Last night, the New Zealand Parliament passed (under urgency) a Bill to provide for autonomous sanctions in response to the ongoing Russian invasion of Ukraine. The text of the Bill was released yesterday afternoon, following a Government release earlier this week explaining what it was intended to be. It is expected to receive the Royal assent and become an Act in the next few days. In parallel, the initial designations under it are expected to be prepared and issued.
Even ahead of local sanctions being put in place, the question of how to deal with Russia-associated assets has loomed large over financial institutions.
Prior to the invasion, our International Trade team released a newsletter discussing the implications for New Zealand businesses of the then-upcoming suite of sanctions that Western powers were to impose on Russia. They have since released a more detailed examination of the Russia Sanctions Act.
Who needs to read it? Why?
This Update is targeted at non-bank financial service providers such as fund managers, financial advisers, brokers, and other financial institutions, who may be less aware of the implications of the Act. It will also be of interest to banks, and others who may engage with Russian assets or persons.
What does it cover?
While the text of the Act has been released, the full extent of the regime will not be known until regulations or orders-in-council are issued under it.
The Act provides a framework under which regulations may be issued from time to time to impose sanctions in relation to persons travelling to, entering, or remaining in New Zealand and/or dealing with assets or services in order to respond to threats to the sovereignty or territorial integrity of Ukraine or another country.
From the Government release, it appears that the new regime will:
- be focused on those deemed to be responsible for, or associated with, Russia’s invasion of Ukraine, including people, services, companies, and assets;
- also target those persons considered economically or strategically important to Russia, including oligarchs;
- potentially extend to those supporting the Russian invasion, like Belarus; and
- include the ability to:
- freeze any assets of those persons in New Zealand;
- prevent people and companies from moving their money and assets to New Zealand to escape sanctions imposed by other countries; and
- stop super yachts, ships, and aircraft from entering New Zealand waters or airspace.
The Act does not appear to envisage a transitional period for businesses to prepare or put in place arrangements to give effect to the sanctions.
Some restrictions, such as travel bans, are already in place.
The proposed regime appears as though it will be more focused than it might have been, and certainly more so than the sanctions imposed by some other jurisdictions who New Zealand traditionally considers as allies (e.g. Australia, Canada, the United Kingdom, and the United States). Notably, it does not appear to be currently proposed that the New Zealand regime will prohibit trade in goods or services with, or holding investments in, Russian persons or businesses not named on a sanctions list.
In preparation for the New Zealand regime, financial institutions should (at a minimum):
- make sure that they:
- are prepared to run sanctions checks on existing customers (against lists of names of sanctioned persons as soon as those are issued); and
- have the systems to freeze assets of any such persons if required to do so;
- review their customer terms and conditions, so they understand what obligations they may have to those customers; and
- ensure their onboarding processes can be promptly updated to prevent onboarding as new customers persons named in sanction lists.
Larger financial institutions, such as banks, may need to take further measures. For instance, a reporting entity under the Anti-Money Laundering and Countering Financing of Terrorism Act 2009 (as well as any other person designated by regulations) will be a “duty holder”, with specific obligations to report suspicions that they are dealing with designated assets or services. Designations of other persons have yet to be made.
However, the formal New Zealand regime (when in force) will only be one component of the issues financial institutions need to consider. Others will include:
- independent of formal sanctions, the voluntary actions they should take, given the widespread condemnation of Russia’s actions and the expectations of stakeholders;
- the requirements arising under any responsible investment or environmental, social, and governance policies that they have in place;
- in relation to any international activities, their exposure to other jurisdictions’ sanctions, which may be broader than the New Zealand regime; and
- to the extent their response is broader than required by law, whether it is compliant with the Human Rights Act 1993.
One trend we expect to continue is more and more investors and businesses seeking to reduce or sever any economic ties they have with entities associated with Russia.
This, of course, raises the question of how the divestment or termination of the relationship is to be carried out. The Moscow Stock Exchange remains closed, a number of Russian banks have been blocked from the SWIFT system, capital controls have been imposed in Russia, and international sanctions continue to mount. Furthermore, Russian retaliatory measures, such as allowing foreign exchange obligations to foreign creditors in “unfriendly” countries (including New Zealand) to be paid in record-low rubles, may add to this complication.
As raised above, our International Trade team have prepared a more detailed examination of the Russia Sanctions Act.
If you have any questions in relation to the impact of these developments on financial institutions, or on the upcoming sanctions regime more generally, please contact one of our experts.
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