JCOA -focusing on sanctions risk, with a focus on indirect sanctions, an area of complexity [Comsure notes PART 2]

THE JCOA  welcome two exceptional speakers:

• Nabi Abdullaev,
• Partner at Control Risks, who brings extensive experience in sanctions risk assessment and intelligence-led approaches.
• tests for sanction UBO control and case studies
• Collingwood Thompson KC,
• a leading UK barrister with first-hand expertise advising on complex and sensitive indirect sanctions matters. 
• The title of Collingwood's talk will be “Legal Issues in Control- Between a Rock and a Hard Place”

Each speaker provided a presentation – covering, for example, case studies,  exploring real-world scenarios, to explain evolving regulatory expectations, and share insights to help you strengthen your organisation’s sanctions framework and provide valuable insights that could assist you with tricky client matters.

RISK WARNING - NOTES FROM THE EVENT

The following are Mathew Beale’s notes from this JCOA event.

• Disclaimer - These are MATHEW BEALE’S personal, informal notes from the sanctions workshop. They may contain mistakes or incomplete information. Nothing here is legal advice.
• Sanctions regulations are complex and change frequently. Always seek advice from a qualified lawyer or compliance expert before taking any action based on these notes.

An extended warning is at the end of this post

NOTES FROM THE EVENT

THE FOLLOWING INCLUDES NABI ABDULLAEV PRESENTATION AND  CLOSING QA

Nabi Abdullaev, provide a briefing on the following  matters

• Control Testing Standards: Over 400 tests conducted in four years; recognised by regulators and law firms for managing sanctions risk.
• Three-Pillar Risk Approach: Ownership Test, Control Test, and Sanctions Risk Exposure Test provide a full risk evaluation framework.
• Case Studies Impact: Tests influenced licensing decisions and revealed financial schemes used to evade sanctions.
• Legal Perspectives: Courts prioritise factual control over formal titles in sanctions exposure assessments, requiring thorough documentation.
• Extraterritorial Compliance Obligations: US and UK sanctions apply globally, necessitating caution in transactions involving non-sanctioning countries.
• Market Position: 30-year local presence provides a competitive edge and access to insider information for nuanced risk analysis.

Action items for delegates

• Provide detailed control test methodology and ownership analysis framework to clients facing sanctions risk to support robust due diligence
• Continue gathering and updating control test questions in collaboration with law firms and regulatory feedback to maintain standards accepted by international regulators
• Maintain and expand source network (10-12 independent sources) for ownership and control verification, especially for Russian entities with opaque structures  
• Conduct client review meetings, integrating legal counsel to interpret control test outcomes and advise on business risk appetite decisions  
• Update sanctions risk exposure questionnaires based on the latest sanctions developments in coordination with former HAC officials and legal partners
• Investigate complex case studies, including debt transactions involving sanctioned entities, to provide actionable risk assessments for clients and financial institutions  
• Analyse ownership/control structures in multilayer jurisdictions (Jersey, Turkey, Hong Kong) while emphasising extraterritorial sanctions compliance and criminal risk considerations  
• Advise clients holding legacy assets frozen under sanctions on risk management and licensing requirements related to trusts and discretionary portfolios  
• Facilitate understanding of risk associated with Russian individuals denying regime proximity through enhanced control and exposure analysis  
• Support clients through nuanced trust law adaptations by providing expertise on control and beneficial ownership relevant to sanctions  
• Tailor risk assessment frameworks based on client risk appetite, especially regarding minority vs majority ownership interests involving Russian subsidiaries or counterparties  
• Monitor politically sensitive human rights sanctions cases closely and integrate relevant questions into sanctions due diligence questionnaires  

MATHEW BEALE MORE DETAILED NOTES

Sanctions Compliance and Control Testing

The discussion highlighted the critical role of detailed control and ownership testing in managing sanctions risk in Russian operations.

