Frequently Asked Questions (FAQ)
- 1. What is a sanction?
- 2. Who has to apply sanctions?
- 3. What are the obligations of persons in Latvia in connection with the compliance of sanctions?
- 4. What is the liability for not complying with sanction restrictions?
- 5. Where can I find information on applicable sanctions or check individuals on sanction lists?
- 6. Where can I find further clarifications on the application of sanctions imposed by the European Union?
- 7. Will it be possible to import or export goods to and from Russia or Belarus?
- 8. Is it possible to complete agreements concluded before implementation of sanctions?
- 9. What must be done if a person is found on the sanction lists after the transaction has been concluded?
- 10. What sanctions risk factors should be addressed?
- 11. Are US OFAC sanctions directly applicable?
- 12. How to determine whether a legal entity is subject to control of a sanctioned person?
- 13. Is it possible to unilaterally withdraw from a contract concluded with a sanctioned person?
- 14. Does my Company have to introduce sanctions policy?
A sanction is a foreign policy measure whose general objective is to ensure peace, international security, democracy and the rule of law, and the restoration of human rights and international law. A sanction may, for example, prohibit entry into, stay in, residence or employment in a country or territory, as well as restrict international trade, impose financial sanctions and other prohibitions.
Sanctions must be applied by all persons in Latvia in Latvia whose activities are affected by the established sanction, incl. individuals, legal entities and authorities.
Considering the prohibition to violate any sanctions, each person must strictly assess whether there is a possibility that it can violate sanctions. This especially must be done by persons who engage in business relations with any person from Russia or Belarus as there can be either direct or indirect possibility of violating sanctions. When applying a sanction, it is important to monitor closely who are the specific entities to which the sanction should be applied and the content of the sanction, i.e. the activities to which the sanction applies. For obliged entites of anti-money laundering legislation (e.g. financial institutions, insurers, real estate brokers, gambling operators) there are additional obligations like to:
- immediately, but no later than on the next working day, report to the State Security Service on the violation of the international or national sanctions or an attempt to violate them, and the funds frozen due to such actions, and to inform the respective competent authority thereof;
- if suspicions of the circumvention of international or national sanctions or circumvention attempt in the enforcement of financial restrictions have arisen, report thereon to the Financial Intelligence Unit.
According to Article 84 of the Criminal Act for the violation of sanctions imposed by the United Nations, European Union, and other international organisations or sanctions imposed by the Republic of Latvia, the applicable punishment is the deprivation of liberty for a period of up to eight years or temporary deprivation of liberty, or community service, or a fine.
In addition, in the scope of the criminal law coercive measures may be imposed on legal entities that committed or facilitated the sanction evasion – in the most sever cases – fines of up to 37’500’000.00 EUR (seventy-five thousand minimum monthly wages).
Additional administrative fines are provided for obliged entities of anti-money laundering legislation.
In addition, transactions and agreements that contribute to avoidance of sanctions may be declared void and non-binding.
It is important to note that knowingly or intentionally engaging in any activity that is intended to circumvent the sanctions imposed is also prohibited. As a general rule, sanctioning legislation provides that any claim for compensation, set – off or additional security made by the sanctioned person shall not be satisfied in respect of the contract or transaction affected by the sanction.
Generally, in order to verify whether a certain person is sanctioned, it is possible to use sanctions search tool of the Financial Intelligence Unit, available at https://sankcijas.fid.gov.lv/. It generally includes compilation of all the international and national sanctions that are applicable to persons in Latvia, however, the Financial Intelligence Service also always recommends comparing this information with information published in the Official Journal of the EU or (UN Security Council chapter – Sanctions). Please note that considering the speed in which content and scope of sanctions are constantly evolving, it is strongly advisable to also verify the newest information about provided by the European Commission here. It also advisable to regularly get acquainted with the information provided by the Ministry of Foreign Affairs of the Republic of Latvia regarding the application of sanctions, available here.
The EU Sanctions Map, a tool developed by the European Union (EU), can be used to search for information: https://www.sanctionsmap.eu/.
In addition, the US OFAC Sanctions Search can be used: https://sanctionssearch.ofac.treas.gov/.
The European Commission has published and regularly updates answers to frequently asked questions about the application of sanctions. The European Commission’s answers are available on the Frequently Asked Questions section of the European Commission’s website.
There is currently no general ban on the import or export of goods, but there are certain sectors and categories of goods that are prohibited from any export and/or import of goods to Russia or Belarus.
