Ukraine: Sanctions in sport
As a result of the conflict in Ukraine, the UK, the US, the EU and their allies have imposed additional sanctions on Russian state actors and entities of economic and strategic significance to the Russian state, along with targeted restrictions on certain commercial activities with Russia. Sanctions have now also been extended to apply to additional individuals and entities in Belarus because of the country's assistance to Russia. Both those Russian and Belarusian sanctions are being regularly reviewed and further extended by each of the UK, the US and the EU so need to be checked on almost a daily basis.
These additional sanctions are supplementary to the existing Russia, Crimea and Belarus sanctions imposed since 2014.
The implications for the sports industry are significant, as can be seen from recent highly publicised events such as Everton FC's severing of sponsorship ties with Uzbekistan-born billionaire Alisher Usmanov following his assets being subject to UK and EU “asset freeze” sanctions in early March 2022.
On the morning of 10 March 2022, it was announced by the UK Foreign, Commonwealth and Development Office that a further seven Russian businessmen, including Roman Abramovich, the owner of Chelsea Football Club, had been added to the UK’s sanctions list as Designated Persons and made subject to asset-freezing orders and travel bans. This means that Mr Abramovich’s funds and assets, including his shares in Chelsea, have now been frozen. In addition, as it is owned by a Designated Person, Chelsea FC is also now subject to an asset freeze under UK financial sanctions, but with the club being licensed by the UK Treasury still to be able to carry out certain business activities.
This note is a reminder of the legal implications of UK sanctions regulations (most recently updated in relation to Russia in the 2019 Regulations)1 and considers the effect of some of those provisions on the sports sector.
This note focuses on UK law sanctions provisions. There are also sanctions provisions targeting entities or individuals implemented under wider international sanctions measures, including US and EU sanctions measures. The English law position is stated as of 24 March 2022.
2. Executive summary
Along with a similar response from EU, the US and other allies, the UK government on 24 February 2022 substantially expanded the existing sanctions regime arising from the 2019 Regulations, and that expansion is continuing. The UK sanctions regime contains various restrictions, but for the sports industry the most prominent are the powers where individuals who are targeted for the purposes of the 2019 Regulations as Designated Persons, or entities which are owned2 or controlled by Designated Persons, can have their assets frozen. It is also further prohibited to make any funds or economic resources (widely defined as all goods and services) available directly or indirectly to a Designated Person.
The 2019 Regulations apply (i) to UK incorporated entities, (ii) UK nationals and (iii) any commercial activity conducted in the UK. Financial institutions as well as individuals, sporting clubs, leagues and organisations may all fall within the ambit of the 2019 Regulations. In this note we'll describe the asset-freezing sanctions generally and consider various types of potential financial transactions in the media, sports and entertainment sectors to see if and how they're affected.
3. The legal background to UK sanctions
This note focuses on two categories of restrictions under the 2019 Regulations: asset-freezing powers; and the barring of Russian corporates and their subsidiaries, and the Government of Russia, from the UK capital markets.
The asset-freezing powers under the 2019 Regulations in relation to dealing with a Designated Person’s funds (or economic resources) stipulate that a person to whom the 2019 Regulations apply:
“must not deal with funds or economic resources3 owned, held or controlled by a designated person (nor make funds available to any such person) if it knows, or has reasonable cause to suspect, that it is dealing with such funds or economic resources.”4
A Designated Person for the purposes of the 2019 Regulations would be any person on the Office of Financial Sanctions Implementation List (OFSI List), which is maintained by the HM Treasury Department in the UK.
The 2019 Regulations do, however, contain certain limited exceptions from those prohibitions.
There is a licensing regime which permits certain payments or actions that would otherwise be a sanctioned payment or action under the 2019 Regulations.
- general licences issued by OFSI; or
- specific licences issued by the Secretary of State on application.
Chelsea Football Club has also availed itself of a general licence issued by the OFSI in order to continue to engage in activities that would otherwise be prohibited by financial sanctions and is continuing to further refine and expand that licence through discussions with the OFSI as issues arise. The club has been allowed to play its scheduled matches and proceed with “football related activities”, albeit originally not to sell tickets for its away games. However, on 23 March 2022, the UK Government updated Chelsea's general licence to:
- allow Chelsea fans to purchase tickets for the club's away games and cup matches, including its fixture with Manchester United in May 2022. The Premier League announced that Chelsea's revenue from those games will be donated to charity to benefit victims of the Ukraine conflict.
- permit Fordstam Limited, the Parent company of Chelsea FC, and of which Mr Abramovich is “the person having significant control”, to inject up to GBP30m “in respect of cashflow or liquidity issues faced by the Club”.
