Ukraine Conflict and Financial Institutions- Webinar Transcript

JG: Good morning, everybody. It is 8 March and we will shortly begin our Ukraine Conflict International Sanctions session. As ever, I'm going to wait for the virtual room to fill up, so bear with us a minute or so, and it is filling up very quickly. I think the core number at what point we were going to start would be around 200 people in the room, and I can see the [microwave popping] is continuing at a pace and we're getting up to 200. So in order to make the best use of everybody's time, let me do some introductions. We're doing it slightly differently. Those who are regulars to the Financial Services webinars won't be used to seeing our faces, so hopefully you won't like this and you'll never ask me to do this again.

Speaking now, you've got Jake Green and I co-chair the Financial Regulatory Group and we are here with half of our experts on the Sanctions side. So to my immediate right, I have Ross Denton who heads our International Trade Sanctions. I am with our senior associate, Sophie Law, who I don't think has gone to bed for the last couple of weeks. So, Sophie, good morning to you. David Capps, who many of you will know, who does most of our Financial Services disputes work. And I'm delighted to be joined by Alexander and Olivier. Alexander is leading our US Sanctions and Olivier on the European Sanctions side. So we've kind of got a squad together and assembled. It's not quite Avengers assembled, but there we go.

You'll appreciate that a lot of this is moving in real time, so what we're trying to do is our very best today to explain to you in the context of financial services what the key sanctions are and how we think they work. We will start by going through the UK. We'll build on the key EU differences and then the US side. We will look at potential Russian countermeasures and then we're going to spend quite a bit of time, with a bit of luck, discussing questions we've seen in the market, questions from you. So please do use the Q&A function. We prefer the Q&A function as opposed to the chat function. Please put your questions in there and hopefully we will pick them up towards the end or even running [while we can get there].
But now I think we are going to begin. So happy International Women's Day to everybody. And with that, I'm going to pass on to Ross. And, Ross, I'll just ask you just to give an overview on sanctions historically and now. They're not new, they've been in place historically. So I suppose if you can try your very best to bring us up to date, and that probably means up to date as to what's gone to last night. Good morning, Ross, and over to you.

RD: Good morning. Thanks, Jake. Happy International Women's Day again. Yes, Jake is absolutely right. We have had a bunch of sanctions around for a long time. Specifically in respect to Russia, we've had those in place since 2014, since the annexation of Crimea. And the pattern that was laid down then, is being kept but accelerated.

So what have we had on Russia in respect of sanctions since 2014? Well, as you know, there was a process set out under Article 5 of the EU Regulation under which a number of state owned entities, being banks, energy companies and space nuclear companies, were limited in the access that they could get to the Western capital markets for something that was called new transferable securities. So, in effect, that group of companies were stopped from gaining access to anything in the Western markets other than access to the 30-day market, and that was pretty rigorously enforced against those handful of companies. But, of course, if you were to open up that restriction to all Russian companies, or many Russian companies, that would actually be a really, really important sanction and we are contemplating that happening shortly.

There were also, as part of that 2014 package, prohibitions on certain oil and gas equipment to or for use in Russia in relation to deep water, arctic or shale end uses, and again we're seeing a morphing of that old 2014 sanction into wider sanctions in respect of equipment, and certainly oil refinery equipment and dual use, etc, etc. And then obviously we've seen export controls in respect of technologies and items.

So that was the 2014 picture. What has happened since then? Well, sort of in fall last year, through now into winter, we've seen a massive build-up of Russian forces on the eastern parts of Ukraine, around Luhansk and Donetsk. Everybody was wondering what that was about. And what we saw was the West … I won't say it's unique but it's virtually unique, the West started to say to Russia, "If you invade Ukraine, various things are going to happen to you", and we actually set out, without any detail whatsoever, we actually set out what we were going to do. So there's pieces of the jigsaw of the measures that were going to come down the pipe for Russia if it invaded.

I'm not sure whether anybody really thought that Russian was going to invade, but I think it was pretty clear that if Russia did invade, the West was going to take a really, really harsh view of this and try to put as maximum pressure as it can on the Ukraine. And subsequently, we started with the recognition by the Russians of the Donbas regions, the two regions there. That caused a low level imposition of sanctions or relatively low level of sanctions. Whether or not that did deter President Putin is neither here nor there, because he invaded anyway, and now we're seeing a ratcheting up.

And I always think of it as Russia sort of going down a funnel of narrower and narrower restrictions on what it can do. So we're seeing more and more sanctions coming out, almost on a daily basis, discussion about new sanctions. For example, now for all you, you would have to start looking at your oil business to see if that's associated with Russia because now it does seem to be as if the Russia oil business is coming into target.

But from financial institutions' perspective I think we've seen an enormous amount of activity over the past couple of weeks. We're still absorbing it and we're going to do our best to try and explain to you the major bones of those financial sanctions and what they might mean for your business. I think we are going to see more though, and we should expect to see, for example, activity around Sberbank, maybe other banks that are moving from one sort of status to a designated status. So without further ado, I'm going to stop there and pass over to Sophie … I think she's going to … or no, sorry, David.

JG: Ross, one thing you've mentioned as to whether or not Russia believed the sanctions that were coming, or anyone believed a war was coming, there is some interesting analysis over the past few days suggesting that the Russians civil service, for want of a better expression, had under-wargamed the sanctions quite deliberately, that they were told to wargame what sanctions could be made against them, but were never told quite the why, and therefore had misinterpreted what the West might do. And these sanctions are, if you look at people like Bill Browder and … the red notice is probably the closest understanding how Russian financial services works [*] the sanctions are more successful than the Russians had anticipated.

