Corporate Intelligence Agency analysis: what risks Romanian business is exposed to in trade relations with Russian companies on sanctions lists

• More than 400 companies have been set up in recent weeks in one Romanian county, most of them owned by Ukrainian citizens

• Romanian companies that do business with Russian entities on the sanctions list, even unknowingly, can be held liable

• Russia's exclusion from SWIFT will create financial bottlenecks across the chain for local companies doing business in Russia

Bucharest, May 2, 2022 - The introduction of successive packages of economic sanctions against Russia is prompting some Russian-registered companies or Russian businessmen to find ways to avoid the embargo in order to continue their activities or even to survive.

According to an analysis by the Corporate Intelligence Agency, a business risk management company, Russian firms have stepped up their efforts to find ways to stay in business by moving operations to jurisdictions where they can do so without fear of being sanctioned or having their access to money blocked.

In recent weeks, money transfers, cryptocurrency transfers and real estate purchases have been identified in Turkey, the UAE and other states or jurisdictions that have taken a neutral stance on the war in Ukraine, which will make due diligence procedures already in place in EU companies more difficult. For example, in the UK alone, Russian businessmen have acquired €1.5 billion worth of property, of which €830 million is held through entities registered in offshore jurisdictions.

"According to the information we have, since the outbreak of the war in Ukraine, more than 400 companies have been set up in a single Romanian county located in the border area or in economically relevant areas, most of them having Ukrainian citizens as shareholders. At the same time, the shareholders transferred large sums of money to accounts opened in the names of these companies. In view of the ease with which it is possible to set up a commercial company today, we consider that these may include companies in which the founders appear by name, but the real beneficiaries may be citizens of Russian origin on the sanctions lists"says Gabriel Zgunea, CEO Corporate Intelligence Agency, warning that this phenomenon will spread in the coming period. "Knowing the approach of local companies regarding the <> or <> procedures, we are sure that there will be situations in which Romanian companies will unintentionally end up conducting business operations with entities in which UBO (ultimate beneficiary owner) may be citizens or companies of the Russian Federation".

Among the most common options for avoiding sanctions are:

• avoid the embargo by transferring transactions to the names of citizens/companies in EU jurisdictions or traditional partner countries (Norway, Switzerland, etc.);

• the establishment of entities in other countries that have chosen not to apply economic sanctions against citizens/companies from the Russian Federation (China, most African countries, Turkey, Israel, Arab countries, etc.);

• setting up companies in off-shore jurisdictions which, in turn, may be shareholding in companies in the above-mentioned countries, in the Swedish system, etc.

What risks Romanian companies are exposed to

Representatives of the Corporate Intelligence Agency believe that this situation will not be temporary, the consequences of the current Russian-Ukrainian conflict will be felt for years to come. Also, those concerned will no longer wait for an exceptional situation, such as the current conflict, but will try to secure their operations now by transferring them to safe jurisdictions or to persons apparently unrelated to the real beneficiaries.

Under the EU Treaties and the Restrictions and Sanctions Directives, a company registered in the European Union is prohibited from circumventing the embargo regime by using another entity, even if it is registered outside the EU, or even giving instructions to do so. And the list of sanctions for persons/entities in the Russian Federation has been in existence for a long time, having been updated recently after the outbreak of the Russian-Ukrainian conflict.

Thus, in the context in which Romanian companies have business relations with entities on the sanctions list, even unknowingly, they can be held liable by the Romanian authorities, in accordance with the legislation in force, the authorities applying the principle of law, according to which, "ignorance of the law does not absolve you from liability".

As the list of sanctions is amended (weekly or even daily), EU companies will step on a "minefield" in terms of the risks they expose themselves to by ignoring (intentionally or unintentionally) the measures in place and by failing to take steps to get to know their business partners. They will not only be affected in terms of sanctions by the states where they operate, but also in terms of reputation, which affects the value indicators for listed companies. Compliance departments have limited resources to know the beneficial ownership of non-EU entities, which makes them vulnerable in the medium and long term.

Moreover, the European Union's package of economic measures, in particular Russia's exclusion from SWIFT, will create financial bottlenecks across the chain for local companies that do business in Russia.

How local businesses can protect themselves

In the context of the war between Russia and Ukraine, managers need to scrutinize the companies they work with to reduce business risks such as non-payment of receivables or insolvency.

"We recommend managers of Romanian companies to be much more careful about the partners they work with, especially as we are far behind economically developed countries, where risk management, prevention and compliance culture are business principles, and companies have at hand tools to verify the identity of the client/partner. Access to background check and due diligence services are necessary in this context, all the more so as the information on the list of sanctions is disparate, is updated periodically and it is difficult for a company to follow these updates on a daily/weekly basis"says Dan Rusu, Senior Partner Corporate Intelligence Agency, noting that the lack of partner awareness actions can translate into financial and reputational losses that are difficult to quantify at this stage. "We consider that a transparent warning mechanism should be put in place, perhaps even in a public-private partnership, in order to identify, at an early stage of the collaboration, any indications that the partner or final beneficiary is an entity on the sanctions list."

Top 10 products purchased by Romania from Russia

According to the National Statistical Institute (NSI), Romania imports from Russia mostly fuel oil, gas, coke, iron ores, alloy steels, mineral or chemical fertilizers, coal, hot-rolled bars and rods, paper, paperboard and wood. The value of trade fell in 2020 by 36% compared with 2019 and was 37% below the 2011 level, totaling more than €2.6 billion, or 1.8% of the total, according to NSI data.

About Corporate Intelligence Agency

Corporate Intelligence Agency is a risk management company dedicated exclusively to the business environment, specialized in identifying potential vulnerabilities, risks or business opportunities of the companies that use its services.

Corporate Intelligence Agency offers premium solutions in Applied Intelligence, Competitive Intelligence and Risk Management, by using the latest tools and technologies, along with the dynamism, creativity, and especially the very high level of expertise in the intelligence field of the experts in the team.

Corporate Intelligence Agency services are addressed to all companies and corporations that understand the importance of using professionals to generate reliable information that can inform decision-making processes, providing knowledge on socio-political phenomena or conjunctures, markets or situations of interest, as well as reducing risks or vulnerabilities in areas that may affect the company's economic and reputational interests.