered by the discussion on international sanctions was the inconsistency in their application and, as a result, a certain amount of unpredictability in this area.
An example of this is the approach taken by the World Bank, which is freely trading with Russia, in contrast to the policy pursued by the European Bank for Reconstruction and Development (EBRD), which has halted all new Russia-related financial transactions.
The Czech Republic has adopted a less restrictive stance on investing in Russia. The Czech government is preparing an implementation plan to promote economic diplomacy and open up alternative markets (such as Belarus and Azerbaijan) with a view to minimise the ramifications of international sanctions on the central government budget and Czech businesses.
Criminal liability on the horizon
Soon, corporations, banks and other financial institutions in the Czech Republic may start to feel the effects of breaching international sanctions in criminal prosecutions. To date, it has only been possible to prosecute private individuals for the crime of violating international sanctions.
An amendment to the Act on the Criminal Liability of Legal Persons, currently being debated by the Czech Parliament, will, if approved, introduce a change in the criminal liability of banks and financial institutions in this area.
This pivotal change will see the introduction of corporate liability for, essentially, all crimes except those excluded by the law. As a result, this amendment will significantly lengthen the list of constituent elements of crimes for which a legal person may now be prosecuted.
In addition to a range of other economic crimes, new examples include misconduct in the management of another person’s assets and, in relation to other forms of criminal collusion, the crime of failing to report a crime (including the crime of breaching international sanctions).
Besides the risk of penalties, which in themselves may be quite harsh, criminal proceedings also pose the risk of a tarnished reputation. Although “only” 92 legal persons have been prosecuted since the Act on the Criminal Liability of Legal Persons entered into effect (i.e. since 1 January 2012), more than ten times that number have been involved in (preparatory) criminal proceedings.
Some cases have attracted unwelcome media coverage from the outset of proceedings, even though the entities in question were not prosecuted. So far, the Czech courts have tended to impose monetary penalties, although there have also been disqualifications and, in one case, the courts have handed down the ultimate punishment – the dissolution of a legal person.
Kinstellar recommendations to ensure compliance
Kinstellar recommends that the following actions be taken to avoid the risk of reputational damage and the consequences of criminal or administrative liability:
- Supplement existing (or build up entirely new) compliance programmes in response to risks arising from the amendment to the Act on the Criminal Liability of Legal Persons in order to ensure compliance with all sanctions
- Run checks on the functionality of compliance programmes and the activities of employees or other persons acting on behalf of the corporation in question
- Sufficiently educate employees regarding their duties, the rules of conduct and the procedures for the reporting of any risks or errors identified
- Internally investigate any errors identified, draw specific conclusions from the investigation results, and respond with corrective action and preventive measures.
For more information about this important area, please contact Jitka Logesova, Partner and head of the firm-wide CRSI practice, at .