Q&A: Putin’s effect on compliance

PFM talks with King & Wood Mallesons SJ Berwin lawyer Shaistah Akhtar about what private fund advisors need to consider in light of growing geopolitical tensions in Eastern Europe.

PFM: The West has placed sanctions on Russia to punish Moscow for what they say is an illegal seizure of Crimea. How should private fund managers react to this major global news?

Akhtar: The first thing to do is check that none of the funds under management are dealing directly (or indirectly) with any names and entities placed on a trading blacklist. The US will have its own list, as will the EU and individual member states that make up the union. Remember, a name not on the EU list doesn’t necessarily mean it isn’t on the UK or US list for instance.

For some GPs, they have screening tools that automatically update each time these blacklists are revised. But GPs without these software tools need to regularly check publicly available websites for updates, especially when they hear in the mainstream news of any new sanctions or developments. Law firms like ours also issue regular alerts that let clients who are concerned about these issues know about revised blacklists.

The sanctions so far have been limited to Russian officials, lawmakers and other close allies of Putin. Doesn’t seem likely then that a GP risks dealing with these specific individuals, right?

Well not quite. It’s not simply a matter of checking these lists for names that are familiar. One thing we learned during the sanctions that followed the Arab Spring is how easy it is for sanctioned entities or high profile individuals to disguise their ownership or control of offshore entities or shell companies. The prohibitions are very widely drafted – they freeze the funds and economic resources owned, held or controlled by listed parties; and prohibit making funds or economic resources available, directly or indirectly, to or for the benefit of the listed parties or associated entities. So really the onus is on the fund manager to know who they’re dealing with as part of their regular Know Your Customer (or KYC) procedures and to enhance these where appropriate.

Seems like that could be a tall order. How much do GPs have to play detective?

There always is that question of how far down the line does a manager need to check for sanctioned names. What authorities like to see is some type of audit trail that shows what you’ve done is reasonable and proportionate to the deal. Obviously more high-risk industries like oil and gas require more due diligence and documentation. And if any red flags are raised during the KYC procedure, make sure that those are reasonably addressed.

No one knows what Putin’s next move will be, meaning tougher sanctions against Russia are always a possibility. How can GPs prepare for a ban on, say, a particular economic sector?

GPs need to consider including in their M&A agreements a general warranty clause that says the target isn’t on any blacklist and is not associated with any designated parties, which at least gives some protection on the civil legal side. Then the contract should consider what happens if that entity is in fact placed on a blacklist or subjected to trade restrictions later on. For example there may be an automatic right to termination or a provision for a license to be obtained from the authorities to enable an otherwise prohibited transaction to proceed.

Shaistah Akhtar is a London-based partner in the litigation department of King & Wood Mallesons SJ Berwin.