Why are Australian sanctions now the topic of the day?

Traditionally, Australian sanctions have focused on limiting access to military-related goods and services, freezing assets and travel bans towards those whose behaviour (or more correctly, the behaviour of a foreign government) we deplore. Sanctions have been imposed on many nations by Australia and others in recent years, yet their effectiveness is still an open question.

Since late February 2022, Australian sanctions have been significantly extended against Russia, its president and nominated associates. They include:

• Financial sanctions, cutting access to designated entities (major Russian banks) from the western banking system, including the Swift system and the use of international credit cards (VISA and MasterCard);
• Designating numerous wealthy Russian businessmen (known colloquially as oligarchs) as sanctioned persons, effectively freezing any Australian assets or trade with them; and
• Expanding the scope of goods and services now sanctioned.

These recent events have enlivened discussion of the role, procedure and effectiveness of sanctions and what Australian business should know to manage sanctions’ risks.

Australia’s sanctions regime

Australia implements two types of economic sanctions[1]:

• United Nations Security Council (UNSC) multilateral sanctions, which Australia imposes as a member of the United Nations (UN) under the Charter of the United Nations Act 1945 (Cth) (the UN Charter Act); and
• Autonomous sanctions which Australia imposes as part of its independent foreign policy under the Autonomous Sanctions Act 2011 (Cth) (the Sanctions Act) and Autonomous Sanctions Regulations 2011 (Cth) (the Sanctions Regulations).

Contraventions of the UN Charter Act, the Sanctions Act and the Sanctions Regulations give rise to serious penalties including imprisonment and/or significant fines (see below).

Australian sanction laws have extra-territorial application in relation to activities wholly or partly in or outside Australia, by Australian citizens and Australian-registered bodies corporate overseas and on board Australian-flagged vessels and aircraft.

Sanctions are administered by the Australian Sanctions Office (ASO), part of the Department of Foreign Affairs and Trade (DFAT) and implemented by declarations made by the Minister for Foreign Affairs and Trade (Minister) through:

• Restrictions on trade in goods and services;
• Restrictions on engaging in commercial activities;
• Targeted financial sanctions on designated persons and entities; and
• Travel bans on certain persons.

DFAT maintains a Consolidated List of all entities and person subject to sanctions.

Australia’s sanctions laws were largely inadequate until 2011. This was highlighted by the conduct of the Australia Wheat Board Ltd (AWB) and its abuse of the United Nations Oil-For-Food Humanitarian Program and “breaches” of UN sanctions then targeting Iraq in the late 1990s and early 2000s. Prior to 2011, a breach of a UN sanction gave rise to no civil or criminal offence under Australian law. Hence, conduct prior to 2011 that might be regarded as “sanctions-busting” was often considered through the prism of whether a company director or officer breached that statutory duty[2]. As a result of the AWB Royal Commission, Australia’s sanctions laws were substantially amended and updated.

There are a range of other procedures under the Customs Act 1901 (Cth) that regulate the export regime. In addition, the Australia Group is an informal multi-State arrangement which aims to allow exporting or trans-shipping countries to minimise the risk of assisting chemical and biological weapons’ proliferation. These are not covered in this update.

What are sanctioned goods/services/assets?

Sanctioned goods and services are those intended to be used by designated persons and entities. Sanctioned goods must not be exported or imported and sanctioned services cannot be provided to a designated person. Australia also has an export control regime which restricts the export of military and dual-use goods.

A freezable or controlled asset is one which is owned or controlled by a designated person or entity listed on the Consolidated List. It is an offence to use or deal with an asset of this kind and the holder must inform and provide specific information to the Australian Federal Police (AFP) as soon as possible.

Penalties for breaching sanctions laws

ASO can issue a notice requiring information or documents, including sworn evidence, for the purpose of determining whether a sanctions law has been complied with.

The AFP and DFAT have the power to investigate potential breaches of sanctions and the Commonwealth Director of Public Prosecutions has the power to prosecute substantial alleged breaches in accordance with the Prosecution Policy of the Commonwealth.

It is a serious criminal offence to contravene a sanctions measure (or a condition of a sanctions permit or authorisation). Offences directed towards individuals contravening the UN Charter Act and the Sanctions Act require intentional conduct[3], while offences directed towards companies impose strict liability. The table below outlines the offences under the Sanctions Act. There are identical offences for contraventions of United Nations sanctions under the UN Charter Act[4].

Enforcement of sanctions law against Australian persons

The two Australian cases involving contraventions of Australia’s sanctions laws that have resulted in criminal prosecutions concerned a sanctioned supply[7] of proscribed goods to Iran and to North Korea.

