The war against Ukraine has seen a number of governments around the world making moves to impose sanctions on Russia. New Zealand is no exception, and among travel bans the additional sanctions outlined in new legislation will have an impact on how, as reporting entities, we handle due diligence.
Here we unpick the details of the Act, the impacts to your business, and review the recently released update which includes the list of entities and individuals named in the Act.
What is the Russia Sanctions Act?
On 9 March 2022 the Russia Sanctions Act was passed in Parliament.
The aim of this bill is to prevent designated entities and persons accessing services in New Zealand. It is a legal framework that enables swift enactments of sanctions to target specific people, entities, services or products.
What is the update to the Act?
At midnight on Thursday 17 March 2022, a list of entities and individuals subject to the Russia Sanctions Act 2022 was released by the New Zealand Government.
This list specifies those entities and people that are now unable to travel or remain in New Zealand, having aircrafts or ships controlled by those named entities and individuals entering or leaving New Zealand, and are now prohibited from having assets in New Zealand.
The updated regulation includes 159 people, 19 entities and 5 classes of people. This is likely to include people that are not explicitly named in the sanctions but are associated with those named in the regulation.
What does the Act enforce?
Essentially, New Zealand entities are not to deal with designated persons, entities, services or assets who are added to sanctions lists. This includes, dealing with property transactions, entering into or facilitating such dealings, providing financial, accounting or legal advice or services. The facilitation of such goods and services are also prohibited.
What does this mean for your business?
In the Act, reporting entities are defined to be “duty holders”.
Assets held by the named entities or people are now frozen and this includes entities that are reporting entities for the purposes of the AML/CFT Act. If a duty holder has a sanctioned asset under their control, or is providing services to a sanctioned customer, then they must cease all activity by freezing assets or stopping those services.
From an AML/CFT perspective, this does not mean that you are prevented from engaging with individuals or entities in and from Russia. However, it does mean that ‘know your customer’ (KYC) frameworks need to be respected and care taken to ensure that the customer is well known to you. It is especially important that customer’s sources of wealth/funds are understood where necessary.
It is essential that ultimate beneficial owners and effective controllers are identified and verified. This is to ensure that you are protected from inadvertently engaging with an entity flagged on a sanctions list, on the updated sanctions list, or on other sanctions lists globally.
It is recommended that customer lists are reviewed to identify if your business is dealing with sanctioned people or entities.
Continuing activities can result in a seven year imprisonment sentence or a $300,000 fine for individuals; for a company, the fine will not exceed $1 million.
Currently, sanctions will last for 3 years but this may change.
Red flags, what to look out for
Red flags relevant to your industry will be applicable at this time. Some key flags to bear in mind are:
- Use of third parties, shell companies or similar structures to shield the identity of sanctioned people/entities, and to hide source of wealth/funds;
- Instructions received from customers that were received after the invasion of Ukraine (24 February) that seek to obscure beneficial ownership or source of wealth/funds;
- Detailed queries from customers on AML/CFT or tax compliance procedures;
Avoidance of personal contact, instead using intermediaries or avoiding CDD/EDD information provision altogether;
- Transferring beneficial ownership of assets, such as property, in the name of a foreign legal entity with obscure beneficial ownership, especially where the transaction is complex, unusual in terms of value (very high or very low), and involves complex financial transactions and wire transfers; and/or
- Funding of transactions by third parties with no apparent connection to the customer.
It should be noted that the above is not an exhaustive list, and review of relevant industry red flags should be undertaken alongside any review of the updates on these sanctions.
What you need to do to ensure compliance
- Review current clients who are active in your business, and determine what KYC, CDD and checks have been undertaken;
- Review the current list provided by MFAT and determine if you have active clients on that list;
- Review your current KYC and CDD processes to ensure that they are compliant with your obligations;
- Review your PEP checks and ensure that the resources you are using are updated with the MFAT list, as well as any overseas lists that may be relevant to your business; and
- Keep yourself updated with the news and information from the NZ Government, MFAT, DIA and FIU.
How tic company is helping you to comply with these updates?
When tic company conducts its due diligence checks on your behalf we run politically exposed persons (PEP) and sanctions screening checks. We run these checks each time you send through a request to us to onboard a new client or when you request ongoing due diligence checks.
Our standard approach is not to reuse previously obtained information in relation to PEP and Sanction screening. We have taken this position and stood by our approach not to reuse as this ensures that any updates in lists are continuously detected and that you are aware if any of your new or existing clients are placed on lists globally.
Not all outsourcing companies take this approach as in theory you can reuse information models, but this moves away from the optimal risk-based approach, and exposes you to bad actors.
Not reusing data for PEP and Sanction screening is especially beneficial in situations like this, where we’re faced with ongoing global sanction responses in reaction to the Russian invasion.
The sanctions databases that we access for the purposes of identification and verification of clients are updated constantly by our data sources providers, so each check will include these newly named entities and individuals. The tic company analyst team gets in touch with compliance officers if anything is noted during the customer due diligence process in relation to the identification of sanctions against an entity. The team also ensures that your record keeping is up to date.
If the compliance officer suspects that they are dealing with a designated person or entity, they must file a suspicious activity report (SAR) within 3 business days of the suspicion being formed. The Tic Company team is available to support clients should the need to file arise.
What can you do or not do?
These regulations are not intended to lock people out of accessing products or services. However, there will be some people or some entities that will be unable to access services.
Entities identified, during the customer due diligence checks that we conduct on your behalf, as being sanctioned will no longer be able to:
- Engage in the provision of services;
- Facilitate services that are captured activities, on behalf of designated entities, people, products or services;
- Provide legal, accounting or financial services to those designated people or entities;
- Supply, broker, arrange, procure, pay for, buy, sell, import, export, share, transfer or gift services and assets prescribed by the Act.