Legal schemes of settlements of the CIS and the parent company in the conditions of sanctions

Mainstream

Settlement between companies in the CIS countries and the head structure in the face of sanctions is not a one-time search for a “convenient bank”. It is a comprehensive system of currency compliance, allowing businesses to move money legally and predictably.

The question is not whether a specific payment will pass today. The key question is how to build a sustainable settlement architecture that will withstand tightening restrictions, will not trigger account locks, will not lead to tax claims, and will not create personal liability risks for management.

Effective calculation structuring begins with three checks:

• Whether the chosen method of settlement is legal from the point of view of currency regulation of all affected jurisdictions.
• How resistant is the payment route to sanctions risks and bank compliance?
• Whether the transaction corresponds to its economic content and does not create unjustified tax consequences.

If these three issues are not worked out in advance, the company risks a payment freeze, denial of service, a penalty from the regulatory authority or criminal law risks for circumventing restrictions.

When it is necessary to set up the calculations

A systematic approach to currency control and compliance becomes mandatory if:

• the parent company pays dividends or receives royalties from subsidiaries in the CIS countries;
• loans are granted and repaid within the group;
• cross-border supplies of goods, equipment or raw materials are carried out;
• services are provided, work is performed or EPC contracts are implemented between the parent and operating companies;
• Common treasury centers or intragroup financing structures are used;
• in the chain of calculations involved persons from Russia, Kazakhstan, Uzbekistan, Azerbaijan, Armenia, Kyrgyzstan, Belarus and other CIS countries;
• - familiar currency corridors (US dollar, euro) are closed or carry a high risk of blocking;
• the counterparty, correspondent bank or the transaction itself fall under sectoral or blocking sanctions;
• Russia has imposed counter-capital restrictions requiring special permits or special procedures.
• The payment was frozen or returned by the bank without a clear explanation.

The mistake most companies make

Many groups start with the question:

Which bank to make the payment through?

That's the wrong first question.

The right question is:

What legal and payment structure should be built to legally, stably and without blockings to service financial flows between the parent company and business in the CIS in the current and projected sanctions landscape?

Sometimes the best solution is to switch to settlements in national currencies. Sometimes – restructuring the contract base and the use of offsetting counterclaims. Sometimes, it is the creation of an intermediary company in a friendly jurisdiction. Sometimes, it is necessary to revise the functional profile of subsidiaries and profit distribution channels. Sometimes it is a combination of several tools.

Settlements under sanctions do not require a search for a “gray” workaround, but a transparent and documented compliance model that can be protected before the bank, the tax authority and currency control.

Step 1. Audit of corporate and contract structure

The first object of analysis is not bank details, but the legal structure of the holding and existing contracts.

Key elements for verification:

• Corporate structure and ownership chain;
• tax residency of each group company;
• the applicable currency legislation of the Russian Federation and the relevant CIS countries;
• the existence of intergovernmental agreements affecting foreign exchange transactions;
• Classification of operations (current, capital, non-trading);
• obligations on repatriation of foreign currency earnings and the procedure for its execution;
• requirements for the formulation of foreign trade contracts for registration in the bank;
• terms of loans, licensing, distribution, service and agency agreements;
• the real scope of rights and functions of each group company;
• Restrictions on dividend payments and financing to non-residents.

If the contract and structure are not in sync with economic reality, the calculations become vulnerable. However, even a suboptimal structure can often be healed without costly reorganizations—through adjustments to contracts, functional profiles, and payment instructions.

Step 2. Qualify the transaction for the purposes of currency control and sanctions restrictions

To build a secure route, you need to accurately determine the legal nature of each financial flow:

• dividends;
• interest on loans;
• royalties and royalties;
• repayment of loans and capital investments;
• payments for goods and services;
• intragroup redistributions;
• payments on construction and EPC contracts;
• commissions to agents and service companies.

Different categories of payments are subject to different restrictions. For example, dividends may be subject to special licensing procedures or prohibitions. Royalties may come under increased control in terms of transfer pricing. Loan repayment is sometimes easier to implement than dividend payments, but requires a flawless loan dossier.

