Russia Sanctions Regulations

On 18 March 2022, the New Zealand Government made the Russia Sanctions Regulations 2022 (Regulations), which introduce specific prohibitions and restrictions in response to Russia’s invasion of Ukraine. The Regulations include a Schedule that details the first tranche of individuals, entities, and classes of persons that are now sanctioned under the Russia Sanctions Act 2022 (Act). Our earlier alert on the Act is available here.

The first tranche prioritises political and military individuals and entities. Effective immediately[1], it extends existing sanctions on the Russian President, Prime Minister, Foreign Minister, Defence Minister and nine further members of the Russian Security Council to include asset freezes and prohibitions on their vessels and aircraft entering New Zealand. It also prohibits dealings in assets and services that involve 18 military entities and one Russian state-backed bank, Promsvyazbank (PSB). The sanctions are intended to prevent these individuals and entities from moving assets to New Zealand, dealing with assets already here, or using New Zealand’s financial system to circumvent sanctions that may be imposed by other countries in the future.

The sanctions also prevent New Zealand individuals, entities and financial institutions from having dealings with designated persons, assets and services.  This ensures that New Zealand individuals or entities doing business with those sanctioned do not support, whether inadvertently or not, Russia’s invasion of Ukraine.

A full list of the individuals and entities impacted by the sanctions are detailed on MFAT’s website. MFAT has also published Q&As on the sanctions. The New Zealand Police Financial Intelligence Unit (FIU) has published guidance for reporting entities under the Act.

While much of the content of the Regulations and the first tranche of designations was well signalled by the Government, the Regulations contain some interesting provisions and omissions, which we discuss below.

Broad definition of ‘New Zealand person’

The Regulations apply to all ‘New Zealand persons’, which have been broadly defined in the Regulations to include “an entity carrying on business in New Zealand or incorporated or registered under New Zealand law”.

The use of the phrase “carrying on business in New Zealand”[2] ensures that the Regulations will have significant extraterritorial effect and capture, for example, many of the Australian parents of leading New Zealand companies.

Prohibitions on dealings with designated persons’ ‘associates’ and entities they ‘own or control’

The Regulations also contain a prohibition on dealings with the ‘associates’ of individuals and entities subject to certain sanctions (i.e. asset freezes, prohibitions on their vessels and aircraft entering New Zealand, and prohibitions on dealings in assets and services).[3] The Regulations’ definition of ‘associate’[4] is broad and will ensure that the following persons will also be subject to New Zealand sanctions:

• a designated person’s agent;
• an entity that a designated person ‘owns or controls’ (applying a comparatively low ‘25% Rule’)[5]; and
• a designated person’s ‘senior manager’.

Identifying ‘associates’ and entities that a designated person ‘owns or controls’ is likely to prove difficult for some New Zealand corporates that do not conduct rigorous customer and transaction due diligence processes.

Interesting exceptions

Regulation 12 is particularly interesting as it provides express permission for a number of activities that may otherwise be prohibited by New Zealand’s Russia sanctions regime. The following classes of New Zealand persons should all consider Regulation 12 carefully: holders of Russian bank accounts; creditors of Russian persons struggling to clear funds in New Zealand; holders of Russian investments that are, or may soon become, restricted assets; and those who operate or deal with premises or estates in New Zealand that have become restricted assets (or, more importantly, are likely to become restricted in the near future).

The exceptions allow New Zealand persons to:

• hold and use a bank account (or similar) with a sanctioned person if they held that account immediately before it became subject to the sanctions;
• hold (but not otherwise deal with) an asset covered by the sanctions if the asset was held immediately before it was designated;
• receive money covered by the sanctions if, immediately before it came under the sanctions, the person from whom it is received had a legal obligation to pay it (at that time or in the future) to them;
• deal with an asset or service covered by the sanctions for the purpose of:
  • providing a sanctioned individual or their dependents with an asset or service reasonably necessary for personal or household purposes;
  • preserving, or maintaining the value of, an asset covered by the sanctions; or
  • the enforcement or intended enforcement of the Act.

Further sanctions on Russian banks

When the Act was passed, the Government signalled that the first tranche of sanctions would include immediate asset freezes and sanctions on Russian banks. Despite this, only one Russian bank (PSB – a bank few New Zealand persons are likely to deal with) has been included to date. We think it is quite possible that the Government was waiting for the Australian Government to announce its sanctions on Russian banks before finalising its own.

The Australian Foreign Minister announced far reaching sanctions on Friday 18 March that target 11 additional Russian banks and government entities. The additional banks together account for approximately 80 percent of all banking assets in Russia, and include Sberbank, Gazprombank, VEB, VTB, Rosselkhozbank, Sovcombank, Novikombank, Alfa-Bank and Credit Bank of Moscow. The additional entities include the Russian National Wealth Fund and the Russian Ministry of Finance. When considered alongside the earlier targeting of the Central Bank of Russia, Australia’s sanctions now target all Russian Government entities responsible for issuing and managing Russia’s sovereign debt. We expect the New Zealand Government to target further Russian banks in the coming days.

Readers with an interest in Australia’s sanctions are encouraged to read the recent alert published by MinterEllison’s Australian sanctions experts here.

How can we help?

We have extensive experience of advising on sanctions compliance and enforcement related matters, including in relation to Western governments’ recent sanctions targeting Russia. We routinely assist clients to: produce obligations registers; conduct compliance assessments; undertake customer and transaction due diligence and screening processes; structure low risk transactions; and develop or refine sanctions compliance programmes.

Members of our team have represented clients in sanctions investigations undertaken by the New Zealand Customs Service, the UN, and the UK and US governments. We have also represented clients in sanctions-related mediations and judicial proceedings in New Zealand and the UK.

We work closely with partner firms in other jurisdictions, including the Asia-Pacific-wide network of MinterEllison offices, when foreign legal advice is required.

This article was co-authored by Nathalie Harrington, Senior Solicitor in our Public Law team.

 
Footnotes

[1] Regulations came into force on 18 March 2022 for a term of 3 years.
[2] See Companies Act 1993, s 332, “Meaning of carrying on business”.
[3] Regulations, Schedule, Part 3: Classes of Persons.
[4] Regulations, r 5(1), definition of ‘associate’.
[5] According to the Regulations