The barring of Russian corporates and their subsidiaries, and the Government of Russia, from the UK capital markets
The 2019 Regulations essentially operate to bar Russian corporates and their subsidiaries, and the Government of Russia, from the UK capital markets. Existing measures prohibiting dealing with transferable securities or money market instruments have been extended to include instruments issued after 1 March 2022 by any entity or individual that is “connected with Russia” (including Russian incorporated entities and residents), the Government of Russia and specified entities (including Sberbank, Gazprombank, United Aircraft Corporation, Rosneft, Transneft and Gazprom Neft). These measures now also apply to the UK-incorporated subsidiaries of these entities.
Measures prohibiting the making available of loans or credits with a maturity of at least 30 days have been extended to any entity or individual that is “connected with Russia” (including Russian incorporated entities and residents) and other specified entities (including Sberbank, Gazprombank, United Aircraft Corporation, Rosneft, Transneft and Gazprom Neft). These measures now also apply to the UK-incorporated subsidiaries of these entities.
4. Application of sanctions in the financial and media, sports and entertainment sectors
In simple terms, the UK government (and in equivalent ways from other allied governments) has been regularly expanding the list of Designated Persons on the OFSI List who are now caught by the sanctions.
The sanctions regime and the expansion of the OFSI List has had knock-on effects throughout the media, sports and entertainment sectors, both directly and through the wider commercial and reputational risks of engaging with Russian counterparties at the current time.
In sports, such as football and Formula 1, we've seen:
- Chelsea Football Club, as an entity owned and controlled by a Designated Person, have its assets frozen, with the sale of the club also put on hold. However, in the case of Chelsea, the UK government has issued a special general licence which the UK Treasury said “will allow Chelsea to undertake activities which would otherwise be prohibited by financial sanctions”, meaning the club can fulfil its fixtures and carry out football business, without undermining the impact of sanctions.” As a result of that licence, Chelsea will continue to be able to make payments in relation to loan and sale arrangements of players made before Mr Abramovich became a Designated Person and to pay its staff's remuneration and pensions, as well as the reasonable costs of hosting fixtures.
- Teams suspending their sponsorship agreements with Russian companies and their contracts with Russian athletes, with Haas cancelling their sponsorship deal with Uralkali and suspending Nikita Mazepin's contract. Nikita Mazepin and his father, Dmitry Mazepin, also became subject to EU sanctions on 9 March 2022.
- Teams refusing to play Russian teams or Russian players, or play in Russian competitions.
Governing bodies have also removed Russian and Belarusian teams from competitions and stripped the country of hosting prestigious events, such as UEFA's Champions League final and the Formula 1 Association both cancelling the 2022 Russian Grand Prix at Sochi and terminating its ongoing contract with the Russian Grand Prix promoter, meaning Russia will no longer host a Grand Prix.
Clubs/organisations controlled by Designated Persons:
Many sports, but particularly football and motor racing, are dominated by high-net-worth individuals, and as a result ownership models have now been called into question.
As well as Chelsea FC, there are several other football clubs whose owners may be perceived to have a close relationship with the Russian government and, as a result, those owners may also face a threat of being sanctioned in the UK and/or the EU. Consequently, owners may attempt to divest their ownership in clubs or take other protective action.
Even if a club is not itself subject to sanctions, if it can be shown that the club is indirectly or directly controlled by a Designated Person then they can find their assets frozen.
Such divestment of ownership in organisations in the media, sports and entertainment sectors is likely to have significant practical impacts on the day-to-day running of those organisations, especially where ownership is relinquished quickly in an attempt to avoid the impacts of potential sanctions.
Clubs/organisations dealing with counterparties controlled by Designated Persons:
If a club or organisation subject to the application of the 2019 Regulations deals with another person that is controlled by a Designated Person, such dealings will be prohibited under the 2019 Regulations.
As a result, certain activities involving divesting ownership in an entity, selling intellectual property rights, player transfers and/or commercial revenues from sponsorship deals with entities controlled by sanctioned sponsors would no longer be lawful.
Lenders and other counterparties dealing with clubs/organisations controlled by Designated Persons:
If a Lender or another person subject to the application of the 2019 Regulations makes funds available to a club which is controlled by a Designated Person, such dealings will also be prohibited under the 2019 Regulations.
Lenders may not, directly or indirectly, grant a relevant loan or enter into an arrangement which relates to a relevant loan. As noted above, the rules on what constitutes a relevant loan have been widely drafted to capture not just Designated Persons but also persons “connected with Russia” increasing the scope of the affected borrowers.
Where a club is a borrower under a committed or uncommitted credit facility to fund a property development (eg to redevelop its stadium) with a Lender in the UK and that Lender has reasonable grounds to suspect that the borrower (or relevant affiliate) is a Designated Person, then, unless there is a licence in place, the borrower would be unable to access funds under the facility. This could put development projects on a standstill or lead to an enforcement event unless there is an exemption, or a licence is obtained.