• Established Standard for Control Tests grew from early uncertainty to conducting over 400 tests in four years, becoming a benchmark recognised by regulators and law firms 
  • Collaborated with law firms, including former OFAC officials, to develop a structured control test format
  • Control tests focus on formal and informal power, influence of sanctioned individuals, and economic ties such as loans and dividends
  • These tests help clients demonstrate due diligence to regulators despite a lack of formal instructions
  • The growth was fuelled by demand from international companies needing a reliable sanctions risk assessment

• Three-Pillar Approach to Sanctions Risk involves Ownership Test, Control Test, and Sanctions Risk Exposure Test, providing a holistic risk evaluation framework
  • Ownership structures are often obscured by Russian laws, allowing companies to hide shareholders to evade sanctions visibility
  • Reconstruction of ownership uses archived data, media reports, and interviews with multiple independent sources to ensure robustness
  • Control tests evaluate who actually runs companies, including informal influence and economic support from sanctioned parties
  • Sanctions risk exposure assesses ties to politics, military, corruption, and criminality to gauge future sanction likelihood

• Case Studies Demonstrate Practical Impact of these tests, such as clearing a financial services firm selling debt from a sanctioned bank and assessing a Cyprus-based entrepreneur’s exposure 
  • Results have influenced licensing decisions and client risk appetite for proceeding with business relationships.
  • Tests revealed financial schemes used to evade sanctions, guiding banks in refusing risky engagements.
  • The firm’s deep local network and 30 years of Russia experience were key in providing nuanced risk analysis.

• Legal and Regulatory Perspectives emphasised the importance of factual control over formal documentation in court decisions about sanctions exposure 
  • Courts focus on who actually controls assets and makes decisions, not just legal titles or structures.
  • Risk assessments must be documented thoroughly to protect clients and service providers from sanctions enforcement risks.
  • The evolving trust law and sanctions regimes require continuous adaptation in due diligence and control evaluation practices.

Navigating Complex International Structures under Sanctions

Managing sanctions in multinational setups requires careful analysis of ownership, jurisdictional exposure, and the nature of the transaction.

• Cross-Jurisdictional Sanctions Compliance is complex when entities operate in non-sanctioning countries like Turkey or Hong Kong, but transact with Russian counterparts 
  • Despite no sanctions in Turkey or China, Jersey-registered entities remain liable for sanctions violations anywhere globally.
  • Business nature and counterparties must be scrutinised using ownership and control tests to assess risks.
  • Jersey law treats extraterritorial sanctions breaches as if they occurred locally, increasing compliance pressure.

• Risk Thresholds Vary by Ownership Share and Risk Appetite in fund and SPV structures involving Russian subsidiaries
  • No fixed threshold; risk tolerance guides whether to analyse subsidiaries holding as low as 25% ownership.
  • Higher ownership stakes require deeper investigation of control and sanctions exposure across the entire structure.
  • The three-pillar analytical framework applies to all relevant subsidiaries to capture indirect sanctions risks.

• Sanctions and Asset Management Challenges arise with frozen or legacy assets, especially trusts established before sanctions regimes changed 
  • Assets settled legitimately before sanctions may become frozen, complicating trust and portfolio management.
  • Reporting obligations and license applications are required to handle frozen assets lawfully.
  • Clients must adopt robust documentation of risk assessments and decisions regarding these legacy holdings

Human Rights and Political Sanctions Insights

The speakers shed light on the nature, application, and challenges of human rights-related sanctions and politically motivated designations.

• Human Rights Sanctions Are Applied Selectively and Arbitrarily, with examples like Chechen leader Ramzan Kadyrov and others sanctioned under the Magnitsky law 
  • Designations reflect political considerations rather than consistent criteria, causing unpredictability for compliance teams.
  • Cases include family members of officials sanctioned for human rights violations despite indirect involvement.
  • Such sanctions freeze travel and business activities even if affected individuals are not notorious violators.

• Sanctions Extend Beyond Russia to Other Regions, including Iran, Libya, and Syria, with the Middle East sanctions advisory team available for expertise 
  • The firm offers regional sanctions knowledge to complement its Russia focus, adapting to diverse geopolitical risks.
  • Human rights abuses globally are increasingly integrated into sanctions risk frameworks.

• Human Rights Risk Integrated into Social Distancing Frameworks to assess support for conflict, propaganda, or occupation activities 
  • Specific questions probe involvement in occupied territories, local war support, and subversive actions outside Russia.
  • This broadens sanctions risk beyond traditional financial or ownership criteria to include social and political behaviour.
  • The approach can be adapted to other geopolitical contexts beyond Russia

Sanctions Risk Assessment and Due Diligence Practices

Effective sanctions risk management relies on thorough investigation, clear documentation, and an understanding of the political context.