It is also prohibited for persons to purchase goods or receive services from those natural and legal persons against whom sanctions have been imposed. In most cases individual sanctions provide obligation of freezing of funds and economic resources of the sanctioned person and a prohibition for to transfer funds and economic resources to sanctioned persons.
Persons are also prohibited from purchasing goods or receiving services from persons who are owned or controlled by persons included in the sanctions lists.
In addition, the current logistical conditions must be taken into account. Airspace and ports within EU are closed to Russian carriers and the delivery of goods through roads is rather cumbersome. It should also be noted that new sanctions are being applied which may change the conditions even further.
The completion of agreements depends on the specific sanction imposed on the counterparty of the agreement and depending on the subject of the agreement. For example, if the other counterparty of the agreement is a sanctioned person whose assets have to be frozen, it is not possible to complete the agreement. In other cases, for example, the agreement could not be completed as it concerns provision of technology which is prohibited for use in Russia.
Please note that there are multiple exemptions from sanctions indicated in the relevant EU regulations and in each case, it must be assessed whether the exemption really applies to the sanctioned person or the subject of the agreement.
If you have entered into a transaction which is prohibited under the applicable sanctioning regimes, you must immediately take all reasonable steps to stop fulfillment of the contractual obligations, such as non-settlement, non-delivery of goods or other actions aimed at ensuring that funds or economic resources are not transferred to a sanctioned person.
In addition, the State Security Service may have to be informed about a violation of the international or national sanctions or an attempt to violate them. This must be done immediately, but no later than on the next working day. The funds in question must be frozen. If suspicions of the circumvention of international or national sanctions or circumvention attempt in the enforcement of financial restrictions have arisen, report may also have to be sent to the Financial Intelligence Unit.
Even before the new sanctions against Russia and Belarus were introduced, there were many sanctions risk factors that had to be addressed in transactions with counterparties, but in our view, among others the following risk factors (‘red flags’) should be especially considered when assessing a business partner from Russia or Belarus at the moment:
- whether the cooperation partner, other group companies or its ultimate beneficial owner is a sanctioned person;
- whether the structure of the transaction is too complex for the prospective transaction;
- whether the ownership structure is too complex for the prospective transaction;
- whether the resources belonging to the sanctioned person appear in the export/import as well as transit structure of the counterparty;
- whether the cooperation partner obtains financing from Russian or Belarusian banks or sanctioned persons;
- whether the company has subsidiaries, parent companies or sister companies in Russia or Belarus;
- whether the cooperation partner has connections with politically significant persons in Russia or Belarus;
- whether the partner uses services that promote anonymity.
Please note that this is non-exhaustive list of risk factors to be considered, there are many more risk elements to be considered. In each individual case there can be different factors to which special attention should be paid.
US OFAC sanctions are indirectly applicable to the Republic of Latvia, to euro currency transactions and local persons. Violation of OFAC sanctions is not subject to criminal liability, but there is a risk of becoming a victim of sanctions, which may make it impossible to make payments in Latvia as banks will not want to further provide their services.
When assessing whether a particular entity is controlled by a sanctioned person, firstly the reference point of 50% ownership should be taken into account (US – 50%, EU – 50% +). Furthermore, it should be noted that ownership can also be exercised in different ways, namely, both directly and indirectly through various legal arrangements and agreements in the ownership structure, as well as by hiding behind other natural persons. Control is also often exercised on a contractual or other basis, for example, when the beneficial owner has the right to elect and remove members of the board, decide on major decisions of shareholders and to take other important matters affecting the operations of a particular entity.
In view of the above, it is necessary to pay detailed attention to identification of a business partner in order to determine whether it is not under the authority of a sanctioned person. In our opinion, the current level of sanctions against Russia and Belarus poses a sever risk as it may not be possible to fully investigate the cooperation partner.
If the performance of the contract is made difficult or impossible due to sanctions, it must be assessed whether a force majeure event has occurred and if it is possible to withdraw from the contract. In this case, it is important to determine whether the contract itself contains a force majeure clause and what is the applicable law to the contract.
In this respect the following steps are recommended:
- to explore whether the performance of obligations under a contract violates or may potentially violate the sanctions;
- If so, carefully assess the wording of the contract if it gives leeway for termination;
- Please note that in many cases force majeure may not be directly relied upon for immediate termination of the contract, and it just serves as a tool for suspension of performance of obligations under the contract;
Please note that a party is relieved from liability, including civil liability, if due to applicable sanctions it abstains from entering into a contract, terminates the contract, or requires the premature performance of the obligations from the other party. However it must be strictly determined whether sanctions prohibit performance of the contract.
