Sanctions Guide for Entrepreneurs

Every entrepreneur’s goal is to build a successful business and generate profit. A large number of entrepreneurs are focused on finding new clients, attracting additional funding, and business growth, and they lack the time or simply the desire to deal with bureaucracy and processes that do not generate profit. Such processes include checking existing or potential cooperation partners or goods against sanctions lists. Similarly, there is a group of entrepreneurs who, knowing the risks of sanctions, look for “workarounds.” Some, on the other hand, have a mistaken perception and understanding of sanctions in general. To help entrepreneurs understand their obligations and evaluate risks, we will outline some of the most current issues in the field of sanctions.

The first thing to note is that the “Law on International Sanctions and National Sanctions of the Republic of Latvia” applies to everyone and not just to specific subjects, such as credit institutions, legal aid providers, accountants, and others. This directly follows from Article 2 of the Law, which states that the law applies to all persons, and they have an obligation to observe and implement international and national sanctions. Consequently, every entrepreneur is obliged to check their business partner or potential business partner against sanctions. However, this applies not only to business partners but also to the goods or services intended for purchase. In practice, situations may arise where the business partner is not on the sanctions lists, but the goods you wish to purchase are. To mitigate the risks of non-compliance with sanctions, entrepreneurs should, at a minimum, go through a “four-step test.”

The first step is to check individuals and business partners:

1. On the Financial Intelligence Unit website https://sankcijas.fid.gov.lv/, which contains subjects of sanctions against whom EU, UN, or national sanctions have been directly and immediately imposed;
2. EU Sanctions Map https://www.sanctionsmap.eu/#/main; c. US OFAC Sanctions Search https://sanctionssearch.ofac.treas.gov/;
3. Lursoft Unified Sanctions Catalogue: https://sankcijas.lursoft.lv;
4. Council Regulation (EC) No 765/2006;
5. Council Regulation (EU) No 269/2014.

The second step is to check whether the legal entity is owned by any sanctioned person.

Importantly, Article 2 of Council Regulation No 269/2014 stipulates the obligation to “freeze” all funds and economic resources belonging to, owned, held, or controlled by any natural or legal persons, entities, or bodies listed in Annex I, or natural or legal persons, entities, or bodies associated with them, and prohibits making funds or economic resources available to or for the benefit of natural or legal persons, entities, or bodies listed in Annex I, or natural or legal persons, entities, or bodies associated with them. Therefore, it is necessary to check not only the business partner itself but also the persons who own or who hold or control the business partner (referring here to legal entities). According to EU guidelines, being the owner of a legal person, entity, or body means holding at least 50% of the ownership rights of the legal person, group, or organization, or being the owner of a controlling interest in their shares.

The third step is to check whether the legal entity is controlled by any sanctioned person.

Even if the legal entity is not on the sanctions lists, the persons exercising control must be checked.

The EU Commission has established several criteria to be considered in determining whether a legal entity is controlled by another (including a sanctioned) person, i.e., whether this person can and effectively does exercise a decisive influence over this legal entity. These criteria are as follows:

1. the power to appoint or remove a majority of the members of the administrative, management, or supervisory body of the legal entity;
2. the right to use all or part of the assets of the legal person or entity;
3. sharing joint and several liability for the financial obligations of the legal person or entity or guaranteeing them;
4. influencing the corporate strategy, operational policy, business plans, investments, financial security, human resources, and legal matters of the legal entity;
5. implementing or maintaining mechanisms to monitor the commercial activities of the legal entity or its unit;
6. the existence of any other indications, such as sharing the company address or using the same name, which could give third parties the impression that both companies or their units are in fact part of the same enterprise.

If it is established that a sanctioned person exercises control over a legal entity (even if it is not included in the sanctions list) and this legal entity owns another legal entity (which is also not included in the sanctions list), then it is presumed that the control of the sanctioned person also extends to the assets of this other legal entity.

According to EU guidelines, cooperation can continue as long as the company is not under the direct control of the sanctioned person.

The fourth step is to check whether what you want to purchase is on the sanctions lists.