And what's really interesting on a personal level, and we've been dealing with our clients over the last couple of weeks, is our clients always want to get everything right but there is a nervousness over the sanctions, an emotional nervousness, that we actually don't often see around other financial crimes. And, you know, [kudos] to our clients, we thank our clients for their support and we've seen something very difficult, which is clients working together on opposite sides of the table, around sanctions in a way that we just don't see in other areas. So really interesting. But the emotional sides to the sanctions can't be misunderstood within every level. So that's thanks to you for your understanding as well.

But over to you, David, to try to work out way through the way in which, firstly, the UK sanctions from a financial services standpoint, work.

DC: Okay. Thanks, Jake. Yep, I'm going to take a canter through the key UK sanctions, focussing in particular on how they impact financial services firms, and then I'm going to hand over to Sophie who's going to discuss the relevant EU provisions, although there's quite a big deal of overlap, as we'll see. I'm firstly going to look at the capital market restrictions around dealing in transferable securities and money market instruments. And as Ross has said, many of the restrictions date back to 2014.

So there was a … and has been a Regulation 16 of The Russia (Sanctions) (EU Exit) Regulations which were originally in place in 2014 but now are strangely dated 2019. And they prohibit direct and indirect dealing with the following transferable securities or money market instruments if you personally might deal, either know or have reasonable cause to suspect that you might be dealing in them. And those securities are, firstly, transferable securities or money market instruments with a maturity over 30 days issued after – and ¬this is important – 1 August 2014¬ by any of those five banks on the slide, any of their subsidiaries, or anybody who is acting on behalf or at the direction of either those banks or those subsidiaries. Note that instruments before that date are not generally caught.

And then, secondly, the 2014 restrictions covered similar securities but issued after 12 September 2014 by the six corporates mentioned on that slide. And I'm going to refer to these five banks and six companies as "2014 entities" as we go forward.

So let's sort of take us a bit more up to date as we go to the next slide. This is what is new, if you like. A number of significant changes took effect from 1 March and a new Regulation 16A was added to the 2019 Regulations, which prohibits dealings in a whole selection of other transferable securities and money market instruments. Again, you must know or have reasonable cause to suspect that that's what you're doing.

Those which were added, again on the slide, the first star, securities and money market instruments issued after 1 March by UK subsidiaries, effectively, of the 2014 entities. Secondly, and this is more wide-ranging, any transferable security or money market instrument issued after this 1 March date by a person connected with Russia, subject to certain exception. And we're going to come back to what that means in just a moment. And then, thirdly, a transferable security or money market instrument issued after 1 March on behalf of the government of Russia.

Now ownership here means 50 per cent or more. And as I said, "connected with Russia" means either the individual or group of individuals are ordinary resident located in Russia, or, in the case of an entity, it's either incorporated or constituted under Russian law, or domiciled in Russia. And as I said, there are some exceptions to this and in particular it looks at Russian-based subsidiaries of non-Russian entities.

And there's also a general licence. These are licences issued by OFSI which grants an exemption in relation to some of this trading up to midnight tonight, effectively. But that's the new capital markets restriction.

If we can go to the next slide. Just very quickly, what is meant by dealing here? Well, it's a very, very broad definition. It goes much further than you'd expect by its own securities. It actually includes giving advice, portfolio management, underwriting and those sorts of things. So it isn't just dealing. So be careful that you don't underestimate what that means.

If we could go on to the next slide. The next sort of impact area for financial services is in loans and credit. Now some of this is old but quite a lot of it's new. Regulation 17 prohibits the making of various loans to specified Russian entities and it inhibits, directly or indirectly, granting a relevant loan – we'll look at what that is in a minute – or any arrangement to do so, if you either know or have reasonable cause to suspect you're doing so. Again, this has got a mental element which is partly sort of subjective and partly objective. So reasonable suspicion is enough, even if you don't actually know.

A relevant loan, they're divided into four categories. The first is a loan or credit with a maturity over 30 days which is made or granted to any of those 2014 entities that I mentioned – so the five banks and six corporates – any non-UK subsidiary or person that's acting on their direction. So that's been in place since 2014, that's not new.
The next is a category 2 loan. This is new, and this is loans exceeding 30 days made through a UK subsidiary of any of the 2014 entities and that was if it's granted after 1 March.
The next one is a category 3 loan which essentially is a loan after 1 March to a person not an individual who is connected with Russia. So you can see these kind of mirror the changes on the capital markets side.

And then category 4 is essentially a similar loan but made to the government of Russia, first made or granted after 1 March. So as I say, that effectively mirrors the securities restrictions. Knowledge or reasonable grounds for belief are effectively a prerequisite. And in addition to that, there's a general licence that grants an exemption, again to the end of today, for certain of those loans, I think it's categories 1, 2 and 3, but not category 4. So loans in credit are also impacted, both historically but also quite a lot of new stuff there. If we can go …

JG: Just a chance to have some water, and perhaps bringing maybe Alex in, on 30 days. Thirty days was in in 2014. It's in today. Is it different in Europe or the US? Is it … and it's not really a financial services theme, this 30 days, so was there any background to where that figure came from and therefore 29 days or 7 days is okay?

