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Are You Mitigating Against The Sanction Risk

Are You Mitigating Against The Sanction Risk?

Monday, 22 May 2023

As the war in Ukraine grinds on through its second spring, pressure is mounting on listed companies to be more proactive in cracking down on sanctioned investors. As a result, many companies are enhancing their due diligence around AGMs and other shareholder events. Simon Wadey from EQ shares insights gathered from our work in this area and the benefits to be gained from our three levels of sanctions screening.

The issue of sanctions hit the headlines again in April as Foreign Secretary James Cleverly claimed he was “closing the net on the Russian elite”. His words came as two Cypriot ‘fixers’ (Demetris Ioannides and Christodoulos Vassiliades) were sanctioned for allegedly helping the Russian oligarchs Roman Abramovich and Alisher Usmanov hide assets and followed mounting pressure from Conservative MPs to clamp down further on the wealth associated with Vladimir Putin’s regime.

This backdrop ensures that sanctions remain a challenging topic for issuers, particularly as last year’s Economic Crime (Transparency and Enforcement) Act 2022 removed the defence of simply being unaware that someone on the share register is a sanctioned individual. It also placed a greater personal responsibility on individuals within the company issuing shares and, while no cases have yet been brought, failure to comply with this legislation could constitute a criminal offence subject to fines and possible imprisonment.

Understandably, lawyers have been calling for greater clarity but, until that materialises, the broad legal advice suggests that, if an issuer does get caught with a sanctioned shareholder, the Courts are likely to look favourably upon any actions that had been taken to mitigate against that risk. Clearly, this is encouraging many companies to further assess and enhance due diligence around key shareholder events such as AGMs, dividend payments and other corporate actions.

The team at EQ has regular discussions with legal firms to ensure that their sanctions guidance to clients takes into account the practicalities of share registration. Those discussions also ensure that we’re up to speed with the latest legal thinking on issuer risk, enabling us to shape our sanctions screening, which we offer across three levels.

Level 1

It’s standard practice at EQ to provide our issuer clients with essential sanction screening at no cost. This consists of a literal check of names on the share register against the names on the UK sanctions list. We carry this out every time the updated list is published, creating a clean register baseline. Of course, any amendments to the register that take place between these checks need to be managed but brokers do of course have a KYC duty to refuse trades for sanctioned individuals. Furthermore, with non-market transfers, we check each transaction against the sanctions list. If an individual is flagged, we advise the client and add a restriction to the holding, which freezes the account and ensures that no payments are issued.

Level 2

We can also provide an additional level of reassurance by screening share register data using Lexis Nexis software. This applies ‘fuzzy logic’ to check for name permutations against all UK HMT sanctioned entities/individuals. So even if a name on your share register is slightly different to that on the sanctions list, the software will trigger an alert and we will discuss what action should be taken with the issuer.

Level 3

If you run an ADR (American depositary receipt) programme or have significant business operations in the US, it may be prudent to have your ordinary share register checked against the US sanctions list. Similarly, if you have listed debt on a European exchange or significant European operations, a check against the EU list may prove sensible. You may wish to discuss these precautions with your legal advisors but, should you wish to proceed, we can provide these additional checks. Furthermore, by creating scripts to merge the broader analysis requirement into one share register run, we can save you the more expensive approach of running separate comparisons.

Nobody can provide a 100% guarantee that there isn’t a sanctioned individual hidden somewhere within your register. But by mitigating against that risk with what the legislation calls “proportionate effort” and “reasonable endeavour”, you can go a long way towards protecting your register – and your reputation. Please do get in touch with us if you would like to discuss this issue in more detail.