It has been almost three years since the Russia Sanctions Act 2022 came into force following Russia’s invasion of Ukraine in February 2022. The continued focus on economic and other sanctions, both globally and in New Zealand, shows no sign of diminishing in the current geopolitical climate. Over this period, businesses have demonstrated their ability to adapt processes and policies to ensure they are fit for purpose in a country with a heavy reliance on international trade. 

We expect that sanctions compliance will remain front of mind in the year ahead, especially for banks and financial institutions contemplating further regulatory scrutiny with the spectre of de-banking looming large following recent decisions here and abroad.

Statutory review of the Russia Sanctions Act 2022 and managing compliance

The Ministry of Foreign Affairs and Trade (MFAT) has commenced a mandatory statutory review to assess the Act’s effectiveness and functionality. MFAT’s consultation document invited submissions during December 2024 to determine what is (and is not) working with the Act. This review provides a valuable opportunity for interested parties to shape the further development of the sanctions regime and, indirectly, guide the Government’s broader consideration of expanding New Zealand’s autonomous sanctions framework. Officials are due to prepare a report presenting findings and recommendations for consideration by Parliament in early 2025.

In the meantime, the business community is having to navigate a complex web of restrictions, to minimise disruptions to supply chains, increased costs, and missed opportunities. 

• Increased compliance costs: Due diligence and monitoring efforts are crucial to ensuring that sanctions regimes are not inadvertently infringed. This can involve substantial expenditure in staff and technology capabilities which might be disproportionate to the scale of particular undertakings.
• Disruptions to supply chains: New Zealand’s economic reliance on importing and exporting goods and services means that disruption and delays can increase costs as companies seek alternative suppliers or markets.
• Missed business opportunities: As well as the obvious detriment of an existing trading relationship being frozen or forbidden, it is often the case that present and growth opportunities cannot be capitalised on because other market participants are able to move more swiftly without the same compliance obligations constraining them.

The significant ramifications of infringement, both financial and criminal, has a dampening effect on risk appetite for particular transactions and financing arrangements depending on the legislative and regulatory frameworks at play in the circumstances. Banks and other financial institutions play a critical role in facilitating international trade. However, as a result of sanctions regimes, local and foreign banks may block (or significantly delay) transactions which pose a risk from a sanctions perspective. 

De-banking and the potential for legislative intervention

Another significant impact of sanctions is the de-banking of high-risk customers (the practice where a bank or financial institution ends its relationship with a customer). We have previously commented on the interaction between sanctions and de-banking in the context of our involvement in Targa Capital Limited v Westpac New Zealand Limited [2023] NZHC 230 where MinterEllisonRuddWatts acted in successfully defending an injunction application to force a bank to continue providing services in circumstances where it was not satisfied that a customer was not ultimately controlled by a sanctioned individual. Whether or not it is sanctions related, it is clear that de-banking is a very hot topic in New Zealand. 

The decision in December in Bank of New Zealand v The Christian Church Community Trust & Ors [2024] NZCA 645 has increased the focus on de-banking, the role of banks in society and whether given the ‘essentiality’ of electronic transactions in an increasingly cashless modern society renders the provision of a bank account a fundamental service which should be made mandatory. In that case, the Court of Appeal expressly considered whether there was a serious question to be tried as to whether the bank was subject to a public interest obligation as an essential service to provide a minimal or transactional banking facility to customers without alternative banking options. The firm view was that, in contrast to some jurisdictions (e.g. where the provision of basic transactional accounts for natural persons is imposed by statute), there is no legislative requirement in New Zealand and the common law does not impose one. 

One potentially interesting aspect that does not appear to have been considered in the proceeding was the relevance of the bank’s position as the holder of a ‘state-privilege’, namely a banking license, and whether that should inform its ability to refuse to provide services to the public. Instead, the judgment’s focus on the clear wording of the contract between bank and customer and the bank’s discretion to end the relationship “for any reason” has been the subject of significant comment from industry and the legal profession. There is apparent concern regarding the potential for ‘moral’ decisions to be made about whether to provide or continue providing services to commercial counterparties. 

Given Andrew Bayly’s (Minister of Commerce and Consumer Affairs) stated willingness to implement regulatory change swiftly where required, it will be interesting to see whether significant reform in this space is on the agenda in the near future. 

Where to next?

Sanctions have a profound impact on New Zealand organisations given the reliance on international trade and the imperative for the country to remain at the front of the pack in terms of the ease and security of doing business on a global scale. Businesses need to ensure they manage compliance effectively and stay on top of developments in a fast-moving area of the law. This is only likely to increase if MFAT’s consultation process leads to expansion of New Zealand’s autonomous sanctions regime.

Vigilance and adaptability will be key characteristics to successfully navigating the ‘winds of change’ given the potential exposure to geopolitical events.