RD: Well, my understanding of the 2014 structure was that the West decided that they wanted to stop those 2014 entities, as David calls them, getting access to the medium to long term capital markets, which crudely was defined as being anything in excess of 30 days. So that's what it was and you were actually putting them into a market that was only 30 days. I mean, it does have a sort of … there's an element of this which is not strictly capital markets which is when we started looking at this from a UK, EU, and to a lesser extent, US perspective, corporates were saying, well, if I'm trading on terms and conditions that are 45 days, am I exceeding at least a loan there because I'm getting a credit for in excess of 30 days? The EU and UK took the view that that is not … those things would not be caught, or those terms and conditions would not be caught, provided that they were not being used to circumvent the measures, which of course would be a problem. The US originally sort of stuck on that, did not accept that point. And that's where we are now, the US doesn't accept that. The US actually … Alex, you can come in on this, but I think the US has now changed this down to 14 days, so their 30 is our 14.

AD: And just to make a brief point as well, yes, it is 14 days. It actually began with 60, I think, or 45, and slowly moved to 14. You know, the loan category from the US perspective also will include payments that may be delayed. So we had one transaction where a client, in the gas industry, where they were delivering actually gas Gazprom and the payment was coming in some time later. So within a certain month gas deliveries were happening, and then 15 days later the payment was being made. That will fall under this prohibition because the cash could be 14 days from the point in which title transferred. So these long prohibitions actually went beyond pure financial transactions; they really covered various transactions and spectrum, in particular in those places where you may have had payment delay. And the US authorities were very clear that that will fall under their prohibition of 14 days.

JG: Thank you. And, David, bringing you back in the room.

DC: Okay. Next, if we can go on to the next slide, I want to cover correspondent banking and processing sterling payments. Again, this is a newly introduced set of prohibitions. Essentially, Regulation 17A, which has been added, provides that a UK credit or financial institution – I'll refer to that as the correspondent – is not permitted to either establish or continue the correspondent banking relationship with a respondent. And that respondent for these purposes is any designated person under Regulation 5. So those are the people on the list, if you like, or any UK or non-UK credit institute or credit or financial institution owned or controlled by them. But there is a mental element, if the correspondent knows or has reasonable cause to suspect that that's what's going on. So there is that same mental element.

Separately, the correspondent must not process sterling payments to, from, or via a designated person or any UK or non-UK financial institution that they control directly or indirectly, again with the same mental element. So that's correspondent banking and processing sterling payments.

Correspondent banking relationship is very broadly defined: provision of banking services via a correspondent or respondent – surprise, surprise – including providing account-related services such as cash management, international fund transfers, cheque clearing, and also providing foreign exchange services. As I said, knowledge or suspicion is required. And there's also another general licence in place that grants an exception for correspondent relationships with Sberbank until 31 March, effectively, to help people wind down those particular arrangements. So that's correspondent banking etc.

Now if we could move on to the next slide. This is to do with FX and management services. Again, a new prohibition. Regulation 18 provides that provision of financial services for the purposes of either foreign exchange reserve or asset management is prohibited if the person knows or has reasonable cause to believe that those services will be provided to any of the three entities that are described on the slide, including the Central Bank, and any person under the control etc, or under the direction of any of those entities. Again, there is this knowledge element.

Now it turned out that Sberbank was caught by virtue of its being owned, controlled or controlled indirectly by the Central Bank, National Wealth Fund, or the Ministry of Finance, and as a result there's a general licence in place giving exemption to 3 April again to wind down those activities. So there's a short window there.

And then finally, on UK sanctions, I just want to talk about more general asset freezes because this will affect individuals or corporate who are on the list, if you like. First, again, there's a requirement of knowledge and reasonable grounds to suspect [on what they will do].

First is asset freeze. Regulation 11 prohibits dealing with funds or economic resources owned, held or controlled by a designated person. Secondly, Regulation 12, making funds available to or for the benefit of designated person. Then Regulation 13 prohibits making funds available for their benefit. So slightly different. So that's two in the first instance and available for the benefit of, in the second. Regulation 13 prohibits making economic resources available to the designated person. And that requires knowledge or having reasonable cause to suspect that they're doing so, and that the designated person will be likely to exchange the economic resources for, or use them to get funds, goods and services. And then finally, Regulation 15 prohibits making economic resources available to any person indirectly for the benefit of the designated person. So those are the key asset freeze sets of provisions that you'll be looking at if you've got anyone designated.

There are a bunch of general licences again that provide some exemptions. And then before I hand over to Sophie, just a word of caution on this. Having had to sort of plough through all this material, our experience is that these restrictions and permissive licences are pretty dense. They're not necessarily very easy to follow and they do require pretty careful analysis. So in any specific case, I think it's really necessary to check the detail and/or get some advice because this is … we can only sort of, not quite scratch the surface, we can do better than that, but these require very careful handling, particularly given the sanctions [they're floating]. And on that rather gloomy note, I'm going to pass over to Sophie.

SL: Thanks, David. So I'm just going to run through the comparable EU sanctions, and thankfully David has done quite a lot of the hard work for me. You'll be able to see that there's quite a lot of duplication or very similar measures.

So first, from the perspective of transferable securities and money market instruments, you can see, like in the UK, the EU had very similar restrictions in place from 2014, dealing with transferable securities and money market instruments either for a maturity exceeding 90 days within that date period, and the later date period, for the shorter maturity, 30 days, and that related to the same group of banks that you'll see up on the screen, the five banks, and a number of defence and energy companies.