Step 3. Analyze applicable sanctions regimes

The sanctions landscape consists of several layers that need to be assessed simultaneously:

• blocking sanctions (SDN-lists of the USA, sanctions lists of the EU, the UK and other countries);
• Sectoral restrictions (prohibition on financing, supply of certain goods and technologies);
• “ceilings” of prices and restrictions on services related to shipping, insurance, engineering;
• a ban on the provision of accounting, legal, consulting services to certain persons;
• Russian counter-sanctions measures (Presidential orders, decisions of the Government Commission, special procedure for transactions with shares and real estate);
• The sanctions risks of correspondent banks, which may refuse to process payment due to their internal compliance, even if the transaction is not prohibited.

A payment that is perfectly legal under Russian law could be frozen by a foreign bank for fear of secondary sanctions. The goal is to anticipate such risk areas and build a route that minimizes compliance failures.

Step 4. Determine the legal architecture of calculations

After analyzing the operations and sanctions risks, a working model of calculations can be designed.

The working elements of a legitimate architecture include:

• direct settlements in national currencies of the CIS countries (ruble, tenge, Uzbek som, som, manat) with conversion through exchange or over-the-counter mechanisms;
• settlements through banks of friendly jurisdictions that have not joined the sanctions regimes;
• use of correspondent accounts and alternative payment systems;
• Letters of credit and bank guarantees issued by non-blocked financial institutions;
• intragroup offset (netting) of counter-homogeneous claims, drawn up by the law of countries where it is permissible;
• Establishment of intermediate payment agents or trading houses in neutral jurisdictions;
• Redistribution of financial flows through service contracts and distribution chains;
• obtaining permissions from a Government Commission or other authorized body when the operation is subject to special decrees.

Digital financial assets and settlements in cryptocurrencies can only be considered within the framework of the experimental legal regimes that are directly authorized and only after a detailed analysis of the risks of legalization of income and sanctions circumvention. Using cryptocurrencies without such an assessment can create more problems than solutions.

Step 5. Ensure compliance with currency control of the Russian Federation and CIS countries

A legal scheme ceases to be legal if the mandatory requirements of the currency legislation are violated.

The typical scope of obligations includes:

• formulation of foreign trade and loan contracts for registration in an authorized bank;
• compliance with the terms of repatriation of foreign currency earnings and submission of supporting documents;
• Notification of tax authorities on foreign accounts of residents and reports on the movement of funds;
• reflection of transactions in forms of currency control and statistical reporting;
• compliance with the limits and procedure for the use of foreign accounts by resident individuals;
• caution in “splitting” payments to avoid thresholds of registration – this approach can be qualified by the regulatory body as an attempt to circumvent the norms.

Penalties for violation of currency legislation in Russia and a number of CIS countries can reach 75-100% of the amount of illegal transactions. Compliance should include a calendar of currency controls and those responsible for each checkpoint.

Step 6. Compliance documentation for banks

The bank is now the main filter. He doesn’t have to teach the client how to explain the operation properly. He must check it and refuse if something is unclear.

Before initiating payment, a package of documents must be prepared:

• the full text of the contract with all annexes and changes;
• invoices, acceptance acts, consignment notes, CMR, bills of lading;
• calculation of the contract price and its compliance with the market level;
• confirmation of the origin of the goods or the place of provision of services;
• legal opinion on the non-existence of the parties to the transaction and the beneficiaries under sanctions;
• written justification of the economic sense of the operation;
• information about the ultimate recipient of funds and owners of the counterparty;
• an extract from the register of shareholders or corporate documents confirming the group connection;
• The Company’s internal currency compliance policy.

Payment that is sent without a quality compliance package is almost guaranteed to be stopped or returned – at best. At worst, it will lead to the blocking of the account and the investigation of the client.

Step 7. Develop a Payment Strategy “Plan A” and “Plan B”

A single correspondent bank is not enough. The sanctions environment is changing rapidly and the canal could close within a week.

A sustainable strategy involves:

• Opening accounts with several banks, including different currencies and jurisdictions;
• Reserve multi-currency accounts;
• pre-agreed terms of contracts allowing for the change of the payment currency, the payment bank or the replacement of the payer/recipient party;
• worked out agency schemes, where the functions of payment or receiving funds can be performed by another person of the group;
• access to alternative channels for converting and hedging currency risks;
• use of offset and innovation as a reserve method of settlement of intragroup debt;
• assessment of the admissibility of temporary accumulation of funds in a friendly jurisdiction until the final transfer.

Payment strategy should be checked for sustainability at least once a quarter.

Step 8. Conduct a stress test of tax consequences

Changing payment routes and rewriting contracts inevitably entail tax risks that cannot be ignored.

