Navigating The Latest On Russia Sanctions – A Perspective From European Real Estate Financing – International Law

It’s been just over a month since Russia launched its
invasion of Ukraine, and, along with the atrocities of the war
hitting the headlines, a whole host of countries, led by the United
States, United Kingdom and European Union, have been responding
with a series of crushing economic sanctions. These measures have
ranged from “blocking” sanctions, which generally
prohibit any dealings with specific designated parties (and
entities they own), to more limited “sectoral” sanctions,
which ban some dealings with the target (e.g., related to
their new debt or equity). As a result, when it comes to dealing
with Russia, the Russian government, and individuals linked to the
Russian government, the sanctions regime has changed dramatically
in a short period of time.   

Between 24 February and 24 March 2022, the UK Government
significantly extended existing financial sanctions against Russia
to include a large number of Russian legal entities and
individuals. The current list of individuals and entities targeted
by asset freezes can be found on OFSI’s Consolidated List. In addition, the
UK also adopted financial sanctions which prohibit persons from
dealing directly or indirectly with transferable securities or
money-market instruments issued after 0:01 on 1 March 2022 by or on
behalf of persons “connected” with Russia. There are also
restrictions on extending loans and credit arrangements after 0:01
on 1 March 2022 to Russian legal entities and the government of
Russia.

Similarly stringent sanctions have been announced by the
European Union and the United States. For a summary of the current
landscape of the sanctions announced in the United States, UK and
European Union, our colleagues from our White Collar Defense and
Investigations and Regulatory teams have published an update of the
Russia Sanctions landscape which can be accessed here. 

What does this mean for lenders for REF transactions?

Given the array of sanctions imposed, lenders around the world
are no doubt paying close attention to the latest announcements in
order to ensure that their compliance controls and systems remain
adequate and up to date.

In the context of European real estate financing, in comparison
with other financing/equity investments, given that borrowed funds
are generally utilised to fund the purchase/refinancing of real
estate assets located in UK/Europe, the latest changes to sanctions
have a smaller impact on the existing sanctions procedures, as the
asset funded is not located in a sanctioned country (in contrast to
heavily affected industries such as oil/infrastructure, or
investments located in Russia or owned by Russia). However, it is
very important to bear in mind that with the ever-changing
sanctions landscape, care must be taken with respect to the due
diligence of the flow of funds and also the ultimate beneficial
owner/investors, as sanctions apply beyond the simplistic view of
looking only at the underlying investment.

As a general reminder, with regard to real estate financing
provided for real estate investment (i.e., ownership of
real estate) in Europe, the asset itself is not located in a
sanctioned country and so there is no restriction from a sanctions
perspective with respect to the ownership of the asset unless that
asset is being acquired from a blocked person ? for example, a
sanctioned Russian oligarch who owns property across the continent,
which may be sometimes through opaque ownership structures. The
focus therefore is on the Borrower(s), the Sponsors and also the
control of such persons and their use of funds. Each lender has its
own sanctions policies and compliance procedures, and these are
subject to different sanctions regimes. Broadly speaking, in the
context of real estate financing, the matters which a lender should
focus on include the following:

1. ultimate beneficial owner and control of the investor/borrower,
   to ensure there are no dealings with a “sanctioned
   person”;
2. the same applies with respect to the seller of the real estate
   where an acquisition is being funded – a transaction acquiring
   assets from a blocked person would be in breach of sanctions, and,
   therefore, the ultimate beneficial owner and control of the vendor
   should also be subject to due diligence as per point 1 above;
3. flow of funds – both inflow and outflow to a sanctioned person
   or territory may be subject to restrictions; this would include
   injection of equity, payment of distributions/dividends, etc.;
4. the Borrower must have a compliance regime/policy to comply
   with the latest sanctions requirements to ensure it will not breach
   applicable sanctions requirements;
5. the Borrower must not use the lender’s funds to do business
   with sanctioned parties, including by acquiring properties from
   sanctioned sellers; and
6. the Borrower must not repay its obligations using funds that
   are obtained from dealings with a sanctioned person or
   territory.

These are some examples of sanction covenants which are required
by most lenders in providing finance. As mentioned above, due to
the different compliance requirements and sanctions regimes that
different lenders are subject to, the sanctions covenants may vary.
As noted, any use of funds from the lender to conduct a transaction
with a sanctioned person, entity or territory will be in breach of
sanctions. This means that, in an acquisition transaction, the
lender should screen both the borrower (purchaser) and also the
seller of the asset(s) to ensure all parties involved are not
subject to sanctions restrictions at the time.

From the Borrower’s perspective, it is important to ensure
there are adequate sanctions compliance policies in place. The
Borrower would need to be in a position, if requested by the
lender, to provide information regarding ultimate beneficial owner
and flow of funds. These sanctions covenants are ongoing throughout
the life of the facility. 

Finally, for a more in-depth discussion on this topic, our Funds
and White Collar Defense and Investigations colleagues have
published an article recently on this topic in Fund
Finance Friday, which can be accessed here.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.