And so moving forward to 2022, if we could pop onto the next slide. Thank you. So like the UK, these restrictions have been extended. Again, there's a prohibition on dealing directly or indirectly with any transferable securities and money market instruments issued by the 2014 entities, so the ones that were on the previous slide, including their non-UK subsidiaries and persons acting on their behalf. So it seems very similar to the UK wording.

Some additional banks have been added, another four banks have been added to those restrictions, and a further eight Russian defence and energy companies and their subsidiaries. And those prohibitions come in from 12 April, so from securities that were issued from 12 April. And you can see, again, like the UK measures, some very wide meaning to dealing, including indirect sale or purchase, provision of investment services etc, and there's also a new restriction which prohibits the listing of any trading venues in the EU of those transferable securities issued by any Russian entity with more than 15 per cent public ownership. So that's a new prohibition.

Quickly move on to the next slide. Again, you can see, very similar to the UK, there are restrictions on loans and credit. So that extends to granting the loans or the credit or being part of any arrangement to make loans or credit available with a maturity exceeding 30 days to the 2014 entities, the new 2022 banks in the period 12 September 2014 to 26 February. And then after 26 February, any new loans of credits to those entities that are subject to trading restrictions on the previous slide are prohibited. There are certain very specific sections, including in relation to some pre-26 February contracts, but again as David said, those exceptions are quite specific and if you had an arrangement that you thought might be subject to any of those restrictions, I'd recommend checking very much the detail of the legislation.

If we could move on the next slide? So there's a number of new EU sanctions in respect to the government of Russia and the Central Bank. So they are subject to similar restrictions in relation to transferable securities and money market instruments issued after 9 March, either by the government of Russia or the Central Bank, and there's that same restriction on the granting of new loans or credit after 23 February.

There are other new measures that I'll just flag briefly. There's a ban on the provision of public financing, transactions related to the monetary reserves and assets of the Central Bank of Russia. So that's very similar to the new restrictions being brought in on the UK side. And there's also a prohibition on participating in any projects that are co-financed by the Russian Direct Investment Fund.

Next slide, please. Thanks. And so this is a new prohibition on deposit taking and this is something that we haven't yet seen in the UK. It was announced that these restrictions would be brought in in the UK but we haven't seen anything to this effect yet. And the prohibition is in relation to taking deposits from Russian nationals or Russian residents or Russian entities, and so that means that you can no longer accept any deposits if the total value of those deposits exceeds €100,000. That's quite a low level. And there's also a restriction on providing services for transferable securities after 12 April and the sale of euros nominated transferable securities, again, after 12 April. Again, there's some exceptions available, for example, for basic needs.

And another interesting part of this new restriction is the requirement for credit institutions to provide to the relevant authority in their relevant member state a list of those deposits exceeding €100,000 already held by Russian nationals. There's no information about what the Authority's going to do with that or if there will be any further restrictions coming in, but we just thought that was quite an interesting requirement in the new rules.

RD: So basically they're thinking how am I going to show that these … or why would a Russian person prove to me that they're a Russian national? But actually you flip it on its head actually and say, if the person can show to you that they are resident in an EU member state, then they're outside this exemption. So that's actually what will be happening, yeah. We would be looking for those residency requirements and then obviously if you can't get those, then you have to start being really sceptical about whether they're Russian nationals or not.

And on the second point about the notification, that is subject to banking and confidentiality rules in each member state, so that cuts across that. Again, we don't know what they're going to be doing with it but assume it's going to be really to track what's going on in those member states.

On the point about the UK, I was on a call with UK Finance, with OFSI, FCOD etc, and we asked about the equivalent in the UK which has been trailered, and they described that as, "At the moment that is a political aspiration for the Foreign and Commonwealth Office". There is currently no plans to impose this in the UK system, at least as far as OFSI can see. So we may be a ways off actually getting the UK equivalent of that.

SL: Thanks, Ross. And then just a couple of other financial restrictions. So access to SWIFT. This is probably one of the restrictions in the EU that was most publicised, and that came in from 12 March and it meant that the seven banks listed there have been shut out of the SWIFT system. So that then brings a whole line of difficulties in the processing of the payments involving those banks. Interestingly, Sberbank and [Gas ComBank] were not included in those restrictions so they are still open to use SWIFT.

And another restriction is a ban on the provision of euro denominated bank notes to Russia, to any person or entity in Russia. Well, for use in Russia. Again, there are some exceptions for personal use, individuals travelling to Russia and consular and diplomatic purposes, but that's another restriction that the EU have brought in, and we haven't yet seen in the UK.

And then finally, just briefly, on the asset freeze provisions, you'll see there that it's very similar to the requirements under the UK sanctions. And what's interesting to note, however, is that the EU has actually imposed asset freeze restrictions on far fewer banks than the UK. So just the three banks listed on the bottom of the screen.

JG: We have some questions that have been coming through and we'll try to get to some of them. Some of them, to my mind, are verging on direct legal advice but some of them we'd need to take offline. So if we don't get to all of them, I apologise. There's just one relating to accepting deposits and we might look in the background but European deposits, is it just deposits in euros or do we think it's deposits with a total value of €100,000? So as an example $85,000. If we go back to slide … that … keep going, keep going … that's the one. Do we have a view of this? Just euro deposits or its total deposits? My instinct would be, if this was a UK measure, it would be value as opposed to denomination.

