Due Diligence after Russia’s Invasion of Ukraine

Many Western companies are in a bind. Some estimates suggest that up to 30,000 companies in the European Union were controlled or influenced by Russian individuals and entities as of 2020. Furthermore, Russia accounted for approximately 1% of the European Union’s FDI from 2015 to 2020. Meanwhile, many Russian businessmen who are active in Western countries have been alleged to sustain close connections to the Kremlin.

With ‘ESG’ looming large in the conscience of stakeholders, businesses are scrambling to reassess any direct or indirect ties to Russian corporations and businessmen. The failure to perform thorough due diligence on existing or prospective relationships may prove enormously costly, not only in the form of reputational damage, but in the prospect of penalties for regulatory violations. But due diligence providers must now navigate a more restricted information landscape, whilst assessing the context of current and previous political exposure to the Kremlin against the backdrop of Western-imposed sanctions.

Russia’s Disrupted Information Landscape

After the war began, Russian authorities and multinational companies erected a digital barricade to curb the flow of information to and from the country. This has been coupled with the Kremlin’s persistent crackdown on independent Russian media sources, which traditionally have stood at the forefront of unveiling corruption and improper political lobbying. And previously reliable and accessible sources of information are no longer available. Intelligence consultancies have been forced to adapt. Litigation, regulatory and corporate records may still be retrievable, but press coverage from now-defunct websites can only be obtained by accessing archives and via media aggregators. Assessing the credibility ofRussian news providers has always required an experienced eye, never more so than when the information space is itself a fertile battleground.

Sanctions Compliance

A major concern for companies with commercial relationships with Russian entities is compliance with the escalating sanctions regimes. Between February 2022 and June 2022, the US issued eight rounds of sanctions against Russia targeting, inter alia, Russian individuals, financial services providers and investment and trade. As of June 2022, over 1,000 Russian individuals and businesses had been placed on international sanctions lists, including those compiled by the US, the EU and the UK.

In response, some Russian entities have relied on complex procedures to circumvent the economic restrictions, such as the utilisation of intermediary trade networks and alternative payment systems. In addition, a common way to bypass sanctions is to use multi-layered corporate structures and nominees to disguise the ultimate beneficial owner of a business. It may not be immediately clear to a Western company that it is exposed to a sanctioned party and run the risk breaching regulations. 

Limited due diligence checks can still go a long way in providing a degree of comfort before engaging with or continuing to partner with Russian individuals and business people.