• Source of Wealth and Funds Are Complex but Secondary to Sanctions Status in decision making (35:25)
  • Legitimate wealth origin does not exempt sanctioned persons from asset freezes or restrictions.
  • Sanctions focus on associations and control, not only on whether wealth was legally earned.
  • Banks and institutions must balance frustration with the necessity of freezing assets linked to sanctioned individuals.

• Risk Appetite and Client-Specific Assessments Drive Sanctions Strategy with practical examples from Turkish SPVs and fund investments 
  • Clients decide thresholds for acceptable exposure to Russian entities based on their business risk tolerance.
  • Detailed analysis of counterparties’ political ties, control, and sanction risk informs these decisions.
  • Continuous monitoring and updating of risk assessments are vital due to evolving sanctions regimes.

• Due Diligence Must Be Thorough and Well Documented to protect against enforcement and legal risks 
  • Use open sources and multiple independent data points to build robust risk profiles.
  • Document rationale for conclusions and decisions, including uncertainties and risk appetite considerations.
  • This documentation provides legal protection even if risk judgments later prove imperfect.

Regulatory and Legal Environment Impacting Sanctions Compliance

Legal interpretations and regulatory actions shape how firms approach sanctions risk and enforcement.

• Extraterritorial Reach of US and UK Sanctions Creates Broad Compliance Obligations, including criminal risks.
  • US sanctions apply especially to transactions in US dollars or those involving deliberate evasion efforts.
  • Violations may trigger money laundering reporting and criminal investigations beyond sanctions enforcement.
  • Firms must be cautious even if primary sanctions targets seem politically motivated or unusual.

• Judicial Focus on De Facto Control Over Formal Titles guides court decisions on sanctions and asset control.
  • Courts prioritise actual control and influence in determining sanctions exposure, not just legal ownership.
  • This affects how trusts, discretionary beneficiaries, and corporate structures are treated under sanctions law.
  • Legal opinions and evolving case law require firms to review structures regularly for hidden control risks

• Regulatory Guidance and Law Updates Are Ongoing and Evolving, especially in trust law and sanctions regulations
  • Changes in trust law may affect control assessments and compliance approaches.
  • Regulatory handbooks and FAQs provide practical advice for complex structures but require constant review
  • Firms must stay informed and adapt compliance programs as legal frameworks shift

Market Position and Competitive Differentiation

The firm used its long-term local presence and expertise to build a unique position in sanctions consulting.

• Long-Term Russia Presence Provides Competitive Advantage with a 30-year network and deep local intelligence 
  • This network enables access to insider information across banks and companies, essential for nuanced risk analysis.
  • Competitors with smaller local teams could not match the depth of control and ownership testing services.
  • The ability to handle complex cases involving sanctioned banks and political exposures distinguishes the firm.

• Strong Relationships with Law Firms and Regulators Support Growth of the control test service line 
  • Collaborations with law firms having former OFAC officials helped shape methodologies and credibility.
  • Recognition by regulators in the US, Europe, and the UK established the firm’s tests as a de facto standard.
  • Peer referrals and legal community endorsements accelerated service adoption internationally

• Client Trust Derived from Methodical, Statistically Robust Approaches using multiple independent sources.
  • The methodology involves interviewing 10–12 independent sources for ownership and control insights.
  • This approach mitigates risks of incomplete or falsified information common under sanctions-related opacity.
  • Providing strong, defensible documentation reassures clients and regulators about compliance efforts.

TRAINING

• If, after all this, you want some additional training, all you need to do is call Mathew@comsuregroup.com or 00447797747490

Important Disclaimer / Warning

These notes are my [MATHEW BEALE] personal record from the workshop on sanctions. They are informal, written in real-time, and may contain errors, omissions, or misunderstandings.

• Nothing in this post constitutes official advice, legal opinion, or professional guidance.
• Sanctions rules are complex, frequently updated, and highly dependent on specific circumstances and jurisdictions.
• I am not a lawyer, nor am I qualified to give sanctions compliance advice.
• Any statements, interpretations, or summaries I have recorded are my own understanding at the time of the workshop and may not be accurate or complete.
• For any real-world decisions involving sanctions, always consult a qualified legal professional or your organisation’s sanctions compliance officer.

I am sharing these notes only for informational and educational purposes, to help others who attended (or missed) the workshop get a general overview of the discussions.

If you spot any inaccuracies, please let me know in the comments so I can correct them.