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Russia’s invasion of Ukraine thrust sanctions compliance up the agenda of law firms of all sizes. Katharine Freeland reports
The low down
Sanctions have been part of the power play between states since Athens banned Megaran citizens from its markets in 432BC. There is no doubt that sanctions cause damage, and the list of sanctioned individuals and states is longer than ever. At 1,549 individuals, Russia is the world’s most sanctioned country. Such lists bear witness to sanctions as the go-to foreign policy tool for the US, EU and UK – they are viewed as always preferable to armed conflict. But do they work? The poor of any heavily sanctioned country bear the brunt no matter how ‘targeted’ sanctions are. And there is a further burden, for lawyers. The responsibility for policing breaches is increasingly thrust upon the private sector. Law firms from high street to global have to examine their client list and reappraise the way they do business.
Western policy on sanctions has evolved considerably since the imposition of wholesale finance and trade embargoes such as the one levied against Iraq by the UN National Security Council in the 1990s. Targeted or ‘smart’ sanctions now focus on designated individuals, while sectoral sanctions restrict trade with certain industries in the target country, catching anything from the export of pistachios from Iran to the import of luxury goods to North Korea. The US exploits the strength of the dollar by asserting US jurisdiction over virtually any transaction that uses it; it also increases the impact of US designations by using secondary sanctions, targeting commerce between a party under primary sanctions and others conducted outside US legal jurisdiction. North Korea, Iran, Syria and Russia have been the targets of secondary sanctions.
‘For certain issues, we are seeing a trend towards coordinated thematic smart sanctions rather than broad geographical sanctions,’ says Dentons partner Roger Matthews. ‘Most sanctions now target particular sectors or people rather than a country for matters such as human rights infringements, terrorism, corruption or involvement in narcotics.’
An example of modern sanctions policy is the coordinated sanctioning in 2021 of Chinese individuals rather than the country by the US, Canada, EU and UK, over human rights abuses against the Muslim Uighur minority. Travel bans and asset freezes targeted senior officials in Xinjiang suspected of involvement in the violations.
Do they work?
The effectiveness of sanctions is debatable, although they are generally viewed as a persuasive tool of statecraft preferable to military involvement. ‘In the case of Russia, sanctions have been a useful short-term tool but they have not been as widely applied globally as was hoped,’ says Corker Binning partner David Corker. ‘There are many non-aligned countries which dilute their effect. Those countries need to trade grain and other commodities with Russia – there is no way around that.’
North Korea has been subject to extensive international sanctions for decades yet continues to find enterprising ways around them. According to a UN panel monitoring sanction implementation, North Korea’s criminal cyber-hacking operations have raised billions through targeting blockchain and cybercurrencies. This helps to fund its ballistic missile and nuclear programmes. Regulators such as the US Office of Foreign Assets Control (OFAC) now target cryptocurrency businesses for sanctions breaches. The White House is currently weighing up the creation of a regulatory framework for digital assets.
Uniform sanctions compliance across all business sectors is difficult. In shipping, which has had considerable attention from OFAC, there has been industry pushback against the regulator’s expectations.
‘The current system for shipping is complex, with multiple parties involved in each single transit and an antiquated paper-based process with its roots in the 19th century,’ says Clyde & Co partner Patrick Murphy. ‘It is not comparable to the financial services industry, where bulk data can be easily screened for designated persons or entities. Shipowners and to some extent smaller insurers do not have the large compliance teams to draw on that the banks can access.’
Although the worldwide shipping industry previously had to factor in sanctions against countries such as Iran and North Korea, the breadth of the Russia sanctions and introduction of the price cap on Russian seaborne oil by the EU, UK, US, Japan, Canada and Australia meant more operators and insurers are affected than ever before.
‘One thing the past year of Russia sanctions has taught clients is that KYC [know your client] needs to become as ingrained in the compliance systems of businesses that operate outside the regulated sector, such as shipping, as it is in financial services, accountancy and legal,’ says Murphy.
Policing clients
Since Russia’s invasion of Ukraine the UK and EU have emulated US enthusiasm for sanctions by issuing a near-constant stream of restrictive measures against Russia. Law firms have hastily extricated their brands from Moscow and shed Russian clients. ‘Lawyers have greater obligations than ever before to police clients,’ says Peters & Peters partner Michael O’Kane. ‘Everyone knows about AML obligations, but lawyers are also under a duty to report sanctions breaches and failure to do so is a criminal offence.’
