Increasingly tough and complex Russian sanctions carry many hidden risks for lenders, who must be extra vigilant when drawing up banking documents, write Collyer Bristow’s Robin Henry and Anna Battams.

The increasing complexity of international financial sanctions regimes brings dangers to banks and their customers. The US, the UK and the EU have all used sanctions to try to tackle money laundering, corruption and terrorism. But these regimes throw up paradoxes that can catch financial institutions between conflicting obligations.

This presents a serious threat to banks that operate internationally. Institutions that have lent to Russian oligarchs targeted by the latest US sanctions (referred to as “specially designated nationals” or SDNs) may face a dilemma: expose themselves to risks of being in breach of the sanctions; or be sued by customers for failure to meet contractual duties.

Toughest sanctions yet

These sanctions – introduced by the Trump administration in the US in April 2018 in retaliation for alleged interference in the 2016 presidential election – are the toughest imposed by the country to date. And the aggressive extra-territoriality of the measures means they can have a far-reaching effect on individuals and businesses around the world.

In the legal world, as ever, it all comes down to definitions. Under the so-called 'secondary sanctions' regime, non-US individuals can have their assets blocked if they knowingly “facilitate significant transactions” on behalf of a sanctioned person or their close family. But the terminology is so loosely defined that there is a risk that the mere receipt of US dollars by a non-US bank may amount to “facilitating a significant transaction”. This, therefore, imposes a barrier to the bank’s participation in the US dollar market, which could cause some serious operational difficulties in the international economy.

The key problem for banks in relation to customers who may be SDNs is that their banking agreements were not drafted to contain effective provisions on sanctions, because the thought simply never occurred. Even if a company’s loan agreements do include repeating representations that no sanctions exist and specify that a breach of the representations will lead to default, the documents may say nothing further on what can be done to avoid further sanctions breaches.

Lesser of two evils?

This could make a bank feel compelled to accelerate its loans and obtain repayment to comply with the sanctions. But, paradoxically, it may at the same time be concerned that the release of the security back to the borrower on a redemption of those loans might be deemed to constitute – here is that definition again – “knowingly facilitating significant transactions”. So the bank will have to decide which presents the greater risk: being sued by its customer for failure to release the security, or being in breach of the sanctions regime.

Even going to the authorities can be a risk. If the banking documents are silent on the ability to seek approval from the US Office of Foreign Assets Control to continue transactions with SDNs, such an approach by the bank without the consent of its customer may be a breach of confidentiality or legal privilege.

So where banks and their customers are of the view that there is a risk that sanctions apply, or may do so in the future, they should consider reviewing their banking arrangements to ensure they can deal with the risks of sanctions applying to their actions.

If banking documents do not include specific provisions allowing banks to take particular actions in the event that sanctions are imposed, they may have to fall back on common law concepts of frustration or illegality – and that may be insufficient to protect them. 

Robin Henry is a partner and Anna Battams is an associate in law firm Collyer Bristow’s banking and financial disputes team.


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