Only obliged entities under the Act on the Prevention of Money Laundering and Terrorism and Proliferation Financing have a statutory obligation, based on their type of activity, make and document the assessment of international and national sanction risk in order to establish, assess, understand and manage the risks of failure to enforce the international and national sanctions imposed on their activities or customers.
However, this does not mean that other companies and entities should not introduce sanctions policies in their commercial activity as there is a risk that sanctions in the course of normal business activity could be violated in which case liability provided in the Criminal Act can be applied against the Company and its representatives and employees.
A sanction is a foreign policy measure whose general objective is to ensure peace, international security, democracy and the rule of law, and the restoration of human rights and international law. A sanction may, for example, prohibit entry into, stay in, residence or employment in a country or territory, as well as restrict international trade, impose financial sanctions and other prohibitions.
Sanctions must be applied by all persons in Latvia in Latvia whose activities are affected by the established sanction, incl. individuals, legal entities and authorities.
Considering the prohibition to violate any sanctions, each person must strictly assess whether there is a possibility that it can violate sanctions. This especially must be done by persons who engage in business relations with any person from Russia or Belarus as there can be either direct or indirect possibility of violating sanctions. When applying a sanction, it is important to monitor closely who are the specific entities to which the sanction should be applied and the content of the sanction, i.e. the activities to which the sanction applies. For obliged entites of anti-money laundering legislation (e.g. financial institutions, insurers, real estate brokers, gambling operators) there are additional obligations like to:
- immediately, but no later than on the next working day, report to the State Security Service on the violation of the international or national sanctions or an attempt to violate them, and the funds frozen due to such actions, and to inform the respective competent authority thereof;
- if suspicions of the circumvention of international or national sanctions or circumvention attempt in the enforcement of financial restrictions have arisen, report thereon to the Financial Intelligence Unit.
According to Article 84 of the Criminal Act for the violation of sanctions imposed by the United Nations, European Union, and other international organisations or sanctions imposed by the Republic of Latvia, the applicable punishment is the deprivation of liberty for a period of up to eight years or temporary deprivation of liberty, or community service, or a fine.
In addition, in the scope of the criminal law coercive measures may be imposed on legal entities that committed or facilitated the sanction evasion – in the most sever cases – fines of up to 37’500’000.00 EUR (seventy-five thousand minimum monthly wages).
Additional administrative fines are provided for obliged entities of anti-money laundering legislation.
In addition, transactions and agreements that contribute to avoidance of sanctions may be declared void and non-binding.
It is important to note that knowingly or intentionally engaging in any activity that is intended to circumvent the sanctions imposed is also prohibited. As a general rule, sanctioning legislation provides that any claim for compensation, set – off or additional security made by the sanctioned person shall not be satisfied in respect of the contract or transaction affected by the sanction.
Generally, in order to verify whether a certain person is sanctioned, it is possible to use sanctions search tool of the Financial Intelligence Unit, available at https://sankcijas.fid.gov.lv/. It generally includes compilation of all the international and national sanctions that are applicable to persons in Latvia, however, the Financial Intelligence Service also always recommends comparing this information with information published in the Official Journal of the EU or (UN Security Council chapter – Sanctions). Please note that considering the speed in which content and scope of sanctions are constantly evolving, it is strongly advisable to also verify the newest information about provided by the European Commission here. It also advisable to regularly get acquainted with the information provided by the Ministry of Foreign Affairs of the Republic of Latvia regarding the application of sanctions, available here.
The EU Sanctions Map, a tool developed by the European Union (EU), can be used to search for information: https://www.sanctionsmap.eu/.
In addition, the US OFAC Sanctions Search can be used: https://sanctionssearch.ofac.treas.gov/.
The European Commission has published and regularly updates answers to frequently asked questions about the application of sanctions. The European Commission’s answers are available on the Frequently Asked Questions section of the European Commission’s website.
There is currently no general ban on the import or export of goods, but there are certain sectors and categories of goods that are prohibited from any export and/or import of goods to Russia or Belarus.
It is also prohibited for persons to purchase goods or receive services from those natural and legal persons against whom sanctions have been imposed. In most cases individual sanctions provide obligation of freezing of funds and economic resources of the sanctioned person and a prohibition for to transfer funds and economic resources to sanctioned persons.
Persons are also prohibited from purchasing goods or receiving services from persons who are owned or controlled by persons included in the sanctions lists.
In addition, the current logistical conditions must be taken into account. Airspace and ports within EU are closed to Russian carriers and the delivery of goods through roads is rather cumbersome. It should also be noted that new sanctions are being applied which may change the conditions even further.