In 2019, R v BB and R v AA (a husband and wife) each pleaded guilty to conduct contravening the UN Charter Act, by supplying approximately 90 tonnes of nickel alloys to an Iranian-owned, Dubai-based company, for ultimate transfer to Iran between March 2009 and April 2010[8]. The nickel was used in the production of energy in Iran. The Court regarded their conduct as reckless and the offence serious, requiring adequate punishment. Each was convicted and sentenced to two years imprisonment, to be served by way of intensive correction in the community.

In 2021, Chan Han Choi pleaded guilty to conduct contravening the UN Charter Act and the Sanctions Act, by providing brokering services for the sale of arms and related material, tactical inertial measurement units and refined petroleum products to North Korea between August 2017 and December 2017[9]. The court was satisfied that Mr Choi’s conduct was deliberate and motivated by a desire to undermine the sanctions imposed on North Korea. Despite Mr Choi’s onerous remand and bail conditions, (having been classified as a National Security Inmate), the court considered that imprisonment was the only penalty. Mr Choi was sentenced to three years, six months’ imprisonment, which sentence having expired (given his pre-existing custody), he was released without condition.

In the US, on 25 April 2022, Toll Holdings Limited (Toll), an Australian international freight forwarder and logistics company based in Melbourne, Victoria, engaged in conduct contravening numerous US sanctions, by originating or causing to be received, 2,958 payments (processed through US financial institutions) in connection with sea, air and rail shipments by Toll, its affiliates or suppliers to, from or through, North Korea, Iran or Syria and/or which involved the property of designated persons between January 2013 and February 2019[10]. Toll agreed to settle a civil liability suit with the US Department of the Treasury’s Office of Foreign Assets Control (OFAC) by paying a US$6,131,855 penalty. OFAC considered Toll’s reckless disregard for US sanctions was a significant aggravating factor, while Toll’s voluntary self-disclosure and extensive remediation were major mitigating factors.

The attitude of the Australian courts towards sanctions can best be summarised as follows[11]: “…if breaches of sanctions pass without punishment, the sanctions become useless tools of international influence”. In determining the focus of general deterrence towards the business community, the court in Choi made these comments[12]:

It can be assumed that many international traders and brokers have little concern with the work of the UN, or individual nation States, in imposing sanctions. They may not appreciate the effect of providing sanctioned services, which is to undermine aspects of the international order. As the offences for which the offender is to be sentenced are generally committed in a mercantile context, it is important that the sentence be sufficient to deter those who, for financial or political motives, might otherwise be inclined to offend.

A breach of a sanctions measure may, subject to the facts, also attract an offence and prosecution under customs and migration law, fraud, terrorism or tracking offences, anti-money laundering offences or other crimes in the Australian Criminal Code Act 1995 (Cth).

Ministerial approval

The UN Act, the Sanctions Act and the Sanctions Regulations give powers to the Minister to regulate sanctions. The Minister can make declarations concerning persons and entities who are the subject of sanctions.

The Minister can also initiate investigations through the ASO and AFP and issue sanctions permits.

A sanctions permit provides authorisation from the Minister to undertake an activity that would otherwise be prohibited. The permit may include conditions.

Most permits are issued for 180 days, but can be issued for up to two years where there is a reasonable case. The ASO recommends allowing three months for a determination.

Review of designation

The Minister’s decision to designate or declare a person under the autonomous sanctions regime is subject to judicial review under the Administrative Decisions (Judicial Review) Act 1977 (Cth) in the Federal Court of Australia. The basis of pursuing a claim in this forum is to ensure that the decision of the Minister is legal, reasonable and fair.

It is important to note that a review of Australia’s sanctions declarations has not occurred in the 10 years since the Sanctions Act was enacted.

How individuals are sanctioned is opaque and rarely open to public scrutiny. They are made “as a matter of foreign policy”. Various Explanatory Statements published by the Australian Government state that the Minister is satisfied, for example, that a designated entity “is responsible for, or complicit in, the threat to the sovereignty and territorial integrity of…” for example, Ukraine or “…is or has been, engaging in an activity or performing a function that is of economic or strategic significance to Russia…:

What evidence or facts there are, or may be, to support such decisions, are not released to the public. If these decisions are ever challenged, a court will have to independently assess the evidence relied on by the Minister and to rule on the extent and reasonableness of the Minister’s discretion.

Australia’s Magnitsky laws

On 21 December 2021, the Australian Government amended the Sanctions Act by introducing Magnitsky style sanctions.

