UK sanctions relating to Russia: Update on asset freeze and trust services designations and general licences for bond restructurings
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The UK has sanctioned 'financial fixers' for Russian oligarchs, extended the trust services prohibition to all persons subject to the asset freeze, and issued a General Licence permitting the restructuring or amendment of bonds where designated persons may be bondholders.
Designations of ‘Financial Fixers’
On 12 April 2023, the UK Government announced that several individuals and entities identified as 'financial fixers' for Russian oligarchs had been designated for the purposes of the asset freeze (as well as other sanctions, including travel bans and trust services prohibitions) under the Russia (Sanctions) (EU Exit) Regulations 2019 (the Russia Regulations). According to the UK Government, these persons 'have knowingly assisted sanctioned Russia oligarchs to hide their assets in complex financial networks'.
Among those designated are Demetris Ioannides (the Managing Director of Cyprus-based corporate services provider, Meritservus HC Limited, which had also been designated) and Christodoulos Vassiliades (the founder and Managing Director of Christodoulos G. Vassiliades & Co LLC, a Cypriot law firm).
The designations are part of a crackdown by the UK Government on professional enablers whose services are used by designated persons to evade or circumvent sanctions. They signify a toughening of approach by the UK Government as it seeks to bolster the implementation and enforcement of the UK's sanctions regime, which it views as a national security priority.1 The designations were coordinated with the US, which on the same day added Christodoulos Vassiliades, as well as certain entities owned or controlled by him, his two adult children, and a business associate to the SDN List.
Designations relating to the Trust Services Prohibition
On 21 March 2023, HM Treasury's Office of Financial Sanctions Implementation (OFSI) announced that all persons (i.e. individuals and entities) designated for the purposes of the asset freeze under the Russia Regulations (being 1730 persons as at that date) had also been designated for the purposes of the trust services prohibition.
The Trust Services Prohibition
Since 16 December 2022, it has been prohibited for persons subject to UK sanctions jurisdiction to provide (unless a relevant exception or OFSI licence applies) trust services to or for the benefit of:
- a 'person connected with Russia' (e.g. a Russian-incorporated company or an individual ordinarily resident or located in Russia), unless provided as part of an ongoing arrangement pursuant to which such services were provided immediately prior to that date; or
- a person designated specifically for the purposes of the trust services prohibition.
Until OFSI's designations on 21 March 2023, no person had been designated for the purposes of the trust services prohibition.
The Russia Regulations define 'trust services' as:
- the creation of a trust or similar arrangement;
- the provision of a registered office, business address, correspondence address or administrative address for a trust or similar arrangement;
- the operation or management of a trust or similar arrangement; or
- acting or arranging for another person to act as a trustee of a trust or similar arrangement.
An obvious example of trust services being provided for the benefit of a 'person connected with Russia' or designated person is where such services are provided to a trust under which such a person is a beneficiary. It should be noted, though, that the instances in which trust services are considered to be provided are broad: for example, where a 'person connected with Russia' or designated person might reasonably be expected to obtain (or be able to obtain) a significant financial benefit from a trust.
OFSI has issued a General Licence under the Russia Regulations which – subject to reporting requirements – authorises a 90 calendar day window (commencing on the date of designation) during which a person may undertake any activity that would otherwise be prohibited by the trust services prohibition and which is necessary to terminate an arrangement between themselves and a designated person involving the provision of trust services. Such activity may include the continued provision of trust services to the designated person.
- FAQ 50 clarifies that the professional and business services prohibition under the Russia Regulations continues to apply even if, in any particular instance, the provision of trust services is permitted (unless, of course, a relevant exception or OFSI licence applies in respect of the professional and business services). Further, if both the professional and business services prohibition and trust services prohibition apply in relation to a particular activity, then separate licences would be needed from each of the Department of Business and Trade (for the professional and business services) and OFSI (for the trust services).
