Economic sanctions have been proliferating in recent years and have been subject to unprecedented development since Russia’s invasion of Ukraine in February 2022.

Given the reliance of New Zealand’s economy on importing and exporting goods and services, businesses are constantly having to grapple with the implications of dealings with overseas counterparts in an increasingly fractious world. With geopolitical tensions continuing to rise and geoeconomic fragmentation in the face of slow economic recovery, we predict that sanctions compliance and enforcement will continue to be a hot topic in the year ahead.

The rise of sanctions regimes at home and abroad

Sanctions are used internationally to apply pressure to countries, regimes, companies and individuals that threaten peace and security, have harmful policies or do not comply with international law. As a Member State of the United Nations (UN), New Zealand is required to implement sanctions resolutions passed by the
UN Security Council. Generally, these resolutions have been the sole driver of sanctions implementation in this country. However, following Russia’s veto of UN sanctions in response to the invasion of Ukraine, Parliament passed the Russian Sanctions Act 2022 and associated regulations that place a range of obligations on all New Zealanders by prohibiting or restricting specific activities, and requiring the reporting of suspicious activity.

The introduction of Russian sanctions is of interest in two respects:

• it creates compliance obligations and exposure for any business or individual interacting with Russian interests; and
• it potentially signals a new direction in New Zealand's foreign policy and the potential growth of an autonomous sanctions regime, rather than the historical approach of keeping in step with the UN.

These are both issues that business will have to consider when interacting with foreign counterparts.

Relevance of international events to businesses down under

Businesses that rely on the import and export of goods, services and capital, are regularly having to assess the ultimate source of funding, commodities and ‘control’ in transactions. This is not always easy to discern and deciphering the do’s and don’ts of a particular sanctions regime can be challenging. Sanctions compliance is a very technical area of the law riddled with complexity.

New Zealand is rich with examples of successful businesses punching above their weight on the world stage. Now, more than ever, those businesses are eager to identify their sanctions compliance obligations and take steps to minimise their exposure to sanctions-related risks, including by implementing a Sanctions Compliance Policy. Especially for businesses dealing in or with:

• high-risk sectors: financial institutions, investors, importers, exporters and logistics providers, defence and aerospace businesses, technology and telecommunications companies; energy and natural resources companies; multinationals; and professional services firms; or
• high-risk jurisdictions: Belarus, Cuba, Iran, Myanmar, North Korea, Russia, Sudan, Syria, Venezuela and the Ukrainian regions of Crimea, Donetsk, and Luhansk.

But it is not just an individual business’s exposure that is relevant when considering sanctions compliance. In fact, often, one of the primary considerations is how international counterparts may perceive your actions and whether they present a compliance risk by association. If you are dealing with entities in countries with particularly assertive regulators (such as the Office of Foreign Assets Control in the United States) their risk appetite will matter just as much as your own.

A recent illustration: New Zealand’s Russian “oligarch” litigation

Last year, MinterEllisonRuddWatts represented Westpac New Zealand Limited (Westpac) in successfully defending an injunction application brought by Targa Capital Limited (Targa) to force the bank to continue providing services in circumstances where it was not satisfied that Targa was not ultimately controlled by a sanctioned individual, Alexander Abramov [1].

The bank pointed to three key risks justifying its decision to close Targa’s accounts: regulatory; contract and capital markets risk. The extraterritorial scope of UK and Australian sanctions regimes created compliance risk for related group entities registered or carrying on business in the UK or Australia, or UK or Australian nationals employed by Westpac. The High Court considered that the UK sanctions regime in particular has wide “real world” test of control such that it was reasonable to be concerned that Mr Abramov could still ensure Targa’s affairs were conducted in accordance with his wishes notwithstanding attempts to structurally remove him from the Trust that controlled Targa. Ultimately, the High Court judgment confirmed a bank’s right to terminate its relationship with a customer upon reasonable notice, subject to the terms of the contract between the parties. But critically, for present purposes, it also confirmed that, when deciding whether to exit a customer, a bank is entitled to have regard to its own commercial interests and its desire to manage sanctions risks. In particular, Westpac’s assessment of its exposure to risk from continuing its relationship with Targa was not unreasonable given its limited control on how third parties perceive the risk of sanctions breach or react to that perception.

Sanctions sub-plot: The rise of de-banking

The sanctions issues in this case were intertwined with another issue which is the subject of increasing scrutiny around the world: de-banking.

De-banking refers to the practice of a bank or financial institution terminating or restricting its relationship with a customer.

Although not the subject of this article, since the decision in Targa v Westpac there have been two further, high-profile decisions related to de-banking: one in the context of human rights breaches and ESG policies (The Christian Church Community Trust v Bank of New Zealand [2023] NZHC 2523) and the other arising from concerns related to the AML/ CFT compliance of money remittance companies (The Ink Patch Money Transfer Limited v Reserve Bank of New Zealand [2023] NZCA 587).

This is another area to watch and which is garnering attention internationally. Take for example, the resignation of the CEOs of the British bank, NatWest, and a subsidiary private bank, Coutts, after it terminated its relationship with prominent political figure Nigel Farage. Documents obtained by the individual revealed that, while he had for some time been below its commercial criteria – requiring customers to have £3 million in savings or £1 million in loans or investments – Coutts was ultimately concerned that his alleged “xenophobic, chauvinistic and racist views” posed a risk to the bank’s reputation.

As the Targa v Westpac decision illustrates, there will often be an interplay between sanctions and the termination of contractual arrangements. However, there will also be frequent occasions on the margins (i.e. where a sanctions or other legal overlay has not been clearly triggered but one party is uneasy about its continued relationship with the other). In the case of sanctions on high-net-worth individuals, there is growing recognition of the sophistication of arrangements used to obfuscate the beneficial ownership of assets and sources of funds (e.g. through trusts, protector ships, side arrangements and influence over public facing individuals).

Crystal ball gazing for managing compliance and enforcement risk

Doing business may be getting harder, especially with international counterparties. However, a National-led coalition government is expected to prioritise trade as a means for boosting the country’s economic growth. Given the National Party and the Act Party have both historically favoured the establishment of an autonomous sanctions regime to support independent foreign policy, it will be interesting to see how the coalition government balances sanctions implementation with its pro-business policy agenda. Regardless, we expect to see increasing scrutiny by the legislature, regulators and business going forward.

Podcast: Rising sanctions in New Zealand and beyond

Partners Aaron Lloyd, Sean Gollin and Sarah Salmond, and Senior Associate Alex Church delve into the impact of sanctions regimes on New Zealand businesses and overseas. Listen to the Litigation Forecast 2024 podcast series.

 

Reference

1. Targa Capital Limited v Westpac New Zealand Limited [2023] NZHC 230.