Australian sanctions: uncertainty and limited guidance

What you need to know

• Sanctions compliance continues to receive heightened attention since Russia's invasion of Ukraine. On 3 July 2024, the Australian Government launched an inquiry into the efficacy of Australia's sanctions regime, due to report in February 2025.
• This article discusses a number of uncertainties in Australia's sanctions regime:
  • There is no "bright line" for assessing whether an entity is owned or controlled by a designated person, or if an asset has been indirectly made available for the benefit of a designated person.
  • Companies that are "reporting entities" under the AML/CTF regime should be alive to potential overlap between the "tipping off" offence under that regime and having suspicions about a breach of sanctions laws.
  • Civil cases are testing the limits of the operation and effect of Australia's sanctions regime. For example, a recent case held that the sanctions regime can apply to conduct occurring outside of Australia.
  • Unlike the US and the UK, Australia's sanctions regime only provides for criminal enforcement. There has been very limited enforcement action in Australia which might provide practical guidance to companies on the operation of the regime.
  • There is no Australian regulatory guidance for companies on what actions should be taken to attract the defence of exercising reasonable precautions and due diligence.

 What you need to do

• Watch out for the Government's report from its inquiry into the efficacy of Australia's sanctions regime, due in February 2025. We expect that report to discuss (and potentially offer recommendations for addressing) many of these uncertainties.

Our earlier update published in July 2022 provides an overview of Australia's sanctions regime, including key features of Australian sanctions laws, who needs to comply with Australian sanctions, the different types of Australian sanctions, the types of conduct that is typically prohibited, what offences exist for contraventions of sanctions laws and which regulator is tasked with enforcing Australian sanctions. We also provided some practical suggestions regarding points to consider when reviewing your sanctions compliance systems.

On 3 July 2024, the Australian Government launched an inquiry into the efficacy of Australia's sanctions regime. While the inquiry is being conducted, this is a good opportunity to consider in more detail, some of the uncertainties that companies should be aware of when seeking to comply with Australia's sanctions regime.

Our focus in this note is on sanctions imposed by Australia autonomously under the Autonomous Sanctions Act 2011 (Cth) (as opposed to sanctions imposed following the UN Security Council).

No 'bright line' to identify ownership or control by designated persons

As covered in our earlier update, Australia's sanctions laws prohibit a person holding a "controlled asset" (being an asset owned or controlled by a designated person) from using or dealing with that asset, or allowing or facilitating that asset to be used or dealt with, where not authorised by a permit.¹  Persons and entities are added to the list of designated persons by the Minister for Foreign Affairs.²

Ownership and control are not defined in the sanctions laws. How do companies know if they are holding an asset owned or controlled by a designated person?

A test for control of a body corporate is set out in section 50 AA of the Corporations Act 2001 (Cth). Generally, an entity controls a second entity if the first entity has the capacity to determine the outcome of decisions about the second entity's financial and operating policies. Therefore, someone may exert control over a corporate entity even if they have less than a 50% interest.

Sanctions regulators in the US and the UK have published some guidance on ownership and control.

In the US, there is a rule that any entity owned 50% or more by a sanctioned person is considered to also be a sanctioned person. Companies are advised to act with caution when considering a transaction with a non-sanctioned entity in which one or more sanctioned persons has a significant ownership that is less than 50% or may control by means other than a majority ownership.³

In the UK, the Office of Financial Sanctions Implementation has published guidance that an entity is owned or controlled directly or indirectly by another person where the person (directly or indirectly) holds more than 50% of the shares or voting rights in the entity, has the ability to appoint or remove a majority of the entity's board of directors, or it is reasonable to expect that the person would be able to ensure the affairs of the entity are conducted in accordance with their wishes.⁴

Compared with the US and UK, companies should be aware there is no "bright line" in Australia's sanctions laws, and no published regulatory guidance, for assessing whether an entity is owned or controlled by a designated person.

Making an asset available for the benefit of a designated person

Australia's sanctions laws also prohibit a person from directly or indirectly making an asset available to, or for the benefit of, a designated person, where the making available of the asset is not authorised by a permit.⁵ "Asset" is broadly defined in the Act as meaning an asset or property of any kind (including intangible property and documents).⁶ "Benefit" is not defined in the Act but has been broadly construed in case law.⁷

The question for companies is whether assets are directly or indirectly made available to or for the benefit of a designated person. It may be plain that your company is not directly making an asset available to or for the benefit of a designated person; whether that has occurred indirectly is less obvious. Does a designated person have shareholdings in corporate entities upstream of the company to which you have made assets available? How significant does the designated person's interest have to be for them to receive a "benefit"?

