How to check if a foreign entity is not linked to Russia?
Currently, entrepreneurs are afraid to establish contacts with foreign entities because they may be linked to Russia. Such cooperation could seriously harm the company’s reputation and, consequently, its financial condition, especially in the event of international opposition to Russian armed aggression in Ukraine. Companies maintaining such cooperation are boycotted in the media, which directly affects consumer purchasing decisions. In addition, the catalog of sanctions imposed on Russia is constantly expanding, especially by the European Union. Violating sanctions can result in a penalty of up to 20 million PLN, and even contractors of Russian companies may unwittingly commit such violations. Polish entrepreneurs have valid concerns about the severe consequences of cooperating with Russian entities. How can they protect themselves and verify whether their business partner is not linked to Russia?
Threat to the existence of the company
The armed invasion of Ukraine by Russia, which began on February 24, 2022, has caused an economic crisis and brought many negative consequences for market participants. The international community has turned its back on Russia, trying to force it to end military actions in Ukraine. One of the ways of opposition is the introduction of embargoes in the form of a ban on trade with Russia, exchange of goods and services with this country. Public condemnation translates directly into the activities of companies, even if they are identified in the slightest degree with the Russian side. Therefore, for a year now, Polish entrepreneurs have been afraid to establish cooperation with foreign contractors, because it is not easy to determine the ownership structure, especially of complex entities. And the media report daily about French, German, or Hungarian companies that, despite the worldwide opposition to Russia, still do business with it.
National and EU sanctions
The European Union imposes sanctions on Russia in packages. By the end of 2022, it has already introduced 9 of them. The imposed sanctions can be found in the EU’s Official Journal available online at https://eur-lex.europa.eu/oj/direct-access.html?locale=en. In addition, Poland introduces its own sanctions under the Act of 13 April 2022 on special solutions in the area of counteracting support for aggression against Ukraine and serving national security.
The Polish Ministry of Interior and Administration publishes and updates the official list of persons and entities subject to sanctions at https://www.gov.pl/web/mswia/lista-osob-i-podmiotow-objetych-sankcjami. It is there that one can check their contractor, their connections, the reason for being listed, and the sanctions applied to them. Given the severe consequences that threaten for violating sanctions prohibitions, Polish entrepreneurs should keep track of this list on an ongoing basis. Among other things, for violating the prohibition of providing financial resources or failing to immediately report information on operations on frozen accounts, the Head of the National Fiscal Administration can impose a fine of up to PLN 20,000,000.
The import ban
The list of entities subject to sanctions includes, among others, prominent businessmen operating in the Russian steel industry, as well as individuals providing financial services, military products and technologies to the Russian state, as well as banks and financial institutions, companies in the military and defense sectors, companies in the aviation, shipbuilding, and machinery industries.
For Polish entrepreneurs, the list of goods that cannot be imported from Russia into the EU can be helpful in avoiding establishing or continuing cooperation with Russian counterparties. In particular, the Union has closed all its ports to Russia, allowing only a few import exceptions, including:
- Energy, coal, nuclear fuel, and other goods essential for the functioning of nuclear potential for civilian use;
- Pharmaceutical, medical, and agri-food products;
- Humanitarian aid.
In the case of transactions involving maritime transport, Polish entrepreneurs should be interested in checking the counterparty carefully to ensure that the ordered and delivered goods do not get stuck or returned from the EU border. The import ban also applies to ships that attempt to circumvent the embargo by changing their Russian registration to the flag of another state. Port authorities can detect an attempt to change the registration by checking the IMO number of the ship (a unique identification number assigned on behalf of the International Maritime Organization). Similar sanctions apply to road and air transport. The list of goods subject to the import ban includes, among others: crude oil and petroleum products, coal, steel, gold, cement, wood, paper, plastics, alcohol, cigarettes, and cosmetics.
The Council Regulation (EU) 2022/576 of 8 April 2022 amending Regulation (EU) No 833/2014 concerning restrictive measures in view of Russia’s destabilising actions in Ukraine is also a source of information on goods and products subject to EU sanctions.
What do the sanctions mean for Polish entrepreneurs?
Entities connected to Russia or Belarus, which are also subject to some of the sanctions, are not only prohibited from entering the EU territory. Their assets, including all accounts in EU banks, have also been frozen. The sanctions also mean that such entities are not allowed to provide, even indirectly, any financial means or assets. The sanctions also apply to exports to Russia. The export ban includes, among others, modern technology, certain types of machinery and transportation equipment, luxury goods, as well as equipment, technology, and services used in the energy industry. The sanctions also involve a ban on importing and exporting not only goods, but also certain services, such as accounting, bookkeeping, or tax advisory services.
How to check a contractor?
The most important way to verify a contractor and their potential connections to Russia is to establish their beneficial owner and then check if they are on the aforementioned sanctions list maintained by the Ministry of Interior and Administration. The information can be obtained from the Central Register of Beneficial Owners maintained by the Ministry of Finance. Registers such as CEIDG and KRS, as well as their foreign counterparts maintained by Russia (http://egrul.nalog.ru/) and Belarus (http://egr.gov.by/egrn/index.jsp?content=Find) can also be helpful in establishing the ownership structure of a company.
Direct inquiry to a contractor
In case of difficulties in determining the ownership structure of a business partner using available registers, another method of verifying the contractor as part of economic intelligence activities is to directly ask them to confirm who their ultimate beneficial owner is. Of course, to verify the answer given, it is possible to ask the foreign entrepreneur to provide documents confirming their declarations.
Economic due diligence of a contractor – how often?
Sanctions lists are updated periodically. In order to avoid sanctions risk, economic due diligence activities to verify the ownership structure of a contractor should be conducted at least every time we enter into a business relationship with a new partner or enter new markets. Information about updates to sanctions lists also appear in the media and public space – it is responsible behavior to be aware of these updates. It should be remembered that Russia and Belarus may also have their own sanctions lists. If information about the entities included on these lists cannot be obtained, determining the scope of the embargo on imports to these countries should not be a problem.
What does economic due diligence provide?
The ownership structure of a foreign company can be verified by conducting an independent investigation using publicly available sources, such as checking information on the contractor’s website or available opinions online. Embassies and national chambers of commerce should also be able to provide information. In many cases, access to financial reports of foreign companies can be obtained. Of course, the easiest and most reliable way to verify a contractor is to entrust their verification to a professional economic intelligence agency or detective agency, which will know where to look and what methods to use to obtain the necessary information. These allow entrepreneurs to make an informed assessment of the risk of potential cooperation with the scrutinized contractor, especially in the current sanctions risk environment. This is not always a simple matter, especially when the entrepreneur is dealing with a contractor with an extensive holding structure, which includes many entities from different jurisdictions.