Sergei Magnitsky was a Ukrainian-born Russian tax accountant who uncovered alleged mass corruption and was subsequently prosecuted by the Russian government and died in a Russian prison in November 2009. Following this, the US, UK and other countries introduced sanctions targeting issues (rather than individuals or countries) to combat human rights abuses.

Australia’s Magnitsky sanctions can be imposed to address particular thematic sanctions, for example where serious human rights violations are suspected to have occurred or a violation of international humanitarian law has occurred. They set out the decision-making process for imposing targeted financial sanctions and travel bans on designated persons and entities under the thematic sanctions regimes.

Australia announced the first use of financial and travel sanctions under the Magnitsky-style Regulations on 29 March 2022, sanctioning 39 individuals responsible for corruption and human rights abuses.

Russia sanctions

In response to Russia’s invasion of Ukraine, the Minister has designated a number of autonomous sanctions on designated persons including Russian Ministers, pro-Russian propagandists, the Belarussian President, Russian state-owned enterprises and individuals running large private company groups or conglomerates (the well-known Russian oligarchs).

The sanctions include restrictions on the following[13]:

• Traditional services (for example, military activity, investment and financial services);
• Commercial activities (for example, banking with publicly-owned or controlled Russian banks, military equipment or services);
• Coal, coke, oil, gas and petroleum based goods;
• Aluminium ores, oxides and ore concentrates;
• Luxury goods (for example, luxury goods including horses, caviar, furs, wine, works of art, perfumes, vehicles, lead crystal glass, cars and motorcycles, fountain pens and equipment for skiing, golf and water sports); and
• Travel bans.

There is however, no necessary unity between those Russian entities sanctioned by Australia and, for example, the US, the UK and the EU. For example, the owner of Chelsea Football Club, Roman Abramovich was sanctioned by the UK and the Australian Governments yet not the US Government (apparently, according to international media, at the request of the Ukrainian President). Why such a different approach is taken is not explained nor is there any obvious reason.

Ultimately, one has to ask, what impact sanctions from Australia will have on Russian entities with limited to no direct asset exposure in Australia. Time will tell if indeed these sanctions have any meaningful effect on a country (Russia) that appears to place national pride and imperial vision over the rule of law and economic prosperity.

Do sanctions work?

Sanctions are promoted as an effective means of implementing national foreign policy. For example, while sanctions may have pushed Iran to negotiations over its nuclear activities in 2015, they do not appear to have materially changed Iran’s foreign policy. Sanctions were also placed on associates of the Russian Government in 2014 following its annexation of Crimea. Again, however, Russia was not deterred and Crimea remains annexed by Russia. Sanctions have been in place over many years towards North Korea and Cuba yet strangely, their national governments remain undaunted. Studies examining the effective use of sanctions consider modest (some may say minimal) policy changes are preferable to, for example, military action or regime change which are considered less effective[14]. Whether this means sanctions are effective probably depends on your political perspective. Nevertheless, the scale of financial sanctions on Russia, its retaliation by requiring contract debts to be paid in roubles or cutting off supplies (such as gas to European countries) and a lack of sanctions from major trading countries (such as India and China) mean life is just a little more complicated.

Practical questions to consider

What should I do to protect myself or my business?

• Review the information provided by ASO and DFAT in relation to the sanctions regimes.
• Screen customers and third parties and transactions for sanctions risk, with a focus on any high risk transactions.
• It may be prudent to subscribe to receive updates to the Consolidated List to keep informed of whether are doing business with designated persons or entities. 
• Undertake regular due diligence of your supply chain partners, third parties and your business operations, understand any "Russia-related" connection in your supply chain and consider measures that may be required to minimise sanction risks, including an application for a sanctions permit.
• Ensure standard form sanctions' clauses refer to Australian sanctions.
• Train and educate all employees and third parties to identify and manage sanctions risks.
• Consider random audits of programs, system controls and transactions.
• Ensure your corporate governance regime includes a clear sanctions policy and business procedures, with appropriate senior management responsibility with reports to the Board of Directors.
• Review existing contracts and templates to ensure sanction clauses are up to date.

What should I do if I think I have been affected?

Conduct a high level review, assisted by lawyers experienced in sanctions laws and practices.

An indicative assessment can be requested from ASO to consider whether an individual or entity might be affected by Australian sanctions law. The ASO recommends allowing three months for the assessment of a matter, and obtaining legal advice as appropriate.

Key takeaways

Whatever our views are about the effectiveness of sanctions, they are widely implemented by many countries, including Australia’s major trading partners. They can be complex and ever-changing due to the political nature of sanctions. Australia’s sanctions laws impose significant criminal liability (criminal conviction, imprisonment and substantial fines) for contraventions.