A borrower that has already made drawings and which becomes a Designated Person (or which is owned or controlled directly or indirectly by a Designated Person) could be unable to repay a loan or interest on a loan.
The 2019 Regulations also extend the restrictions to making available any economic resources (assets that can be used to obtain funds) to such persons. This would be a concern, for example, for entities that trade with Designated Persons, as they would be prohibited from supplying goods (eg branded merchandise) to these persons since these would constitute “economic resources”.
Lenders and other counterparties dealing with clubs/organisations which themselves are dealing with other counterparties controlled by Designated Persons:
The impact of the 2019 Regulations in this case would depend on what those dealings are. If a Lender or another person subject to the application of the 2019 Regulations makes funds and economic resources available to or for the benefit of a club or organisation that is controlled by a Designated Person such dealings will also be prohibited under the 2019 Regulations if the Designated Person is able to extract a significant financial benefit.
Consequently, a party discharging an obligation for which a club controlled by a Designated Person would otherwise have been responsible would be prohibited, as it would give the Designated Person a financial benefit.
The financial implications are severe, as club and team ownership models are often run on tight budgets.
Contract counterparties would usually look to the drafting of loan documentation to ensure delivery of the contractual obligations, but this would not overreach the prohibition imposed by the law of England and Wales or the EU.
Sanctions provisions in loan agreements
Sanctions provisions have become a standard feature in Credit Agreements between Lenders and sporting leagues, clubs and associations. Such language includes representations that borrowers, their subsidiaries, and their respective affiliates are not subject to sanctions (which captures sanctions imposed by several countries, including the UK and international organisations) and are not engaged in any transactions that may lead to them being targeted under sanctions or in any transactions with a sanctioned person. In addition, the provisions will include representations and undertakings that borrowers will not use the funds they are borrowing in a manner that would be in breach of any sanctions or would benefit a sanctioned person. Failure to observe these undertakings will typically constitute an event of default enabling the Lenders to terminate the loans.
While some of the Loan Market Association (LMA) template facilities agreements do provide suggested definitions around sanctions referencing UK, EU, US and UN sanctions, they do not include recommended language for sanctions related representations and covenants in recognition both of the complexity of sanction regimes and their potentially far-reaching consequences and of the fact that many lenders have their own preferred formulations for sanctions issues which are generally extremely wide-ranging.
However, in 2018 the LMA did produce an updated Guidance Note in relation to the types of sanction provisions a lender may wish to include in loan documentation. This included representations from the borrower that they (or any members of its group) are not a target of sanctions and an undertaking to provide lenders with comfort that the proceeds of the loan will not be used in a manner which would violate any applicable sanctions regime. In light of the lack of recommended language, the content of sanction language in loan agreements will largely be a matter of assessment on a case-by-case basis, having regard to the circumstances prevalent in each instance such as the identity of the parties, their location, and the sanctions regime which the Lenders are concerned about.
The Ukraine-related sanctions regime remains prone to rapid changes, with western governments reiterating their intent to maintain financial pressure on the governments of Russia and Belarus. As a result, it may be difficult to predict the extent and scope of any further measures implemented in response to the conflict. Businesses and individuals are therefore encouraged to be cautious in deciding who they deal with in the current climate, to protect themselves any financial or reputational risks such dealings may cause.
1 The legal basis for the current sanctions targeting Russia stem from the Russia (Sanctions) (EU Exit) Regulations 2019 implemented pursuant to the Sanctions and Anti-Money Laundering Act 2018.
2 More than 50%.
3 A person "deals" with funds (which includes cash or other value) if it (i) uses, alters, moves, transfers or allows access to the funds (ii) deals with them "in any other way that would result in any change in volume, amount, location, ownership, possession, character or destination" or (ii) makes any other change, including portfolio management, that would enable use of the funds.
A person "deals" with funds (which includes cash or other value) if it (i) uses, alters, moves, transfers or allows access to the funds (ii) deals with them "in any other way that would result in any change in volume, amount, location, ownership, possession, character or destination” or (ii) makes any other change, including portfolio management, that would enable use of the funds.
A person "deals with” economic resources if it "(a) exchanges the economic resources for funds, goods or services, or (b) uses the economic resources in exchange for funds, goods or services (whether by pledging them as security or otherwise).”
"Economic resources" is not defined but is interpreted as meaning non-cash items of value. In December 2020 the Office of Financial Sanctions (OFS) issued guidance which states economic resources would include "assets of every kind – tangible or intangible, movable or immovable – which are not funds, but may be used to obtain funds, goods or services. This includes but is not limited to precious metals or stones, antiques, vehicles and property.”
4 Regulations 11 to 15.