DC: Value, yeah. It's value, yeah. I would expect it to be value because otherwise it's just … it's so easy to segment it by depositing [*] acting on more euro currency and the equivalent value .

JG: The other open question about this is, if that limit is per credit institution which has a defined meaning under EU financial law. And the question is, can you actually go off and put different … put a the same amount into different separate credit institutions that are part of the same overall business which is a question a lot of banks will be looking at to see whether that's possible.

DC: What I think is interesting, at least contrasting the UK and EU, is that there are obviously some similarities but there are also quite significant differences. And obviously you need to establish which regime or regimes you're covered by. Are you purely worried about the domestic UK situation or are you covered by both? Or, indeed – we'd have to come on to this in one second – are you going to be covered by the third major regime which is of course the OFAC US regime? So it's very important to work out what you're covered by. Do they sort of overlap or do they overlay one another ?

JG: That was a very smooth link there, David, taking my screen [link] away from me as I crash my coffee all over the place. Hi, Alex. I don't know if we're saying good morning, good afternoon, go to bed, but we going to cover a little bit on the US sanctions overlay now. So, Alex, if you want to explain the US approach and then I think we might touch upon extraterritoriality. And then we'll push on to some Russian countermeasures and then we'll do some more scenarios and questions. But, Alex, over to you.

AD: Sure, thank you. I think, overall, we've seen the sanctions coming from the US to be fairly aligned, as of today, with those in the EU and by the UK regulators. The key element that is different is the ability of US sanctions to have the extraterritorial impact because most of those freezing asset sanctions are what we call secondary sanctions, which means that to the extent the US regulator puts anyone on the SDN list, Specially Designated National list, under those sanctions, transactions with those entities will be subject to US prohibitions. And again there doesn't even need to be a US nexus, it can be any other nexus or anywhere in the world. That is critical because while we're talking about the UK and the EU, that is not the case. The UK and the EU do require clear UK or EU nexus whereas for the US, again, the secondary element does not.

The second point I wanted to again emphasise in terms of difference is the corresponding banking account restrictions. Again, they're very similar to what the UK has done by naming Sberbank to be the actual entity that will be off the corresponding banking account possibilities. Remember, the US is a key jurisdiction and US dollars are the key financial currency that's being utilised around the world. Some commentators expect that up to 80 per cent of Sberbank's payments, cross border payments, are made in US dollars, so those are the payments that will be cut and unable to be made as of the end of March.

Again, that's a big prohibition because a lot of attention has been made to SWIFT restrictions, but actually cutting off the US corresponding accounts, that is also quite a significant step and SWIFT is the next category up.

So I wanted to mention those two important points. I saw one question about corresponding bank accounts and maybe allow me to clarify because … and I'm sorry for the financial industry gurus.

JG: No, no, no, that would be really useful, Alex. I was going to ask you. So I think the question is, can we just explain in a minute, in a minute and a half, what corresponding bank accounts are and how they work? That's really useful. There's no such thing as a silly question.

AD: No, look, I think it's an important question, Jake, because we … again, and I apologise for the financial industry gurus, they take it for granted and as we do when we work with the regulators and with the financial sectors. But, frankly, talking right now, and if I wanted to make a payment in US dollars from Tokyo to Russia, that US dollar payment will have to go in virtually via US where the corresponding bank account will clear the payment and it will go to Russia. So again, US dollar payments made anywhere in the world will have to go via US. When they go via US, for that split second, the US government gets the jurisdiction over the payment which is where all those payments will be subject to US primary sanctions and will be exposed to the whole array of US sanctions that are imposed on Russians or other entities in the world.

The other related point is, not every currency has the ability to be converted between one and another. Again, give you example, Japanese yen and Russian roubles. If I want to send Japanese yen to Russia, it has to go again via double conversion to go converting into US dollars, and then US dollars into roubles. That journey again, via US, will expose that transaction to the full spectrum of US sanctions. And if the payment is being made to an entity that is SDN, then that payment will be frozen or rejected, as actually the US government now has said. For Sberbank, for instance, it will be rejected, not frozen. Or frozen for other SDNs. So that's where it happens. And I hope, Jake, it makes sense. Again, please jump in because we take it for granted but it's a very important point to make.

DC: Just to add on that, the correspondent banking relationships that large banks have with each other is an extraordinarily valuable asset and they do not want to lose that in any way, shape or form. So that is actually the pinch point that the US government uses to talk to financial institutions about their behaviour. So even though something may or may not be strictly unlawful in the US, the US Treasury uses the correspondent banking relationship to go talk to those foreign banks to say, "Do you really want to do that thing because that may jeopardise your correspondent banking relationship". And they have that conversation with the US counterparty which says, "Do you know your foreign correspondent is doing things that we don't approve of?". And obviously at that particular point both sides of that transaction, both banks, the foreign and the US bank, have a discussion and say, "That piece of business is really not worth doing", however [inaudible].

AD: Yeah. And to that point, I think one thing we haven't mentioned about the US and the EU and the UK is the enforcement point. All of those regulators are agreed that Russia will be a top priority for enforcement. They will be looking at ways in which these sanctions can be undermined or even evaded. So one of the things is obviously, the corresponding banks that are in the US, they have an obligation as a US entity to report to the US regulator about any suspicious activity. A non-US person does not have to report to US authorities about their potential violation or alleged violation, but your corresponding bank will. And this is where I think a lot of the enforcement activities may arise and exposures may arise, to the extent people are using US dollars or other currencies would have to go via US dollars.

