There is no doubting the ramifications for business and other international and UK organisations, or the attention government is now placing on tracking the real owners of business and property in the UK.
Yesterday the Government announced draft legislation to track who owns property in the UK Economic Crime (Transparency and Enforcement) Bill 2022: overarching documents. Alongside this the white paper on reform of Companies House has also been published to give additional powers on verifying and challenge information on the identity of those setting up, running or controlling a company in the UK. Corporate transparency and register reform, both of which our policy team will be looking at in detail.
As senior strategists who maintain a broad picture of the impact of events on their company or organisation, the governance professional will be paying close attention to the current situation to support their chair, CEO and board consider the implications.
Rising costs of fuel were already on the radar and are now increasing sharply, as will costs of transportation. Any activity with the list of banks, organisations and proscribed individuals on the UK government sanctions list will need careful investigation.
There are some signs that Russian companies and individuals have anticipated sanctions, devising more complex structures to make it more difficult to discover who should be sanctioned.
Companies must act now if they have not already to pursue due diligence to enforce sanctions. In all likelihood, these were already on the radar from the build-up over the last few weeks. Sanctions against Russia are not new this week after all, just bigger in scope, see Russia (Sanctions) (EU Exit) Regulations 2019. Russia sanctions: guidance. For a complete list of sanctions, see here.
Sectors specifically mentioned in sanctions will have a higher onus on them to enforce. These include businesses selling military equipment, or ‘dual use’ equipment who must suspend their licenses as well as those selling high tech or oil refinery equipment.
More generally, all FTSE companies will need to ensure to check their register of shareholders to ascertain whether there are shareholders who are part of the current and new list of proscribed individuals to ensure they do not pay dividends to those individuals and that their assets are frozen whether those assets are invested as individuals or entities. Banks will need to ensure no major Russian companies are able to raise finance or borrow money on UK markets. For an overview of the banks, companies and individuals being sanctioned, and the Foreign office approach, see:
Secondary legislation is expected to put these into effect, and Liz Truss has said the list of individuals will grow over coming days and weeks, however, it will take time to establish the nature of their connections to the Russian state.
Where does the governance professional sit in all this?
As the current situation escalates there are overlaps with the company secretary and governance professional responsibilities. One such is to consider the reputational impact of not responding to sanctions in a timely and effective manner with the potential for fines and prosecutions for failing to do so. Our recent research into the role of the governance professionals highlighted the difference between governance and, for example, legal departments and finance. Our members were clear they perceive this as the difference between advising on what can be done to making a judgment on what should be done with an eye on the whole organisation and how those actions will be perceived and judged by stakeholders.
We have summarised considerations that may be of some significance or interest below:
- Primarily to check the chair and board are on top of the issues, including those which are reputational given the heightened political and public interest.
- For listed companies to comb through the share register and utilise s.793 of the Companies Act 2006 to identify whether there are any shareholders who are proscribed individuals, if these shareholders are not already known.
- It is unlikely boards will need to be reminded that breaching sanctions carries a potential criminal sentence, and therefore their DNO insurance will not cover them.
- Where there is relevant case law, the importance of board minutes has been made clear.
- In defence companies, there will be some greater profile in ensuring they are not licensing or selling to Russian companies.
- As above with companies selling or licensing electronic, telecommunication and aerospace technology as well as oil refinery manufacturers.
- In all likelihood, banks will act as a watchdog on transactions that seem to be in breach and alert the regulator.
- If companies are slow to comply with sanctions or not inclined to, they will also risk whistleblowing from concerned employees.
- The banking sector must pursue its own diligence to ensure it is not financing entities and individuals subject to sanctions. Sanctions include freezing the assets of designated persons, including funds and other assets such as property or vehicles and granting a loan or credit, either directly or indirectly, to named Russian businesses and companies. This is rather specialist to banking.
Putting sanctions into effect
Corporate governance professionals will be familiar with s.793 notices to discover who has an interest in its shares. Frequently, initial responses will result in a further s.793 to ascertain the underlying beneficial owner. There can be a trail of breadcrumbs to follow here. While initial investigations should be executed in a matter of days, it is not unreasonable to expect this process to take a number of weeks to ensure compliance with the announced and evolving UK sanctions.
This is particularly true of the current situation where there are signs Russian entities have prepared for the possibility of sanctions in advance by adding extra layers of complexity to their corporate structures through the likes of special purpose vehicles to potentially obscure the real beneficiaries. The trigger is where a person controls the exercise of voting rights rather than where a person acquires an interest in shares.
If there is a failure to respond to a s.793 notice, the company can apply for restrictions to be imposed on shares when current or former shareholders fail to respond. Restrictions include suspension of voting rights, dividend payments and possible forced sale of those shares.
Breaching sanctions is a criminal offence with a maximum of ten years imprisonment or a fine or both, which may be a handy reminder in the unlikely event the board do not engage with the issues. Most director and liability insurance policies will not cover this scenario as criminal liability is generally excluded from policies, although it may be wise to check.
Companies are waiting for more information from the government on the details of sanctions which will clarify how impactful they will be through the immanent secondary legislation announced by the foreign office last week.
Charities may wish to check whether they have any high-net-worth donors on the sanctions list or are receiving funding from any proscribed companies for their reputational comfort.
Cyber security
The war has increased the risk of cyber security attacks on UK institutions and companies. Russia is credited with being the source of previous disruption to the Ukrainian tax system in 2017, an attack which spread malicious software around the globe within hours. It is also reported there were cyber-attacks on Ukraine’s data systems prior to the invasion. Western governments are highly concerned that Russia will attack western infrastructure, particularly around energy, water and airports. The National Cyber Security Centre has asked that the following guidance be issued as a reminder of good practice in times of greater risk to help prioritise necessary cyber security work, offer a temporary boost to defences and give organisations the best chance of preventing an attack and recovering quickly if it happens. See: Actions to take when the cyber threat is heightened.
Supply chain disruption
Use of public cloud enterprise software has increased the potential consequences of an attack should a major cloud company be shut down, potentially impacting tens of thousands of company’s abilities to manage supply chains.
The pandemic demonstrated the vulnerability of global supply chains to any major disruption and particularly to lean manufacturing strategies where there was a minimal approach to holding inventory. Companies will have re-examined their approach over the last couple of years and may well be doing so again at this time. Container freight and shippers were already operating in crisis mode before the invasion, which is expected to result in major new constraints on Asian ocean and air exports and spot container pricing, according to an Economist article by Steve Baker, Vice President of Supply Chain Services. He predicts a rise in cost from $10,000 per container to $30,000—all adding to the potential for inflationary impact.
Sporting responses and reputational impact
Sporting organisations are responding to the war and reputational issues of including Russia by cancelling or restricting sporting fixtures. Some examples include Formula one announcing the 2022 Russian Grand Prix, due to take place in September, is impossible to hold, ‘in the current circumstances’. UEFA announced on Friday that the Champions League final would no longer be held in St Petersburg. FIFA, having faced a negative reception to their announcement on Sunday allowing games with no spectators amongst other restrictions, yesterday changed this to an outright suspension on any Russian team involvement in the World Cup. Their announcement came alongside that of the International Olympic Committee calling on all sporting organisations to stop the participation of Russian and Belarusian athletes and officials in international competitions”.
David Mortimer,
Head of External Affairs, CGIUKI
