There has been a good deal of SRA activity around the subject of sanctions controls in recent months. The whole topic of sanctions, and the limits that they place on client relationships when they arise, is surely amongst the most complex of the compliance challenges that firms will have to confront. This will be the case even where the firm has had no dealings with any one who would count as being a “designated person” and nor is this ever likely to be the case. The SRA will, however, expect some very tight controls to be in place to guard against this possibility – remote as it may be for the great majority of firms, and especially so for those on the high street.
A Complex and Fragmented Regime
The first factor that makes this such a difficult topic to address is that there is no one set of sanctions controls. These are listed in the current SRA guide to the topic, first published last November but now redated the 13th February, to make this the “sole authoritative source” on this issue. Those sanctions that are most obviously present themselves for law firms are those that include “asset freezes” against listed persons. There are, however, also different regimes for trade, immigration and transport. Sanctions might relate to individuals or entities, and even ships or aeroplanes. Sanctions might also apply to territories as a whole such as the controls that have been announced on the provision of services to Russia.
Why Sanctions Affect Every Firm
The complications of the subject aside it is important to understand just how extensively the SRA expects it to affect the day-to-day operations of all firms. The analogous issue of anti-money laundering controls is mostly relevant to those firms and services that fall into the regulated sector by providing any of the listed services in the Money Laundering Regulations 2017, but sanctions controls apply to all and any of the services provided by all firms.
Client Due Diligence Requirements
So what is expected by the SRA in relation to the regime? First and foremost is a requirement to assess whether any client is subject to any such controls. As the recent guidance note puts it:
“It is important that you carry out thorough due diligence checks to identify whether a person (whether natural or legal) is designated. When dealing with a non-natural person, to understand whether they are impacted by the sanctions regime you will also have to consider any counterparties, beneficial owners or individuals with possible control of the entity.”
So far, so good. The great majority of firms now use one or other of the various electronic ID search tools for AML checks and these should include checks of the records that are held by the Office for Financial Sanctions Implementation (OFSI). In passing, by the way, checks undertaken by the firm will now need to be through the recently formed “UK Sanctions” database rather than , as before, the OFSI Consolidated Search Facility. The link to that service is at https://search-uk-sanctions-list.service.gov.uk/ and it would be advisable to update your firm’s policy as to that link. If you have adopted the Infolegal Office Procedures Manual this will be found at para 3.20 of both the Firms’ and Sole Principals’ versions.
Extending Checks to Counterparties
The regime does then become a good deal more onerous, however, in relation to the need, so far as the SRA is concerned, to check all counterparties to any matters also. When first introduced in 2018 the criminal offences of having financial dealings with sanctioned persons were limited to any such dealings that were intentional or reckless, but in something of a knee jerk reaction by Government in 2022 in the weeks following the Russian invasion of Ukraine s strict liability basis was instead applied. The SRA duly, and quite reasonably, announced that they would therefore prosecute for intentional or reckless breaches of the regime, but would otherwise “take a view”.
More concerningly, however, the SRA ruled that if strict liability was now the basis that had been adopted the duties would extend beyond dealings with the firm’s own clients and extend to all counterparties also. Even more concerningly, the SRA have advised that firms are under an obligation to conduct their own such checks and cannot rely on the fact that most counterparties will themselves be legally represented.
“You cannot rely on other parties to assure you they are not designated persons. At the most basic level you should check the identities of clients (and for non-natural persons anyone with control over the entity or more than 50 per cent ownership) and counterparties against the UK sanctions list.”
They then go on to advise that this might be done by the use of the same e-verification programme that the firm will be using on its own clients, though not acknowledging that this will therefore be at a substantial additional cost, or by using the UK Sanctions screening tool mentioned above. This may indeed be free to use but will involve countless hours of time across the entire range of matters being handled over any period of time. As to the further degree of risk that so arises the SRA advise that “firms may breach the regime by transferring assets to third parties or counterparties, for example, in the form of damages, compensation, or payments under a trust or a will.”
What Should Firms Do?
So where does this leave firms and what should they do about it? Most will take the view that they cannot realistically achieve the gold standard that is required by this guidance note. Unlike the SRA regime where ID checking is a specific requirement of the Regulations in the equivalent Sanctions regime it is more of a risk decision for firms to take a view on. It would be commendable to comply with the very exacting standard outlined in this guidance note but most firms are likely to take the view that it will be impossible or impracticable to do so.
We instead suggest in our Office Procedures Manual that the checking of counterparties should be considered where they are not legally represented or whenever there is doubt as to that party’s status. As we stress in that part of the manual, however, that falls short of the SRA’s requirements but it may be all that many firms feel able to commit to. If this does mean that they fall short we will have to hope that the view that will be taken by the SRA in the highly unlikely circumstances of a sanctions counterparty emerging from a matter will be a sympathetic one.
A Disproportionate Burden
All in all, and given the extent of checking as advised by the SRA and the risk level for most firms of ever encountering a sanctioned counterparty, this does seem to be a regulatory sledge hammer that is being applied to a compliance nut.
For more on this topic please see our recently revised factsheet on this topic and in our Office Procedures Manuals for Firms and for Sole Principals, the now updated section 3.20.