Pre-emption is important, rather than waiting for a sanctions issue to emerge. ‘Law firms need to demonstrate that they use the appropriate screening process for all clients and suppliers,’ says John Binns, partner at BCL Solicitors. Law firms with Russian clients have had tricky discussions with insurers on how they have ‘de-risked’ these parties. It has been a steep learning curve for everyone in the profession.
In March 2022 the Solicitors Regulation Authority announced it would conduct spot checks on law firm sanctions compliance. The Economic Crime (Transparency and Enforcement) Act, in force since May 2022, also upped the stakes, changing the legal test for the monetary penalty for those breaching sanctions laws to one of strict liability. The Office of Financial Sanctions Implementation’s (OFSI) powers were increased. It can now impose penalties of £1m or 50% of the value of the breach, whichever is higher, and also ‘name and shame’ those it suspects have breached a financial sanction prohibition or failed to comply. An ‘urgent procedure’ has also been introduced by the act to speed up the designation process.
'There is an international criminal court arrest warrant on Putin. If he is caught and sent to The Hague, no one would argue that he should not have a lawyer'
Michael O’Kane, Peters & Peters
All this is a compliance headache for the legal profession. In common with sectors such as financial services, real estate and education – not to mention political parties – the law had been welcoming Russians and their money into London for the past 25 years.
And there is more to come. Last September the government announced it would introduce its own version of the EU’s restriction on the provision of legal advisory services announced in its eighth package of sanctions against Russia, stating that: ‘The new legal advisory measures will cover certain commercial and transactional services and hamper Russia’s businesses’ ability to operate internationally.’
The EU’s restriction on the provision of legal advisory services to the Russian government and entities established in Russia has proved controversial. The French and Brussels bars launched a formal challenge in March and the UK proposal could encounter similar obstacles: ‘The EU restriction on legal services means that lawyers based in the UK holding an EU passport advising Russian companies on transactions could be caught, which is problematic,’ says O’Kane.
Lawyers will still be able to provide advice in contentious matters and advise those sanctioned on appealing their designation. ‘Everyone has the right to legal representation,’ says O’Kane. ‘There is an international criminal court arrest warrant on Putin. If he is caught and sent to The Hague, no one would argue that he should not have a lawyer.’
In the courts
Those sanctioned have been carefully preparing appeals and these are beginning to filter through the court system. The first case to be heard under post-Brexit legislation the Sanctions and Anti-Money Laundering Act 2018 (SAMLA) was that of LLC Synesis in March, a sanctioned Belarusian company. Although the appeal failed, Mr Justice Jay made valuable observations about how judicial actions under SAMLA will work, including the interaction of ministers’ designations with the European Convention on Human Rights (ECHR).
‘Last April newly passed legislation, section 58(3) of the Economic Crime (Transparency and Enforcement) Act 2022, enabled the government to abrogate the safeguard that sanctions should be “appropriate”,’ said Corker. ‘However in the LLC Synesis judgment, the judge held that the proportionality that the ECHR imposes was analogous to “appropriate”, which is useful for future appeals against sanctions cases.’
The hearing of Eugene Shvidler, a close associate of Roman Abramovich (both pictured top of page), is the first case by an individual sanctioned in the wake of the Ukraine invasion to be launched in the UK. The claim, filed on 24 February, requested an expedited hearing. O’Kane is advising on the claim, which is about the extent to which Shvidler is considered to be an ‘involved person’ in Russia’s actions. Unlike many oligarchs, Shvidler claims to be a UK/US citizen.
What you need to know
Risk assessments
When you carry out your firm’s anti-money laundering (AML) risk assessment, consider how likely it is that your clients may be on the sanctions lists. It’s difficult to categorise the clients that may need to be checked simply by their nationality or country of residence. UK nationals and residents can be on the sanctions lists, so you may still be at risk even if you only act for local clients. The regimes list can help you assess risk, but bear in mind there may be some retainers where it is not immediately apparent that a person or entity may have some connection to a relevant regime.
You cannot limit your risk assessment to the work regulated under the AML regulations. Examples of unregulated work that the sanctions regime may affect include: payment of personal injury settlements; and property settlements following a divorce. You’d also need a licence from OFSI to use legal aid payments for the benefit of a person on the list.
Checking clients against the sanctions lists
You may apply a risk-based approach to setting up a system that checks clients against the sanctions lists.
Factors that may increase the risk of a person being on the sanctions list include: clients or transactions with links to jurisdictions subject to sanctions, even if the clients are based locally; clients or transactions involving politically exposed persons from jurisdictions subject to sanctions; clients or transactions involving complex corporate structures in jurisdictions with high terrorist financing risks; and clients who seem unable to receive funds or send funds from a bank account in their name, for no good reason.