JG: Thank you. And, Alex, we'll move on in a second to Russian countermeasures. A question coming in, and I think you briefly covered it. We're used to any kind of US law having huge extraterritorial effect so that's always the joke, the US being surprised by any UK or European law having extraterritorial effect, but not the other way round. The US sanctions, to what extent do we think they can capture non-US persons, or is this unclear or very clear?

AD: It's pretty clear, to be honest. Except for the Russian sanctions under US law fall into different categories. Some categories do have that impact, they're just called secondary sanctions that apply to anyone in the world. Again, that is unique. No EU or no UK sanctions have that element. The US sanctions targeting Russia do have that.

Many of the recent sanctions we've seen, particularly those ones where US has designated specific banks or entities, they are the ones that will have secondary element, which means it will apply to anyone in the world, forget the US dollars. Transaction in my case, Japanese yen to Hong Kong, that will fall under secondary sanctions by the US. There is no US persons, no US dollars, but that's an ability of your sanctions to apply it so broadly. So, yes, they do.

The issue is however, Jake, there are sanctions from the US perspective that do not have this element and that's where you may need to have an analysis initially, and that's maybe the window of opportunity, I guess, where it may be left for EU or UK or Japan or Korea can impose their own sanctions to cover. But yet US may state, you know, draw a line between where it will go all the way or not all the way. But simply put, if US names someone an SDN under a new regime, that SDN will have secondary implications which means anyone in the world should be very wary of working with them. If it's non-SDN designation, then it's not going to be as broad.

DC: And it's important to note just that the secondary sanctions issue usually bubbles up when there is a difference of view between the US and the rest of the world. In this situation there is no difference between the US and the rest of the world. There are some small differences but we are all on the same page and therefore the need for the secondary sanctions issue is much, much less because obviously it's a point of contention between the US and the rest of the world, and the last thing that the rest of the world wants, or the world wants to present to President Putin, is a way in which he can stick a leverage to try and prise apart the US from the rest of the world. So the secondary sanctions actually have been played down enormously now.

AD: Yeah. Sorry, Jake, just one point. I see someone made … [Kia] Law made a very important point about the US sanctions and how they work.

JG: Yes, Alex.

AD: Yeah. Can you hear me?

JG: Go for it, sorry.

AD: Sorry. So, yeah, I was going to say it's an important point to bear in mind again. If and when … let's say, you know, again, there are two types of US sanctions that have full spectrum of secondary sanctions applicable to anyone and those that don’t, but if you're using US dollars or if your payment goes through the US, because the conversion has to happen this way, once it touches the US soil for that split second, it becomes primary sanctions. It exposes you to the full spectrum of primary sanctions. And, critically, by giving the instruction to the US corresponding bank to make a payment, which may be sanctionable under US law, you ,as a sender of money, will make … actually will violate US law under your sanctions.

It's a very important point and people don't always think about this. But a lot of recent enforcement, some of it I've been personally involved, does touch on this point because you may violate US law by giving instructions to a US bank to do something they're not supposed to do.

JG: You're causing violation. So we're going to get on to some scenarios and questions. I've also been asked what's the FCA or PRA been saying, and I actually spoke to the FCA on Friday so I can give a little bit of an insight that's including … with respect to retail business. But before we get there, potential Russian countermeasures.

AD: Sure. No, I think this particularly is important for those of us who … I guess many of us who joined this webinar have some exposure to Russia, and Russia has responded in multiple ways to the current regime. Frankly, it had already, on the books, some of the countermeasures in place including the unfriendly entities law which now has been populated with jurisdictions, including most of the ones we're in, you know, any jurisdiction that imposed sanctions on Russia is now unfriendly, and any entity from that jurisdiction is now an unfriendly entity for the purposes of Russian law.

What is means in principle – and, look, I don't want to scaremonger anyone – but it does mean potentially that those assets held by those entities from unfriendly jurisdictions may, if this is delayed continuously and Russia needs the money or needs something else, it may lead to nationalisation, it may lead to certain penalties or some other ways in Russia which may get to your assets in Russia, again, by freezing or nationalising or something else. Prime Minister Medvedev already made it clear that that's something Russia would be looking at. I think that's really a tough scenario because remember, currently, another restriction that has been new is Russia disallows the exit from Russia for foreign holders. It does apply to both asset holders, as in stock or other securities, but actually also applies to the actual assets on the ground.

So if you have investments in Russian entities, you may not be able to leave Russia easily. All these announcements were seen. It's probably companies freezing their operations in Russia or putting the money in their local subsidiary that, again, they can't cross the border because Russian government doesn't allowed those things to kind of leave the country. And that is very important because we are facing, potentially, default by Russian major institutions who have interests coming up, and we'll talk about that in the next slide. But to mention here is that Russia has plenty of assets internationally. Without being able to access them, they can't necessarily pay in US dollars even for the interest on bonds coming up, facing even this month, even this week, a potential default.

The last point on this slide I want to mention, it's very important. You may have a contractual relationship with a Russian entity that is subject to a dispute resolution clause, and that clause may allow you to go to an arbitration in London, Hong Kong, Singapore, Paris, you name it. The Russian law, as of last year, now allows Russian courts to take jurisdiction, to have jurisdiction of those disputes regardless of what is in the contract. And as of last December, the Supreme Court confirmed that the Russian entity, if it's sanctioned by foreign law, can ignore that bad provision in the dispute resolution and can bring the case of a dispute into the Russian Federation and the Russian courts will have jurisdiction over that case.