As with the test of ownership and control, there is no "bright line" on whether an asset has been made available for the benefit of a designated person. To date, such case law as has considered this issue has taken an expansive construction. However, one factor that points away from a broad construction is thinking about the stated purpose of autonomous sanctions; they are "highly targeted measures" to be "applied so as to minimise, to the extent possible, the impact on the general populations of the affected countries".⁸

Overlap with the AML/CTF regime: the 'tipping off' offence

There are no impediments under Australia's sanctions laws to persons making inquiries about a designated person's role in relation to certain companies; making such inquiries may be helpful in forming views about whether the sanctions regime applies to existing or planned commercial arrangements. "Designated persons" are publicly identified and included on the Australian Government's Consolidated List of designated persons. However, there is a "tipping off" provision in the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) which prohibits reporting entities from disclosing reports of certain suspicious conduct to anyone other than an AUSTRAC entrusted person.⁹  This might include suspicion of providing a benefit to a designated person in breach of sanctions laws. Companies who are "reporting entities" under the AML/CTF should be alive to the potential overlap between the two regimes.

Australia's sanction regime applies to conduct outside Australia

We discussed the broad application of Australia's autonomous sanctions regime in our earlier article on Tigers Real Coal Limited v Commonwealth of Australia [2024] FCA 340. Tigers Realm, an Australian listed company, sought declarations that the operations of its Russian subsidiary coal mining companies were activities which did not constitute "sanctioned imports". The Court held that transporting coal from a Russian mine to a Russian port met the definition of "transports" in the sanctions regime, and accordingly that the operations constituted "sanctioned imports". The decision shows that Australia's sanctions regime can apply to Australian companies even where the contravening conduct occurred wholly outside of Australia.

Criminal offences only: no civil liability for breaches of Australian sanctions laws

The Australian sanctions regime only provides for criminal enforcement. This is in contrast to the US and UK which both have civil penalty regime for breaches of sanctions laws, as well as criminal enforcement.

In Australia, it is an offence to contravene a sanctions law. For a company, the maximum penalty for contravening a sanctions law is:

(a) the greater of three times the value of the relevant transaction (if the offence involves a transaction), or

(b) 10,000 penalty units ($3.3 million as of 7 November 2024).¹⁰

This is a strict liability offence for companies, meaning that it is not necessary to prove any fault elements (intent, knowledge, recklessness or negligence) for a company to be found guilty.¹¹ Section 6.1 of the Criminal Code states that a defence of mistake of fact under section 9.2 of the Criminal Code is available to defences of strict liability. For individuals, it is necessary to demonstrate the relevant intent element to establish an offence.

In certain circumstances, the Minister can grant a permit to allow a person to engage in conduct that would otherwise contravene sanctions laws.

There have only been a small number of reported instances of criminal enforcement of Australia's sanctions regime. These criminal cases have been brought against individuals. For example, in R v Choi (No 2) [2021] NSWSC 891, Mr Choi pleaded guilty to contravening sanctions offences by providing brokering services for the sale of arms and related material to North Korea in 2017. The Court was satisfied that Mr Choi’s conduct was deliberate and motivated by a desire to undermine the sanctions imposed on North Korea. Mr Choi was sentenced to three and a half years in prison.

No guidance on reasonable precautions and due diligence

It is a defence to a claimed breach of sanctions laws if a company can show that it has taken reasonable precautions, and exercised due diligence, to avoid contraventions of the relevant sanctions provision.¹²  The Australian Sanctions Office (the regulator for the Australian sanctions regime) has not published any guidance on what these reasonable precautions might be or how a company should approach consideration and implementation of such precautions.

In the absence of Australian guidance, companies may be assisted by looking to information published by regulators in the US (the Office of Foreign Assets Control) and the UK (the Office of Financial Sanctions Implementation) on similar topics. Both have published guidance on their approaches to enforcement.

Conclusion

We have considered in this article some uncertainties in Australia's sanctions regime (which may be the subject of discussion and recommendation in the Government's report on its inquiry, due in February 2025). Many of these issues are fact specific and should be considered on a case by case basis. If you'd like assistance in dealing with any uncertainties in complying with the Australia sanctions regime, please get in touch.

Want to know more? 

• Heightened focus on Australian sanctions (5 July 2022)

Authors: Rani John, Partner; Jacqui Turner, Lawyer; Peter Fountotos, Lawyer.