Areas of special attention:

• withholding tax on dividends, interest and royalties – application of preferential rates under agreements on avoidance of double taxation, taking into account partial suspension of their validity;
• Transfer pricing rules – calculations within the group must be market-based and documented.
• The concept of the actual recipient of income – the use of transit companies without a real presence is almost guaranteed to be challenged.
• Taxation of controlled foreign companies (CFC) and thin capitalization rules;
• The doctrine of unjustified tax benefit in business splitting or artificial redistribution of margins.
• insurance premiums and VAT when changing the routes of services.

Adjusting a payment scheme without tax analysis often leads to the fact that the company avoids blocking payment, but receives a large additional charge of taxes and penalties after a year or two.

Step 9. Protect assets and dispute resolution mechanisms

When the calculations become more complicated, the need for protection of funds increases.

Provision should be made for:

• security mechanisms in contracts - pledge, surety, bank guarantee;
• insurance of risks of non-payment or delay in payment;
• arbitration clause in neutral jurisdiction enforceable in the countries where the debtor’s assets are located;
• the right to suspend counter-execution in case of delay in payment;
• a mechanism for the rapid receipt of interim measures in court or arbitration;
• Legal possibility of debt recovery in the CIS countries, taking into account local procedural codes.

If a dispute does arise, winning it is not enough – you need to be able to execute the decision where the counterparty has assets.

Step 10. Continuous monitoring and regular compliance audit

Sanctions lists, currency control rules and bank compliance are constantly updated. What was legal and passed without question a month ago could now result in a lockdown.

Elements of the monitoring system:

• monitoring of changes in the legislation of the Russian Federation, the EAEU and key CIS countries;
• Screening of contractors and beneficiaries for inclusion in new sanctions lists;
• Regular testing of payment channels;
• updating compliance documentation;
• Internal audit of currency control and reporting;
• training of the Treasury and the Legal Department;
• interaction with bank compliance officers in the mode of preliminary coordination of complex operations.

Companies that do not invest in such monitoring risk suddenly being left without access to their own cash.

National currencies, clearing or transit: pick

Choice cannot be universal. It is determined by the specific profile of the group, the nature of the operations, the jurisdictions of presence and the appetite for risk.

How to strengthen your position before problems arise

The best compliance doesn’t begin when payment is frozen, but when contracts are designed and accounts are opened.

It is advisable to include in treaties and internal regulations:

• Multi-currency reservations with the right to change the payment currency;
• anti-sanctions assurances and guarantees of the parties;
• a condition for the replacement of the paying bank or the receiving bank;
• a provision on difficulties (hardship), which allows you to adapt the calculation procedure when changing the regulation;
• the right to set off counterclaims;
• the possibility of fulfilling obligations through the specified third party;
• the obligation of the parties to provide compliance documentation upon request;
• Dispute resolution in neutral arbitration;
• strict rules for the internal coordination of payments involving legal and compliance functions.

A well-written contract works not only in a normal situation, but also in a crisis phase, when there is no time for negotiations.

Typical errors in the calculation

1. The Bank can change its compliance policy at any time. Without backup channels, the company is defenseless.

2. If the payment is formalized as royalties, but in fact is a hidden dividend, the tax and the bank will see this.

3. In addition to the colossal risks of criminal prosecution, this destroys the protections in future inspections and makes business unacceptable for any official bank.

4. Violation of the currency legislation of the recipient country is as dangerous as violation in the paying country.

5. Any non-standard payment is better discussed with the bank officer before sending, rather than waiting for a request and freezing of funds.

6. When checking in six months, no one will remember why they chose such a route. Documentation is the only protection.

7. Compound another company’s scheme without analyzing their own risks, colleagues may have different jurisdictions, scopes, beneficiaries, and risk tolerance. Blind copying often hurts.

8. Forget about taxes when restructuring settlements Changing the payment route almost always changes the tax consequences. Without a tax ruling, any decision is incomplete.