That's very important because I think we can expect quite a few of the disputes will arise during the current situation. And, again, if you have a sanctioned entity, it will probably go beyond that. The Russian courts will likely be asserting their jurisdiction over those disputes.

JG: And if we just shift on to the next slide, Alex. You might take the first one. Before we get there, and I spoke to the … I don't really want … a regulator on Friday and one of the things they wanted to discuss with me was Russia, and in particular retail investment firms and retail service providers and their exposure to Russia.

They said two or three points, some of which … well, I think most of them are obvious but they are interesting to hear. One, they expect all investment firms to have an up-to-date Russian risk assessment. That is a document that's been agreed by the board that says, "This is what we think our exposure to Russia is", and also, "This is separately our risk tolerance". They're slightly different, are they? And that's a board level document.

The other point is, you can … and we had this question, "Can you deal with non-sanctioned Russian entities or Russian persons?". The answer is, well, yes, you might be able to deal with them, but it comes to Alex's point which is your credit risk, or indeed your ability to enforce or otherwise, against Russia is going to be materially different at the moment to what you thought it might have been, ignoring what you thought your ability to enforce against a Russian entity might have been pre-sanctions. But therefore you would need to bake in to your capital planning, your ICARs for investment firms, your resource and stress testing analysis for banks, what you think those kind of exposures look like today. Linked to that, there is of course the commercial risk, the run-on, the entity if for whatever reason you're caught up in this – and we've seen some retail investment firms having exposures to do with trading Russian securities – is it a look that is going to create negative attention?

And, again, there's nothing wrong with that but the board must, from FCA's perspective, PRA's perspective, have considered that. Your stress test should be looked at. What is your operational resilience and how could that potentially be impacted by outsourcing third party service providers?

And, lastly, for those dealing with any issuers, of course any exposure to Russia might amount to price sensitive non-public information etc. None of this is rocket science. That's actually the same analysis as one's analysis to COVID, i.e. how exposed are we to third parties vis-à-vis COVID and potential risks? The same applies to Russia.

But two or three weeks ago, the Regulator's view was that we're all getting on top of this and there was a little bit of understanding. We're now moving into the weeks whereby the time for talking is over, there should be something there. So that's kind of the view of a leading regulator, particularly on the retail side. And it answers a couple of questions we've had coming in, which is can we deal with … well, actually, that's my point number 3 on this slide, "Can we take on Russian clients, non-sanctioned?". Well, the answer is yes, but consider the other points that we've mentioned.

DC: I would also suggest there the first question, rather than taking on the clients, is how you're going to get paid. What is the way in which you're going to get paid for whatever you do for them? And that's question 1 before we start thinking about that.

JG: Yeah. Alex, if you want to take 1 and then, Sophie, you might go for 2, and we're going to try and take some of the questions that have come in. Apologies, we're not going to be able to take them all, [we'll advise you] privately as well. I will run through one of the ones in the chat that's quite useful as a scenario for everyone. But, Alex, do you want to take 1?

AD: Sure. I see a lot of great questions but, frankly, allow me share with you number 1. Basically, it's a scenario where you may have a security or some asset that you may want to sell, but you can't sell it for either the Russian government doesn't allow you to do that, or you don't have a buyer and your internal license, as was discussed, it's a fairly short window, 30 days, what do you do with that asset that is maybe subject to, again, prohibitions that's under the US law?

When I spoke to OFAC, you know, we've seen a situation in Israel of stocks last year when people again couldn't sell them because there were no buyers, frankly. It's the same thing. You may need to freeze these assets or put them in escrow, depending on the arrangements you may have in place and your jurisdiction, or whether you're a financial institution, whether you can assign it in a separate location. So you're not actually using this asset and it's sitting on its own until sanctions are lifted or special licences received. So that's a fairly easy answer. It will impact a lot of people who probably have in their portfolios some of those Russian stocks and bonds that are subject to sanctions.

JG: Settlement of rouble denominated transactions. Sophie will perhaps unpack the question for us and then we can kind of work out where to go on that one.

SL: Sure. Well, there's quite a lot of questions that this potential scenario throws up. There's the question that you've had to answer in any scenario where there's a Russian nexus, so checking your counterparty, whether that counterparty is subject to sanctions, whether any parties in the transaction are subject to sanctions. But assuming you can get over those hurdles, I think perhaps the biggest issue here is the UK prohibition on correspondent banking relationships. So it may well be a practical issue of being unable to actually have the funds flow in order to settle that transaction. And I think actually I'm going to throw that back to Alex because I think there was a development yesterday you were telling us earlier about, from the Russian side.

AD: Yes, indeed. I think Mr Putin said yesterday that he instructs the payment of particularly the … on the interest of bonds, the government bonds, to be paid in roubles. And we just had a discussion with the team, well, what does it mean? If there's no clear answer, this is a really invested territory as to, you know, the rouble is falling. Today I was just checking. It's about 140 roubles per dollar, it was 70 about two weeks ago, you know, it's in a free fall in a sense. So getting roubles is not going to be helpful, you need to get in hard currency, especially in this environment. So the first step would be if you have any exposure to getting money from Russia in terms interest on your bonds or otherwise, do check whether it does spell out the currency in which you need to be paid. If its point is not clear, the Russians may give you roubles and then it's a point which probably we need to discuss separately offline how to work around this. If you do have currency specified, then you're okay and you should be required to get dollars or other currencies except for there may be a potential for default if they can't pay you.