If you have a high risk of dealing with clients on the sanctions list, you should also have processes in place to help find out whether key beneficial owners, or the intended recipient(s) of funds from a transaction, are subject to the restrictions.
Source: Law Society
Sanctions developments
Several countries are exploring the possibility of seizing assets from sanctioned Russians and selling them to pay for Ukraine’s reconstruction, including Estonia. Canada has already passed a law allowing for frozen assets be to sold for this purpose. Labour MP Chris Bryant last year unsuccessfully pushed for a provision to be added to the Economic Crime (Transparency and Enforcement) Bill for non-reported assets to be seized from sanctioned individuals.
Although, currently, assets can be frozen, it is difficult to prove the requisite level of criminality to justify seizure. ‘ECHR Article 1 gives everyone the right to enjoyment of property, except for the proceeds of crime,’ says O’Kane. ‘It would be difficult to move from a freeze to a seize regime without infringing the convention.’ Any step in that direction would likely lead to a flood of legal challenges.
Sanctions and transactional legal work
For international sanctions to work they need buy-in from multiple countries, with as little diversification as possible between regimes. Since SAMLA was introduced post-Brexit, businesses with global operations have to consider at least three independent but overlapping sanctions regimes: the US, UK and EU – with the UK and EU currently arguably taking a more aggressive stance to imposing sanctions on Russia. Although all three regimes have a ‘50% rule’ which applies when evaluating whether a person directly or indirectly owns or controls an entity (referring to 50% of shares or voting rights in a company), there are complexities. The lists of sanctioned individuals vary, as do the definitions of ‘ownership’ and ‘control’.
‘OFSI has clarified that the UK does not automatically aggregate the interests of different designated persons in assessing “ownership” of a company, while the EU and US do,’ says Matthews. ‘This means that the same company may be sanctioned in the US and EU, but not in the UK, even where the same underlying shareholders are designated in all jurisdictions. It is especially important for companies with geographically diverse operations to consider the sanctions regime for each jurisdiction. Depending on its geographical scope, they may also have to consider the sanctions regimes of others such as Canada, Switzerland, Japan or Australia.’
UK enforcement
Historically the US’s export controls and sanctions enforcement agency OFAC has taken the most aggressive position in imposing and enforcing sanctions. Although the UK has to date sanctioned more individuals in response to the Ukraine invasion, it does not have the same track record on enforcement as the US.
SAMLA attempts to remedy the deficit, with provisions for more aggressive enforcement by OFSI than previously conducted under the auspices of the EU sanctions legislation. There has been just one major penalty awarded so far – a £20.47m fine imposed on Standard Chartered Bank in 2020 for breaching sectoral sanctions against Russia.
‘OFSI, like other state enforcement agencies such as the National Crime Agency, is under-resourced and needs more investment to do its job properly,’ says one sanctions lawyer.
In March the government’s Integrated Review Refresh announced a £50m Economic Deterrence Initiative to strengthen the implementation and enforcement of UK sanctions by tackling sanctions evasion, envisaging more of an OFAC-style role for OFSI.
Non-Russian sanctions
Russia has dominated the headlines so extensively over the past year that sanctions against other countries have been pushed to the margins. Before Russia invaded Crimea in 2014 the foci of sanctions and export controls were Iran and North Korea, as well as Venezuela, Myanmar and Cuba. President Trump’s withdrawal from the Joint Comprehensive Plan of Action involving Iran and a number of world powers in 2018 caused shockwaves.
The deal, struck by president Obama in July 2015, placed significant restrictions on Iran’s nuclear programme in return for sanctions relief. When the US pulled out it reinstated harsh sanctions and Iran’s nuclear programme resumed. Although president Biden has declared his intention for the US to rejoin the deal, talks with Iran in Vienna are currently at a standstill. There is disagreement on key issues such as Iran’s alleged supply of drones to Russia in Ukraine, the sanctioned status of its military groups and ongoing alleged human rights infringements.
Future for lawyers
The barrage of Russia-focused sanctions forced a spotlight on international business transactions between law firms and their clients, as well as introducing more questions on opaque matters such as who is the landlord of the London headquarters? Or who are the suppliers? The legal profession is now looking at the experience of Russian de-risking as a possible template for handling sanctions against China if it makes a military move against Taiwan.
‘While the profession is looking at Russia, it should be looking at China,’ says O’Kane. ‘If you advise clients with exposure to the far east it would be wise to consider the geo-political position and possible impact of any western sanctions.’
Katharine Freeland is a freelance journalist
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