In practice, a situation may arise where neither the business partner, nor the owners of the legal entity, nor the board are on the sanctions lists. However, the goods you plan to purchase may be on the sanctions lists. Currently, special caution should be given to goods from the Russian Federation and Belarus. For example, it is now prohibited to import strategic goods, gold, coal, caviar, and other goods and products from the Russian Federation. However, before concluding transactions with your business partner, it is advisable in each individual case to ensure that the object of the transaction (goods and services) is not on the sanctions lists.

A credit institution can also be on the sanctions list.

It is equally important to check your business partner’s credit institution through which the payment is intended to be made, as sanctions may also be applied against the credit institution.

Relations with credit institutions and payment institutions.

In order for a company to conduct economic activity and generate profit, an account in a credit institution or payment institution is necessary. Nowadays, it is often heard that credit institutions in Latvia are terminating business relationships and closing accounts. This may be directly related to the fact that the credit institution perceives AML or sanctions risks. To avoid an unpleasant situation and not be left without an account in a credit institution or payment institution, it should be noted that credit institutions and payment institutions monitor sanctions risks for payment service providers and ensure the monitoring of sanctions circumvention risks.

It is precisely the credit institutions and payment institutions that verify whether payments are legal and the information provided in them is true.

Today, entrepreneurs must also reckon with the fact that some credit institutions, which are not ready to take on additional risks, refuse to service cash flows related to Russia or Belarus altogether. This also applies to cases where everything is in order regarding sanctions. Simply put, today Russia and Belarus are countries with an increased risk of sanctions.

Currently, entrepreneurs are faced with the need to provide a large number of requested documents, and payment processing times have increased significantly. Therefore, it is essential to cooperate with credit institutions and be proactive in performing appropriate checks on business partners.

It is important to draw the attention of entrepreneurs to the fact that a credit institution, upon detecting a violation of sanctions, can not only terminate the contract but is also obliged to immediately, but no later than the next business day, report the violation of sanctions and the resulting frozen funds to the State Security Service and inform the relevant competent authority.

Criminal Liability.

Criminal liability is established in Latvia for the violation of international, EU1 and national2 sanctions, as provided for in Section 84 of the Criminal Law, setting a maximum penalty of imprisonment for a term of up to eight years. The question of whether the circumvention of sanctions is also criminally punishable is topical.

Although the definition of the concept of circumvention of sanctions is not established in regulatory acts, from the perspective of legal qualification, the circumvention of sanctions is of a criminal law nature and has the same consequences as the violation of sanctions within the meaning of Section 84 of the Criminal Law.

Some tips.

Sanctions risks can be avoided or minimized; to do so, we have summarized the problems identified in practice and possible solutions.

In addition to the obligation to check for sanctions, evaluate the legal and beneficial owners of the partner company, as well as the persons exercising control in the company.

Pay sufficient attention to the information provided in your existing business partner’s documents and the quality of the documents provided.

When conducting transactions with intermediaries, it is particularly important to evaluate the risks of the origin of goods and check their supply chain.

When paying for goods, pay attention to the payment details to avoid a situation where partners offer to pay through a bank that is subject to sanctions.

To avoid unnecessary problems with credit institutions, it is recommended to submit documents to the bank and agree on the payment procedure in advance before making payments. The same may apply if you are the recipient of a payment.

In certain cases, to shorten the monitoring and payment process by the bank, it is recommended to obtain permission from the FCMC, the special department of the Ministry of Foreign Affairs, or customs. To do this, you can apply for an FCMC license for a payment through the bank (attaching a legal analysis proving that such a payment does not violate sanctions) or send a request for a goods export permit to the email address: [email protected].

To reduce the risks of involvement in activities related to the circumvention of sanctions, it is advisable to obtain letters of guarantee from business partners stating that the transaction is not sanctioned, and to obtain conclusions on the transaction from professional consultants with relevant experience.

When drafting international contracts with a business partner, it is important to include clauses that will allow for the termination or postponement of the contract’s execution without negative consequences in the event of sanctions risks.

Develop and implement a sanctions policy (currently this is mandatory only for specific subjects). If you do not have the relevant experience and competence, involve professionals. Today, a sanctions policy is needed not only for those working with Russia or Belarus. The sanctions policy should include a risk analysis procedure for the business partner, the goods purchased, and the transaction itself. A sanctions policy is a good tool that can practically help responsible persons distribute responsibility, and it also shows that the company has internal controls, which law enforcement authorities can take into account in the event of a violation.