- FAQ 51 similarly clarifies that the asset freeze prohibitions and the trust services prohibition apply in parallel. The FAQ highlights that there is an exception to the trust services prohibition that allows for trust services to be provided for the purposes of complying with asset freeze requirements.
Given that no person had been designated for the purposes of the trust services prohibition until 21 March 2023, the most obvious impact of the designations is to extend the reach of the prohibition to individuals and entities that are not considered 'persons connected with Russia'. For example, Russian individuals who were designated for the purposes of the asset freeze but may have avoided the restrictions of the trust services prohibition by virtue of them being ordinarily resident or located outside of Russia – and therefore not 'persons connected with Russia' – will now fall within the ambit of the prohibition.
However, the provision of most, if not all, trust services would in any event appear be prohibited by the asset freeze due to the wide definitions of 'funds' and 'economic resources' under UK sanctions legislation. In which case, it may be that the extension of the trust services prohibition to persons already designated for the purposes of the asset freeze will not materially alter an analysis of whether trust services could be provided to such persons.
In its announcement accompanying the designations, OFSI stated that '[e]nforcement agencies suggest there is evidence of UK-based trust and company service providers offering their services to persons to enable them to reduce the impact of sanctions in the event they become subject to them.' The trust services designations therefore appear to represent a broader trend towards unambiguously targeting intermediaries whose services are used by designated persons to evade or circumvent sanctions, as also reflected in the new designations of 'financial fixers'.
General Licence relating to Bonds2
The General Licence
On 28 March 2023, OFSI issued a General Licence under the Russia Regulations authorising – subject to reporting requirements – any act by a bond issuer, which considers that it has or may have bondholders who are designated for the purposes of the asset freeze, to effect the terms of any bond restructuring or amendments agreed between itself and its bondholders, provided that the following conditions are complied with:
- as part of any such bond restructuring or amendments, no funds or economic resources (or any legal or equitable interests or rights therein) are made available, directly or indirectly, to or for the benefit of, a designated person; and
- insofar as a designated person would have been (but for their designation) entitled to any funds or economic resources (or any legal or equitable interests or rights therein) under the terms of the bond restructuring or amendments, such funds or economic resources shall be frozen and not made available to that designated person, until such time as they are no longer designated.
The General Licence also permits UK nationals and UK incorporated entities to take any steps necessary to effect such a bond restructuring or amendment (provided the conditions mentioned above are complied with).
The General Licence has effect, unless extended by OFSI, until 28 March 2025.
The restructuring of bonds held by a designated person would typically be contrary to the asset freeze prohibitions because it would involve dealing with their 'frozen' assets (i.e. funds or economic resources owned, held or controlled by the designated person). The General Licence therefore effectively authorises bond restructuring activities that would otherwise be restricted by the 'dealing' prohibition under regulation 11 of the Russia Regulations. If the designated person is also subject to other sanctions regimes – notably those of the US and EU – then licences may still be required under those regimes.
An issuer could make use of the General Licence to, for example, cancel bonds held by a designated person as part of a restructuring aimed at removing designated bondholders, which may be desirable given the sanctions and reputational issues associated with such persons continuing to hold bonds. However, since the General Licence expressly prohibits any restructuring or amendment that would result in funds or economic resources being made available (directly or indirectly) to or for the benefit of a designated person, any payments due to a designated bondholder as a result of a cancellation (or otherwise in relation to a restructuring or amendment) would need to be placed into a frozen bank account. For the same reason, the General Licence could not be used for a restructuring that would result in new bonds being issued to a designated person.
1 See too the UK Government's policy paper, 'Integrated Review Refresh 2023: Responding to a more contested and volatile world' (March 2023), which emphasises its focus on implementing and enforcing the UK's sanctions regime and cracking down on sanctions evasion.
2 For the purposes of this section, any references to a person designated for the purposes of the asset freeze includes any entity owned or controlled (directly or indirectly) by a person so designated.
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