We recently published a blog reporting on governance considerations for regulated firms in relation to Russian sanctions. As the sanctions landscape continues to evolve, impacted firms operating in different jurisdictions are grappling with overlapping and differing requirements, and global firms will need to ensure a coordinated approach across their operations. We have set out below some practical guidance for regulated firms based on our recent experience of the issues they may be facing:
- Co-ordination: Given that sanctions regimes may differ significantly across the various jurisdictions in which firms operate, co-ordinating the response to sanctions is clearly of vital importance from a governance perspective. The establishment of a Working Group with all key stakeholders and an effective internal communication plan, supported by targeted firm-wide training, can assist with this. It’s also important to highlight that whilst technology is a primary enabler in sanctions identification, human determination remains imperative to successful governance and reporting. In the case of any doubt on local or conflicting requirements, consider whether internal or external advice should be sought.
- Interpretation: As new and overlapping requirements are brought in quickly by the EU, UK, US and other countries, the interpretation of particular requirements can be challenging. By way of example, recent UK regulations have widened the prohibition on dealing in certain instruments and securities if issued on or after 1 March 2022 to any “person connected with Russia” (subject to certain exceptions). This is a significant change from the prior approach and identifying such persons may not be straightforward. In addition to ensuring a consistent approach, firms may wish to take a broad approach to interpretation and to record carefully the rationale for any decisions regarding the practical application of the new requirements, ensuring that there is a consensus across the firm on these matters.
- Market abuse: We have previously seen a higher incidence of potentially abusive behaviour whenever markets have experienced particular periods of volatility. Against the current backdrop of soaring oil prices, firms should be on heightened alert for market conduct issues including market manipulation. Red flags for potential misconduct will depend on, among other things, the type of asset class and the features of the particular market. However, previous enforcement action has highlighted potential indicators of market manipulation, such as unusual order sizes or orders representing a very high proportion of the orders placed in the market in relation to the shares in question. As highlighted in our briefing on the topic, market participants should refine controls continuously as external factors may require systems and controls enhancements. On 3 March 2022, the FCA issued a statement on its website reminding issuers of securities admitted to UK trading venues of their disclosure obligations under the UK Market Abuse Regulation. For further information on this, please see our blog.
- Looking ahead: Given the potential for future enforcement action in relation to sanctions breaches and also related breaches of regulatory requirements, firms and senior managers should have an eye now to their ability to respond to any regulator enquiries which may follow in due course. Regulators are already thinking ahead. By way of example, in the UK the UK government has brought forward the introduction of its draft Economic Crime (Transparency and Enforcement) Bill. This includes proposals to make civil monetary penalties available for financial sanctions violations on a strict liability basis, removing the current requirement to prove that the person knew or had reasonable cause to suspect they were breaching sanctions.