Checklist of the treasurer and lawyer of the group

Before implementing or auditing the calculation model, 15 questions must be answered:

1. Who is the payer and recipient of the funds in terms of foreign currency residence?
2. What is the real economic purpose of the transaction – payments for goods, services, dividends, loans?
3. Is the transaction subject to special regulation (permits, limits, special accounts)?
4. Are all contracts signed by the right people and reflect a real relationship?
5. Has the chain of beneficiaries been checked for sanctions and restrictions?
6. Are the necessary clauses included in the contracts (currency, sanctions, bank replacement)?
7. Are the contracts registered under the foreign exchange legislation?
8. Are the requirements for repatriation of proceeds and deadlines met?
9. Is there a full compliance package for the bank before the payment is sent?
10. Are there any other banks and alternative channels in case of a major block?
11. Has the tax stress test scheme (tax at source, TCO, CFC) been carried out?
12. Are the payment routes as transparent and documented as possible?
13. Is there regular monitoring of changes in the sanctions legislation?
14. Is there a plan of action in case of a payment freeze or bank failure?
15. Does the group have a relevant legal opinion describing the entire settlement architecture and its risks?

What a strong currency compliance and settlement strategy looks like

A strong strategy is built on five levels, each of which is mandatory:

1. Legal Construction Audit of corporate structure, contracts, legal qualification of transactions and currency legislation of all affected countries.

2. Sanctions Compliance Screening of persons, banks, goods and services. Determination of acceptable corridors and formats of operations.

3. Tax expertise Assessment of the consequences of withholding tax, TP, CFC and the concept of the actual recipient of income. Integration of tax requirements into payment architecture.

4. The choice of a combination of currencies, banks, instruments (letter of credit, credit, guarantees) and reserve routes.

5. Documentation and monitoring Formation of compliance packages, payment coordination regulations, change monitoring system and regular audit.

Levels 1-4 without a fifth give a temporary result. Level 5 is impossible without the first four.

FAQ

It is possible, if the restrictions of the decrees of the President of the Russian Federation are observed, the necessary permits are obtained (if required), and sanctions restrictions from the EU are taken into account. This requires individual structuring for a specific group.

To date, only in the expressly permitted experimental legal regimes and subject to full compliance with anti-money laundering legislation. Using cryptocurrencies to circumvent currency or sanctions restrictions carries high legal risks.

Immediately provide the bank with a full package of documents confirming the legality and economic sense of the transaction, as well as to involve a legal consultant for interaction with the compliance service of the bank. In parallel, activate the backup payment channel, if this is provided by the strategy.

Yes, if the amount of obligations exceeds the established threshold (in the Russian Federation - for import and export contracts, as well as loan agreements). Requirements in other CIS countries vary, but the overall approach is similar.

Banks that serve operations in the interests of sanctioned persons or supply subsanctioned goods risk falling under secondary sanctions of the United States, the EU or the United Kingdom. Even unblocked banks are extremely cautious in compliance.

It is possible if neither party to the transaction, the corresponding bank and the transaction itself do not violate the applicable sanctions programs. However, in practice, dollar and euro routes for businesses connected to Russia or the sanctioned sectors are almost completely closed or require special licenses.

Which is better – one treasury center in a third country or direct settlements between the parent and subsidiaries? The Treasury Center simplifies netting and liquidity management, but it becomes a point of risk. Direct calculations are easier, but split streams. Choices require modeling.

Ideally, it is continuous, with a mandatory full review at least once a quarter and with every significant change in regulation or sanctions lists.

Related services

• International Sanctions, Export Controls & Compliance
• Corporate Structuring & Cross-Border Holding Governance (Russia & CIS)
• International Trade, Customs & Supply Chain Compliance
• Tax Planning & Controversy for Multinational Groups
• Banking & Finance Regulatory Advisory
• Cross-Border Disputes, Asset Tracing & Enforcement
• Currency Regulation & Foreign Exchange Control

Related material

• How to build a compliance policy for an international holding company
• Sanctions clauses in treaties: What to do today
• Currency control of foreign trade transactions: treasurer's-book
• Transfer pricing in the chains of the CIS – Russia – Europe
• Circumvention of sanctions and criminal risks: wherein the red line passes
• Recognition and enforcement of arbitral awards in CIS countries
• How to Protect Intra-Group Loans from Tax Claims
• Payment of dividends under the terms of the decree of the President of the Russian Federation: step-by-step
• Working with CIS banks: What to Expect from Compliance and How to Prepare

Conclusion

Settlement between the parent company and business in the CIS countries under sanctions does not require one-time banking experiments, but a systemic legal, tax and compliance architecture.

A strong settlement model relies not on a search for loopholes, but on a transparent economic logic, supported by a contractual framework, exchange controls, and a willingness to engage with banks and regulators.

In the face of ever-tightening constraints, the winner is not the one who finds the fastest route, but the one who has designed a system that can adapt without losing control of assets and without creating unacceptable risks for management and owners.