Dec 2024
When Russia invaded Ukraine on 22 February 2022 most Bermudian residents did not think it would have much impact to the island. However as both an overseas territory of the United Kingdom and as an international finance centre, the resulting international sanctions would affect Bermuda especially in relation to the Bermuda Civil Aviation Authority (BCCA) and the re/insurance industry.
Sanctions can be imposed unilaterally or multi-laterally by a group of countries and are designed to respond to an emerging crisis, to signal disapproval and to pressure offending groups or countries into behaviour that promotes peace, democracy and respect for the international law. The most relevant sanctions from our perspective are financial or trade sanctions that stop you from doing business with targeted countries, groups, entities or individuals. Financial sanctions can include targeted asset freezes to restrict access to funds and economic resources as well as restrictions on financial markets or services.
As a British Overseas Territory Bermuda is subject to the same international sanctions as the United Kingdom, which also incorporates sanctions issued by the United Nations. Bermuda relies on the UK’s framework for sanction implementation, which is provided in the form of Overseas Territories Orders in Council (“OT Orders”), which are brought into force domestically through the International Sanctions Act 2003. Bermuda persons should also be aware that where there is a US nexus to a transaction (there is a US counterparty, the transaction currency is USD or money is flowing through a US correspondent bank), they also need consider sanctions imposed by the US Office of Foreign Assets Control (OFAC). Similarly EU sanctions and sanctions imposed by other countries may also be relevant as many impose them on their citizens regardless of where they may be living – for example, if you have a French employee working on a transaction in Bermuda, the transaction is then subject to French sanctions.
Following the Ukraine conflict the international community swiftly imposed sanctions to deal with Russia’s latest transgression. The United Kingdom already issued the Russia (Sanctions) (EU Exit) Regulations 2019 to impose UK specific sanctions on Russia post Brexit following Russia’s invasion and annexation of Crimea. Additional parties were named as designated persons subject to asset freezes and certain industries were targeted with financial sanctions.
Aviation Finance: The aviation industry was crucial in diminishing the Russian government’s war effort. Russian state owned Aeroflot (and its subsidiary airlines) were designated as sanctioned persons as were the aircraft leasing arms of major Russian banks such as VTB and VEB.
Why would this impact Bermuda? Many people did not realise the majority of the Russian commercial fleet are actually registered on the Bermuda Aircraft Register. Russia’s vast territory and poor road infrastructure make air travel the most efficient way to cover long distances. Russia can’t produce enough of its own planes so needed to buy Western built Boeing and Airbus aircraft which required financing. Most Western financial institutions (including export credit agencies) were concerned if they financed Russian airlines to purchase aircraft, the risk of enforcing loans in the event of a default would be substantial. Using the Bermuda Aircraft Register to register the aircraft and using either Bermuda or Irish special purpose vehicles to act as borrower and own the aircraft mitigated the risk.
Consequently when the asset freeze sanctions were implemented following the 2022 Ukraine invasion, the Western owners quickly moved to terminate the aircraft leases. The BCAA assisted by issuing grounding orders to co-operative foreign jurisdictions when the aircraft were flown out of Russia so the owners could seize the aircraft and take possession. The BCAA also assisted by keeping the aircraft registered on the Bermuda Aircraft Register. As a matter of international aviation law, an aircraft cannot be registered on more than one register. Keeping the aircraft on the Bermuda register meant that the attempt by Russia to put the stolen aircraft on the Russian aircraft register was illegal and would not be recognised. Unfortunately aircraft worth multi-million dollars remained immobilised in Russia. When the Russian government allowed a Russian insurer to start settlement discussions with the Western owners of some of the aircraft, it was necessary for the owners to apply to the Financial Sanctions Implementation Unit (FSIU) in Bermuda for specific licences (signed by the Minister of Legal Affairs and Constitutional Reform, with the consent of the UK Secretary of State) to allow them to enter into such settlement agreements.
Re/insurance: The Bermuda re/insurance industry was also impacted. The UK Sanctions and Anti-Money Laundering Act 2018 defines “financial services” as including re/insurance. As such where a UK sanction includes a prohibition of “financial services” for certain sectors, it also includes providing reinsurance. Bermuda reinsurers also cannot rely on general licences issued by the UK government, as these are not applicable to Bermuda. For a licence to be applicable in Bermuda the Bermuda Government would need to issue either a corresponding general licence or issue a specific licence, permitting the otherwise prohibited action. Reinsurers also need to take steps to ensure that any cedents are not providing insurance to a UK designated person as this could result in the reinsurer indirectly providing an economic benefit to a designated person and be a breach of Bermuda sanctions. This could happen inadvertently as the OFAC list of designated persons and the UK list of designated persons are often different. This means that someone who is a designated person under UK sanctions may not be on the OFAC list and so not be flagged if the cedent is only running sanctions checks against the OFAC list.
The Bermuda Monetary Authority (BMA) as the primary insurance regulator also has focused more on sanctions compliance. Section 4 of the Schedule of the Insurance Act requires that registered persons conduct business in a prudent manner, and notes that one of the factors to be taken into account in determining whether business is being conducted in a prudent manner is compliance with international sanctions. The BMA now requires that all new insurance licence applications include a copy of the new insurer’s sanctions policy. In order to evidence that the policy is being properly implemented, it is also recommended that the re/insurer staff do sanctions training.
Enforcement: While Anti-Money Laundering/Anti-Terrorist Financing regulations require only specific entities to take risk-based compliance measures, the Bermuda Sanctions Regime applies to all individuals and legal entities and imposes absolute liability. Breaches of the Bermuda Sanctions Regime are a very serious matter and can result in individuals and entities being referred for prosecution by the FSIU. It should also be noted that licenses are not issued retrospectively and so cannot be relied on to cure past breaches of the Bermuda Sanctions Regime.
The Bermuda Monetary Authority can also take certain enforcement powers with respect to regulated entities and can impose a civil penalty of up to US$10,000,000 if a regulated entity fails to comply with its international sanctions obligations. If the regulated entity is found guilty of a sanctions offence and that offence is proved to have been committed with the consent of, connivance of, or to be attributable to any neglect on the part of any director, manager or officer of such entity, that person is also guilty of the sanctions offence and is liable to prosecution.
As the pace of new international sanctions continues to increase, along with their scope, all persons (including legal persons) should ensure they are carrying out the required diligence to not fall afoul of the Bermuda sanctions regime.
Conyers offers online sanctions training designed for the re/insurance market. For specific legal advice, please contact a member of the Conyers regulatory team.