While Australia has been traditionally a little slow in prosecuting sanctions laws (that might be regarded as a form of complex commercial or financial crime), recent prosecutions in Australia demonstrate an enhanced risk to anyone considering a breach of sanctions. Indeed, even if foreign regulators investigate and potentially prosecute Australian companies (such as the Toll investigation and contraventions of US sanctions laws illustrates), Australian regulators, in light of recent cases, are likely to be more robust in the future.

It is critical that Australian business and executives ensure their sanctions’ compliance procedures are robust and proactively implemented. Where suspicious conduct is identified, it should be investigated and inadequate procedures fixed to demonstrate good faith in the context of any decision to voluntarily report such conduct to the authorities.

[1] The law is stated as at 1 May 2022.

[2] The best example of this is the ASIC prosecution against the former AWB chairman, Trevor Flugge for breach of duty, see ASIC v Flugge & Geary [2016] VSC 779 for the liability judgment and ASIC v Flugge (No 2) [2017] VSC 117 for sentencing.

[3] R v BB [2019] NSWSC 1054 at [52] per Rothman J; the Crown must prove beyond reasonable doubt, that an accused, for example, (1) intended to make a supply (of goods), (2) with knowledge the goods were of a certain character, (3), with knowledge that the direct or indirect supply was for an ultimate transfer of the goods to a sanctioned country and (4) was reckless as to whether the supply was of sanctioned goods.

[4] Sections 26 and 27, Charter of the United Nations Act 1945 (Cth) (UN Charter Act).

[5] Sections 3.1(2) and 3.1(3) require the Crown to prove the requisite physical and fault elements for an offence, read with section 5.6(1), Criminal Code. “Intention” is defined in section 5.2 and where an offence fails to specify a fault element, the default fault element is intention, see R v BB [2019] NSWSC 1054 at [12] per Rothman J.

[6] Sections 16(8) Sanctions Act, read with section 5.1(2), Criminal Code.

[7] The Sanctions Regulations refer to a “sanctioned supply”. The term “supply” was considered by the NSW Supreme Court as follows: “To furnish, to provide, to afford” is to make available and it is unnecessary for me to make a preference or describe a preference to either one of them, but I will use the term “make available” as adequately defining that which is necessary for a person to supply goods of the requisite kind in order to fall within the conduct that have been proscribed by the legislature” (see R v BB (No 4) [2019] NSWSC 1392).

[8] R v AA (No 3) [2019] NSWSC 1892 and R v BB (No 7) [2021] NSWSC 1504. There was an extensive debate as to the admissibility of documents where their provenance was open to doubt, see R v BB (No 2) [2019] NSWSC 1087.

[9] R Choi (No 10) [2021] NSWSC 891.

[10] US Department of the Treasury, see https://home.treasury.gov/policy-issues/financial-sanctions/recent-actions/20220425

[11] R Choi (No 10) [2021] NSWSC 891 at [134] per Adamson J.

[12] R Choi (No 10) [2021] NSWSC 891 at [152] per Adamson J.

[13] The applicable sanctions concerning Russia and the Ukraine include the following: Autonomous Sanctions (Designated Persons and Entities and Declared Persons - Ukraine) List 2014; Autonomous Sanctions (Designated Persons and Entities and Declared Persons – Ukraine) Amendment List 2017; Autonomous Sanctions (Designated and Declared Persons – Ukraine) List 2019; Autonomous Sanctions (Designated and Declared Persons – Ukraine) Amendment List 2020; Autonomous Sanctions (Designated Persons and Entities and Declared Persons – Ukraine) Continuous Effect Declaration 2020 (No 1); Autonomous Sanctions (Designated Persons and Entities and Declared Persons – Ukraine) Continuing Effect Declaration 2020 (No 2); Autonomous Sanctions (Designated Persons and Entities and Declared Persons—Ukraine) Amendment (No. 4) Instrument 2022; Autonomous Sanctions (Import Sanctioned Goods—Russia) Designation 2022; Autonomous Sanctions (Export Sanctioned Goods—Russia) Designation 2022; Autonomous Sanctions (Export Sanctioned Goods – Russia) ; Amendment (No. 1) Designation 2022; Autonomous Sanctions (Designated Persons and Entities and Declared Persons—Russia and Ukraine) Amendment (No. 11) Instrument 2022.

The sanctions are at https://www.legislation.gov.au/Browse/Results/ByTitle/LegislativeInstruments/Asmade/Au/0/autonomous/principal

[14] https://www.piie.com/publications/chapters_preview/4075/06iie4075.pdf