In more detail
However, in the context of the sanctions applied against Russia, the concept of an "in-scope Russian" became a unique concept. In Europe, for example, this applied to anyone who was a Russian national who was not a citizen or resident of the EU. Take the following example: Mrs. Y left Russia when she was two years old. She has lived in the US since the age of four. She is a naturalized US citizen living in Texas. Mrs. Y's US passport says that she was born in Samara. While Mrs. Y does not travel to Russia and the last time she was in Russia was in 2000, she never formally gave up her Russian passport. Under EU legislations, Mrs. Y is an "in-scope Russian" subject to sanctions that do not apply to a specific individual but apply to the class. The US had a similar, albeit more limited, definition. The consequences of being "in-scope" had the effect of everything from (1) the inability to make any further meaningful deposits into a bank account, (2) fiduciary structures being unwound and (3) the inability to get legal/tax/accounting services performed. Looking at world developments, the application of these other types of sanctions to other jurisdictions no longer seems like a hypothetical but has started to feel very real. Developments in Asia and the Middle East are just an example of the ways in which the situation may escalate.
In addition to formal sanctions, one also has to deal with the "I cannot be bothered" rules. These are informal prohibitions on working with or, performing services for sanctioned individuals. Take the following example: Mr. X was sanctioned by name in Australia. Mr. X has a bank account in New York. While there is no Australian nexus to the bank account, the New York bank demands an exit because it does not want the headache of the compliance issues.
Take this situation to the environment of global instability that now exists. I am aware that certain PE/VC funds will not take clients from certain regions of the world because of concerns that the sanctions might apply in the near future. More and more sovereign funds are discussing divestment for political reasons. Some academic institutions have already started discussing divestment. It is not a leap that one or more jurisdictions may apply additional sanctions against specific people, groups of people, residents or nationals. These sanctions can range from blocking additional deposits, to prohibiting trusts with connections to that jurisdiction from being permitted to remain.
What can be done?
If your name gets put on a list, the only real option is a discussion with the actual sanctions regulator to find some form of license to allow you to operate. In view of this, we see different options. These include the following:
- Having multiple citizenships and residencies.
- Having multiple bank accounts.
- Decentralizing corporate structures.
- Moving trusts to jurisdictions that have not imposed sanctions on trustees.
Multiple citizenships and residencies
As learned from the "Russia Playbook," if someone is caught because they are a citizen, the only option is to have a citizenship in the jurisdiction that they now reside in. For example, the EU definition of an in-scope Russian was a Russian citizen or resident that was not an EU citizen or an EU resident. For example, I saw a situation where someone who left Russia at the age of five and lived in Israel was an in-scope Russian.
The only way to solve this issue is to look for established citizenships or residencies in relevant jurisdictions so as to avoid the "in-scope" definition applying.
Multiple banking relationships
In practice, an in-scope Russian cannot use a bank in the EU/Switzerland. I know this is an overstatement of the rule, but many felt this is what happened. The only solution is to have multiple banking relationships with different types of financial institutions — some small, some large — all over the world to operate.
Decentralize structures
The common thinking over the last 50 years has been to have simple and consolidated structures. The challenge with this (oftentimes very smart) approach is that when there is an issue, the entire structure is affected. We now see more and more families unlinking structures.
For example, if a family is in mining, the historical structure for corporate governance might need to be rethought. There is no right answer, but the topic needs to be considered.
Moving trusts to other jurisdictions
The US and the EU both applied a prohibition on providing fiduciary structures or trustee services to certain settlors of assets. Others have not. Perhaps moving the fiduciary structure to jurisdictions that do not have these rules is worth considering.
"I cannot be bothered"
Probably the worst type of issue to address is the statement "there is no legal prohibition to work with you, but you are not worth the headache." This is such a difficult concept because there is no way to fight it. It is completely subjective. The only way to address it is by diversifying the assets, institutions one works with, and currencies held. This has its cost, but it also has its benefit.
Conclusions
We may never see additional sanctions, and I may be claiming that the sky is falling when it is not. However, given some jurisdictions' very aggressive stances now, if you feel that the pressure is there, take it seriously. Do not wait until the problem materialises.
