Will Irving, Camille Butters and Sophie White

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Russia Sanctions – what do they mean for AML/CFT reporting entities (and everyone else)?

Home Insights Russia Sanctions – what do they mean for AML/CFT reporting entities (and everyone else)?

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Contributed by: Will Irving, Camille Butters and Sophie White

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Published on: March 23, 2022

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Aotearoa New Zealand's first tranche of sanctions under the Russia Sanctions Act 2022 came into effect last week, on 18 March 2022. The Russia Sanctions Act is historically significant, being New Zealand's first unilateral sanctions regime not connected to sanctions imposed by the UN Security Council. Further tranches of sanctions are expected over the coming weeks.
 
The Russia Sanctions Act and Regulations have potential implications for any individual, entity, or financial institution in New Zealand, whether or not they are a reporting entity under the Anti-Money Laundering and Countering Financing of Terrorism Act 2009. The extent to which a person is impacted will turn on their potential dealings with designated persons, assets, and services.
 
The maximum penalty for a knowing or reckless breach of the Russia Sanctions Act is a fine of $1 million for an entity, and seven years imprisonment or a fine of $100,000 for an individual, although the Court may also impose an additional penalty of up to three times any commercial gain.

AML/CFT Act

For reporting entities under the AML/CFT Act, the supervisors have issued joint guidance highlighting the following:

  • Understanding beneficial ownership, and conducting enhanced CDD where required, are key steps to determining whether a reporting entity is dealing with persons subject to the Russia Sanctions. If a reporting entity forms a suspicion, it will need to submit a suspicious activity report (a "SAR") in accordance with its existing obligations under the AML/CFT Act. Legal advice should be sought before proceeding with any further activity that may involve a sanctioned person.

  • The circumstances in which a SAR must be submitted include where there are reasonable grounds to suspect a transaction or activity is or may be relevant to the investigation or prosecution of a sanctions related offence. In practice, the requirement under the AML/CFT Act to report a SAR in relation to a suspected sanctions offence is very similar to the reporting obligation of duty holders under the Russia Sanctions Act (which we address further below).

Sanctions and beneficial ownership are hot topics in the AML/CFT space. The Ministry of Justice's 2021 Review of the AML/CFT Act Consultation Document recommended that New Zealand's sanctions regime be widened to better support AML/CFT purposes. Separately, on 22 March 2022, MBIE announced a new bill will be brought to Parliament later this year in relation to beneficial ownership.

A new "SAR" style obligation on AML/CFT reporting entities under the Russia Sanctions Act

The Russia Sanctions Act places a new and specific obligation on reporting entities under the AML/CFT Act (known as "duty holders" under the Russia Sanctions Act).
 
If there are reasonable grounds for a duty holder to suspect that assets within its control are subject to sanctions, the duty holder must file a report to the Commissioner of Police. Guidance issued by the AML/CFT supervisors states that duty holders/reporting entities will be required to file a Suspicious Activity Report via the goAML portal if this situation arises.

Obligations on everyone under the Russia Sanctions Act

The Russia Sanctions Act prevents all New Zealand individuals, entities, and financial institutions from dealings with designated persons, assets, and services. Of particular relevance to financial institutions will be the prohibitions on dealing with assets and services.
 
Regulations 10 and 11 of the Russia Sanctions Regulations 2022 prohibit any New Zealand person from:

  • dealing with assets owned or controlled by a sanctioned person (restricted assets); and

  • dealing with services provided by a sanctioned person or dealing with services provided to a sanctioned person (restricted services).

"Owned or controlled" is not defined in the Russia Sanctions Act or Regulations. In the absence of a definition under the Russia Sanctions Act, the concept of "beneficial ownership" under the AML/CFT Act may be of some assistance, although it is important to note that those concepts relate to the "beneficial ownership" of a reporting entity's customer, rather than specific assets.
 
There are various exceptions to the prohibitions on dealing with assets and services, for example:

  • A New Zealand person may hold (but not otherwise deal with) a restricted asset if they held the asset immediately before the date on which the asset became restricted. This means that New Zealand persons holding assets for sanctioned persons can continue to do so, provided that no other positive action is taken in respect of those assets (ie the asset is frozen).

  • A New Zealand person may deal with a restricted asset or service if the sanctioned person is an individual, and the purpose of providing the restricted asset or service is reasonably necessary for personal or household purposes, such as food or clothing.

  • A New Zealand person may deal with the asset if the purpose is to preserve or maintain the value of a restricted asset.

Who are the designated persons?

The list of sanctioned persons includes approximately 350 Russian individuals with military or political connections, although many of these people are subject only to travel bans. Approximately 20 entities are restricted from providing or receiving services from New Zealand persons. The entities listed include militia groups and Russian engineering and technology companies.
 
Businesses should be aware that there are restrictions on "classes of persons" as well as on the specific individuals and entities listed. Importantly, one of the classes includes associates of sanctioned persons, who will be subject to the same sanctions as the person listed. The Regulations specify that associates can be persons acting on behalf of sanctioned persons, entities owned or controlled by sanctioned persons, or senior managers of controlled entities. Again, these concepts bear a resemblance to AML/CFT concepts in certain respects.

Final thoughts

Unlike under the AML/CFT Act, there is no process set out in the Russia Sanctions Act or Regulations as to how a New Zealand person should assess and/or monitor their potential exposure to sanctioned assets, individuals or entities. Instead, there are simple prohibitions on dealing with sanctioned assets, individuals or entities.
 
All persons in New Zealand, whether or not they are reporting entities, should be aware of the list of sanctioned persons. Where there is a prospect of dealing with assets or services in relation to a sanctioned person, businesses should ensure that proper reviews and assessments of their customer base are undertaken. In addition, reporting entities under the AML/CFT Act will need to consider the sanctions when conducting customer due diligence and assessing potential risks associated with particular customers, and be vigilant as to whether an obligation to file a SAR and/or a report under the Russia Sanctions Act arises. The enactment of legislation and release of guidance should be regarded as an opportunity to review AML/CFT policies to ensure that they are consistent with the guidance from the AML/CFT supervisors.

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