The completion of agreements depends on the specific sanction imposed on the counterparty of the agreement and depending on the subject of the agreement. For example, if the other counterparty of the agreement is a sanctioned person whose assets have to be frozen, it is not possible to complete the agreement. In other cases, for example, the agreement could not be completed as it concerns provision of technology which is prohibited for use in Russia.
Please note that there are multiple exemptions from sanctions indicated in the relevant EU regulations and in each case, it must be assessed whether the exemption really applies to the sanctioned person or the subject of the agreement.
If you have entered into a transaction which is prohibited under the applicable sanctioning regimes, you must immediately take all reasonable steps to stop fulfillment of the contractual obligations, such as non-settlement, non-delivery of goods or other actions aimed at ensuring that funds or economic resources are not transferred to a sanctioned person.
In addition, the State Security Service may have to be informed about a violation of the international or national sanctions or an attempt to violate them. This must be done immediately, but no later than on the next working day. The funds in question must be frozen. If suspicions of the circumvention of international or national sanctions or circumvention attempt in the enforcement of financial restrictions have arisen, report may also have to be sent to the Financial Intelligence Unit.
Even before the new sanctions against Russia and Belarus were introduced, there were many sanctions risk factors that had to be addressed in transactions with counterparties, but in our view, among others the following risk factors (‘red flags’) should be especially considered when assessing a business partner from Russia or Belarus at the moment:
- whether the cooperation partner, other group companies or its ultimate beneficial owner is a sanctioned person;
- whether the structure of the transaction is too complex for the prospective transaction;
- whether the ownership structure is too complex for the prospective transaction;
- whether the resources belonging to the sanctioned person appear in the export/import as well as transit structure of the counterparty;
- whether the cooperation partner obtains financing from Russian or Belarusian banks or sanctioned persons;
- whether the company has subsidiaries, parent companies or sister companies in Russia or Belarus;
- whether the cooperation partner has connections with politically significant persons in Russia or Belarus;
- whether the partner uses services that promote anonymity.
Please note that this is non-exhaustive list of risk factors to be considered, there are many more risk elements to be considered. In each individual case there can be different factors to which special attention should be paid.
US OFAC sanctions are indirectly applicable to the Republic of Latvia, to euro currency transactions and local persons. Violation of OFAC sanctions is not subject to criminal liability, but there is a risk of becoming a victim of sanctions, which may make it impossible to make payments in Latvia as banks will not want to further provide their services.
When assessing whether a particular entity is controlled by a sanctioned person, firstly the reference point of 50% ownership should be taken into account (US – 50%, EU – 50% +). Furthermore, it should be noted that ownership can also be exercised in different ways, namely, both directly and indirectly through various legal arrangements and agreements in the ownership structure, as well as by hiding behind other natural persons. Control is also often exercised on a contractual or other basis, for example, when the beneficial owner has the right to elect and remove members of the board, decide on major decisions of shareholders and to take other important matters affecting the operations of a particular entity.
In view of the above, it is necessary to pay detailed attention to identification of a business partner in order to determine whether it is not under the authority of a sanctioned person. In our opinion, the current level of sanctions against Russia and Belarus poses a sever risk as it may not be possible to fully investigate the cooperation partner.
If the performance of the contract is made difficult or impossible due to sanctions, it must be assessed whether a force majeure event has occurred and if it is possible to withdraw from the contract. In this case, it is important to determine whether the contract itself contains a force majeure clause and what is the applicable law to the contract.
In this respect the following steps are recommended:
- to explore whether the performance of obligations under a contract violates or may potentially violate the sanctions;
- If so, carefully assess the wording of the contract if it gives leeway for termination;
- Please note that in many cases force majeure may not be directly relied upon for immediate termination of the contract, and it just serves as a tool for suspension of performance of obligations under the contract;
Please note that a party is relieved from liability, including civil liability, if due to applicable sanctions it abstains from entering into a contract, terminates the contract, or requires the premature performance of the obligations from the other party. However it must be strictly determined whether sanctions prohibit performance of the contract.
Only obliged entities under the Act on the Prevention of Money Laundering and Terrorism and Proliferation Financing have a statutory obligation, based on their type of activity, make and document the assessment of international and national sanction risk in order to establish, assess, understand and manage the risks of failure to enforce the international and national sanctions imposed on their activities or customers.
However, this does not mean that other companies and entities should not introduce sanctions policies in their commercial activity as there is a risk that sanctions in the course of normal business activity could be violated in which case liability provided in the Criminal Act can be applied against the Company and its representatives and employees.
