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Blog 22 September 2023

Counterparty under sanctions: What does it mean?

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Counterparty under sanctions: What does it mean?

Are you sure that sanctions do not affect you? You may be wrong. Sanctions affect everyone. Regardless of business activity, country of registration, or even personal integrity, you are at risk because you have counterparties. And each business partner may bear potential sanctions risks indirectly. In this article, we model different situations when companies are subject to sanctions.

 

Situation 1: The company is directly subject to sanctions

 

Surprisingly, this scenario is the simplest. Sanctions may be imposed on a foreign state, a foreign legal entity, a legal entity controlled by a foreign legal entity or a non-resident individual, foreigners, stateless persons, and entities engaged in terrorist activities. If a legal entity or individual is included in this list, restrictions may contain various forms of trade barriers, customs duties and restrictions on financial transactions, as well as embargoes. 

 

Here are the most likely consequences:

1. Financial penalties: Companies may face significant fines for breaches, which can amount to millions of dollars, depending on the level of the violation and the country's legislation.

2. Loss of reputation: Companies can lose the trust of customers, partners and investors, leading to loss of business and decreased stock value.

3. Restrictions on access to markets and resources: Companies may encounter restrictions on trade, investment or access to other resources, such as funding or technology.

4. Legal costs and attorney fees: Companies may have to spend significant amounts on legal proceedings and attorney services to defend their interests.

5. Prohibition of operations: In some cases, companies may be prohibited from operating in certain countries or industries, seriously affecting their business and profits.

6. Loss of licences and permits: Companies may lose licences and permits necessary for their operations.

7. Management liability: Сompany managers may face personal liability

 

The full list of sanctions is provided in the text of the Law of Ukraine "On Sanctions". 

 

Situation 2. The counterparty of the company falls under sanctions

 

You comply with the Law, but you cannot be sure that none of your suppliers, contractors or counterparties are on the sanctions list. If your business partners are sanctioned, they may, in turn, put you at risk.

 

Here are some possible consequences:

1. Reputational risk: Working with a sanctioned counterparty can undermine your company's reputation, as customers, partners and investors may treat you with distrust.

2. Financial risks: The company may face problems accessing loans, investments or insurance services due to cooperation with a counterparty under sanctions.

3. Restrictions in business relationships: Other companies may refuse to cooperate if your business is associated with a sanctioned counterparty. That may result in the loss of partners, customers or suppliers.

4. Trade barriers: Goods or services may become subject to trade restrictions or sanctions from other countries if you continue to do business with a sanctioned counterparty.

5. Need to terminate contracts: It may be necessary to terminate existing contracts or refuse to enter into future agreements with a counterparty under sanctions. That may result in loss of profit, additional costs and the need to find alternative suppliers or partners quickly.

6. Changes to compliance programmes: It may be necessary to make changes to your internal compliance programmes to ensure compliance with the sanctions and avoid dealing with sanctioned counterparties in the future. That may include enhanced counterparty due diligence procedures, employee training and the development of new policies and procedures.

 

The consequences of doing business with sanctioned companies can jeopardize those involved. A sanctioned company will not be able to fulfil its agreements and obligations in full. The counterparties of sanctioned entities may also be subject to fines and other penalties. 

The sanctions lists are constantly updated. The lists may include a counterparty that was not there yesterday.

 

Situation 3: Sanctions are imposed on the country where your counterparty is registered

 

In addition to legal entities and individuals, sanctions are applied to countries. In particular, we are currently seeing the following situation with Russia: countries worldwide have imposed restrictions on certain business activities with Russia, including exports of certain goods and technologies, and restrictions on access to European capital markets. Violating these sanctions can be interpreted as involvement in Russia's invasion or support for it. Thus, the violator will be subject to sanctions.

 

In addition, even indirect cooperation with a sanctioned country carries reputational risks. 

Even if your counterparties or industry are not currently under sanctions, the situation may change with the next update of the sanctions lists. The only way to avoid such surprises and the corresponding risks is to keep your finger on the pulse and be aware of all relevant sanctions. To do so, you must keep track of all applicable sanctions updates.

 

And while caution concerning sanctions is always relevant, it is crucial today to be careful not to suffer from unverified cooperation. Timely due diligence is a complex process that can only be implemented adequately with up-to-date data and tools. YouControl provides the most effective tools for tracking and monitoring international sanctions. 

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