JG: Okay. I think we've talked a little bit about taking on new Russian clients. Closing down existing relationships with Russian clients from a regulatory perspective, a couple of points. Retail, the FCA expects you to consider TCF. At the same time, your [SIS], your financial crime obligations, your credit obligations can sometimes trump TCF and, in general, your contracts might allow for a quicker exit, but that is a mixture of contractual interpretation and TCF obligations for retail.

DC: Just on that as well, not just closing down relationships but obviously there's quite a lot of scrutiny going to be carried on in relation to whether force majeure clauses are engaged in relation to what's been happening recently. That's a whole topic that we could take, basically, another hour on. But that's a tricky issue and it very much depends on the contractual terms that you are looking at, but that is clearly something that we'll be exercising and probably quite a few people on this [clause] [*].

JG: Okay. And, look, very conscious of time. I want to show you our tracker as well. I suspect we're going to do more of a Q&A session over the next couple of days, ten days or so, so people can put in their questions in advance and we'll pick out the common themes.

We did have a question I want to run through: "We were a lender to a borrower outside of Russia in which VTB is one the lenders. What implications do the latest sanctions have on our participation?". So lending to someone that is lent by VTB. I'm not sure there's a restriction on that, dependent on whether or not you think that VTB has potential control over the borrower by virtue of their first lend. I'll invite others in a second. Whether or not you might want to continue the relationship or exit yourself is a separate question.

"One of our borrowers outside of Russia has a Russian sanctioned entity as a shareholder. What are the implications?". Well, to be blunt, it slightly depends on the shareholding, not a shareholder, but it would depend on the size of the shareholding but the starting position is that is potentially problematic. I don't know, Alex, if you want to add anything in on those scenarios or … ?

AD: The last point is correct. The US law as well EU and UK law does have a 50 per cent rule so to the extent any entity is 50 per cent or more owned by SDNs in aggregate, that entity becomes blocked by operation of US law and that means the whole range of restrictions will apply to that entity, same as the actual SDN. So again you'll track whether your sanctioned entity, the percentage of ownership in your joint venture. If it's below 50, you're okay.

But those questions do come up because under US sanctions that have secondary element, there is a restriction for non-US persons to facilitate any significant transaction for or on behalf of those SDNs. So in this scenario, let's say you don't have a 50 per cent or more shareholder but it's less, yet you're sitting at the board table and you're dividing profits etc. Are you facilitating transactions for and behalf of that SDN? The answer potentially is yes, depending again on amounts and on the percentages. But it's very easy to … you're going to have to go step-by-step and figure out the exposure points. But it is, as you've said, once you have an SDN at the table, you will have … your risks will enhance in a sense, and you'll have to be able to … well, you'll need to risk assess and figure out how to work around it.

DC: Yeah, the best way to think about that is if you have an SDN at the table or even a designated person at the table is, you're going to have a really difficult life because although that person still exists, maybe the relationship that you have, and others in that group have with that SDN or DP, is effectively over, at least for the duration of the sanctions. So it's literally like they're frozen at the table and anything that you do to that person may bring you some risk.

JG: Sophie, we're often asked, "Where do I find all of the information on this?". I think our next slide, or the slide we're on, has it and would you mind quickly just giving us a 30-second rundown and we can also perhaps plug the Ashurst/Russia sanctions tracker. And perhaps, Sarah, you'll try in the background display that as Sophie's talking and then we'll see this out.

SL: Sure. Thanks, Jake. Well, as you can probably see from the list of different sources of information on the screen, keeping track of the developments is not straightforward. The UK is actually easier to follow, I think, than the EU. The OFSI, the regulator publishes a consolidated list of financial services targets, so anyone who is subject to an asset freeze, that's updated when anyone's added. That makes it very easy to search if someone you're dealing with is subject to the sanction. There's a separate list of investment ban targets which includes all the banks that we've dealt with. That's a separate, shorter list. And you can sign up to get information from OFSI so when they publish the notices which tells you when anyone new is added, it can email them to you. They also publish general licences all in one place and any of the statutory instruments which is how they bring in new restrictions or new different types of sanctions. That's also published in one place, but a different place to all of the others.

For the EU, it's slightly more difficult to follow. They usually publish a consolidated regulation which has all of the changes. They haven’t quite got round to that yet because it's been changing so regularly, so unfortunately whilst [*] regulation, you actually have to follow the daily official journal and trawl through all of the legislation that comes out from the EU in order to keep track of the updates. Again, they publish a consolidated list which you can word search and there is key links there for the other sanctions guidance.

But just in terms of our tracker, we've been putting all of those developments all in one place and it's being updated generally on a daily basis, so for a high level summary and links to all of the relevant bits of legislation or guidance, I can recommend using the tracker which I think Sarah has just brought up on the screen there.

JG: Yeah, I think we'd better leave it there given it's just gone 10.00. Thanks to the 300, 400 or so of you that joined, and mostly thanks to everyone for helping to put this together. So Sarah is off camera, for want of a better expression, David, Ross, Alex, Sophie, Ruby, Olivier etc. and those that are actually caught up on calls now trying to [work on this] with some of our clients. So please do let us know if we can help, and I think we will continue this kind of themed session over the coming weeks. But with that, I hope you have a good Tuesday and happy International Women's Day again to all. Thank you.