Australia’s sanctions reforms: a new framework takes shape

The concept of “effective control” has been central to the sanctions regime since its inception. However, the term has never been statutorily defined, leaving regulated entities to navigate this critical threshold without legislative guidance.

The AS Bill addresses this gap by introducing a statutory definition of “effective control” in section 10.

For a body corporate, effective control would be established by any of the following:

1. having the capacity to cast, or control the casting of, more than one half of the maximum votes at a general meeting;
2. directly or indirectly holding more than one half of the issued share capital (excluding non-participating capital);
3. having the capacity to control the composition of a majority or the whole of the board or governing body; or
4. having the capacity to determine the outcome of decisions about the entity’s financial and operating policies, taking into account practical influence (rather than merely enforceable rights) and any practice or pattern of behaviour.

The introduction of an over 50% shareholding and voting threshold should provide greater certainty than the current framework. Importantly, however, the fourth limb, focusing on practical influence and patterns of behaviour, means that effective control can still be established below the 50% threshold where the factual circumstances warrant it.

The Guide notes that this definition closely aligns with section 910B of the Corporations Act 2001 (Cth) and the approach taken in other countries that impose autonomous sanctions, while sitting above the 25% beneficial ownership threshold in the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth).

This codification is particularly significant given that bodies corporate face strict liability offences where they, or an entity over which they have effective control, contravene the sanctions prohibitions.

The concept of “transport” of sanctioned goods has been clarified in a dedicated provision (section 25). The concept of “transport” under the current regulation 4A of the AS Regulations was the subject of contested litigation in Tigers Realm¹ where the Federal Court considered whether internal transport of coal within Russia fell within the prohibition.

The AS Bill focuses the transport prohibition on situations where a sanctioned good (import or export) is moved within, or across the borders of, the relevant sanctioned country, providing greater certainty for businesses.

Under the current framework, the prohibitions in regulations 14 and 15 of the AS Regulations prohibit making assets available to, or for the benefit of, a designated person or entity, and require the freezing of controlled assets. However, several key concepts, including the meaning of “indirect”, the reach of “for the benefit of” and the interaction with corporate ownership structures, are left undefined. 

The Guide explains that “indirectness” is intended to be assessed by reference to a causal test. Where an Australian person or body corporate influences the ultimate destination of an asset and the asset is ultimately provided to a financially sanctioned party, the prohibition may be engaged. Conversely, where an intermediary acts independently (for example, through an independent onward sale on the open market) the chain of causation may be broken.

The AS Bill also seeks to clarify that the prohibition in section 30 extends to assets made available to an entity that is “effectively controlled” by the financially sanctioned person or entity. 
 

Under the current framework, there are no standing exceptions from sanctions prohibitions. Rather individual entities or persons must apply for sanctions permits from the Minister under regulation 18 of the AS Regulations for any conduct that would otherwise be prohibited or the Minister may issue general permits. The AS Bill introduces standing exemptions that operate automatically without the need for a permit application. The proposed exemptions include:

1. Legal services exemption (section 39): The AS Bill would replace this permit-based approach with a standing exemption for conduct related to the provision of legal services, covering legal advice or representation on matters of Australian law to a sanctioned party, as well as actions necessary to pay settlements and carry out court orders.
2. Humanitarian exemption (section 40): The AS Bill proposes to enshrine a humanitarian exception for all sanctions measures which would at least cover those persons and organisations referred to in UNSC Resolution 2664 (2022), although the precise scope remains under development.
3. Diplomatic and consular missions exemption (section 41): An exemption for conduct reasonably necessary for, or incidental to, the operation of an Australian diplomatic or consular mission abroad.
4. Prescribed circumstances (section 38): This section would also allow the AS Rules to prescribe class-based exemptions authorising certain classes of persons to engage in conduct that would otherwise contravene the prohibitions.

The AS Bill introduces a new exception for personal, domestic and non-commercial use of sanctioned goods. This proposed addition reflects the regimes focus on commercial activities of strategic or economic significance, rather than personal dealings.

Importantly, the exception should not, however, be understood as a general exemption for all personal dealings with sanctioned goods. Its application differs between the relevant offences, and the provisions are principally directed to individuals and immediate family members.
 

The reforms do not remove the significant compliance exposure associated with Australia’s autonomous sanctions regime. Bodies corporate will continue to face strict liability for sanctions offences, including in certain circumstances for contraventions by entities over which they have effective control and the existing defence based on taking reasonable precautions and exercising due diligence is retained in section 42.

The AS Bill also proposes a new offence for contravening a condition of a sanctions permit (section 55) and introduces a more comprehensive information management regime (Part 5).