New sanctions guidance
At the end of this most difficult of years it is perhaps inevitable that we cannot escape the consequences of Russia’s invasion of Ukraine, and how this has impacted on the legal profession. The SRA published revised guidance on the need to ensure that lawyers do not breach the sanctions regime which was introduced a few years ago by the Sanctions and Money Laundering Act 2018, but then ratcheted up earlier this year by the Economic Crime (Transparency and Enforcement) Act which was rushed through Parliament in the weeks following the invasion. The SRA has now produced two revised guidance notes on this topic, both on the 28th November: “Impacts of Russia Sanctions” and “Sanctions Regime Guidance Helps Firms Stay Compliant”.
The various sanctions controls that are in place within the UK can prove to be difficult to comprehend, and although most firms will be unlikely ever to encounter major problems with them, those that do are likely to face quite a complicated and potentially risky position. Sadly, the need to ensure compliance with the sanctions regime now goes beyond those firms that might be expected from the nature of their client base and the services provided to be at risk of complications in this regard to, potentially, all other firms as well.
By way of background, various government departments are involved with the overall sanctions regime, but it is the operations of the Office for Financial Sanctions Implementation (“OFSI”) which is the main point of concern. This department of HM Treasury has unsurprisingly been in overdrive for most of this year examining, in particular, the controls that those in Government would wish to apply to wealthy Russian individuals and supporters and to their business interests as well. Apart from this there are trade sanctions as determined by the Department for International Trade, immigration controls as administered by the Home Office and certain transport controls also which fall to the Department for Transport. These controls should not be confused, however, with the list of high risk territories for AML purposes as set out at r.33 MLR 2017.
Ever since the relevant provisions were introduced in 2018, there has been the potential for criminal liability for those practitioners who were found to be dealing with someone who was named on one of the various lists. Up until the earlier part of this year, however, this risk was tempered by the fact that the risk of prosecution would only have arisen if the practitioner knew, or should reasonably have known, that a client was subject to such controls.
Now, however, a new test of strict liability has been imposed. Whereas beforehand knowing or suspecting that someone might be a “designated person” would have needed to be proved by way of mens rea for the offence to have been committed this is now stated to be merely a relevant factor in determining whether proceedings should be brought against the person concerned. This has led the SRA to harden its approach to the issue of the precautions that advisers should undertake in order to avoid the risks of enforcement activity should they be unfortunate enough to find themself caught up in any such dealings. As the SRA acknowledge in their more general guidance note on the topic, this duty is a “very challenging one”, not least as a result of the fast-moving pace of change by Government in this area of its activities.
Checks on “counter-parties”
Unlike the closely aligned anti-money laundering regime, which is limited to those concerns that are made subject to the Money Laundering Regulations 2017 and so become part of the “regulated sector”, the various sanctions controls are of general application for the legal profession as a whole. If subject to the MLR, it will be necessary to establish the identity of all clients and understand the nature of the ownership and control of companies and other organisations that the firm will represent. The revised sanctions controls, however, go further and apply to all of the other interested parties, including those who are separately represented by their own advisers. On this point the SRA have stated that:
“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 at least a 50 per cent stake) and counter-parties against the UK consolidated sanctions list.”
Given the pressure to which many key departments and teams are currently subject, in residential conveyancing most obviously, the suggestion that the screening of parties should no longer be confined to the firm’s own clients, but should extend to others even though they have their own advisers acting, will cause a great deal of concern. As an alternative to incurring further search fees by checking on the identity of counter-parties, however, the suggestion is made that these additional searches should be made instead through the use of the OFSI Financial Sanctions List, which is at least free to use, even if it adds yet another administrative task in opening a matter file. The alternative of using the OFSI checking tool also finds favour with the SRA in that it will conduct a “fuzzy check”, and so should make allowance for minor spelling errors in the details that are submitted for checking.
No doubt many firms will choose to ignore the SRA advice to counter-check the other parties to matters who should themselves have been assessed for these purposes by their own representatives, but it is important to recognise the risks of possible enforcement action by the SRA should circumstances so conspire. In this regard a risk calculation should be made on the basis of:
|Net Risk = Likelihood of Occurrence x Consequences from Failure|
Viewed in this way, for all of the increased activity in the various enforcement actions being taken by Government it remains highly unlikely that the great majority of general high street firms, and many smaller commercial practices as well, will ever encounter a designated person within the sanctions regime, but they might. This latest development therefore throws out the challenge as to each firm’s “risk appetite”, and whether the risks of enforcement action are judged to be such that the firm will choose to ignore them. Unfortunately, this cannot be the subject of advice that the firm might obtain and it will need instead to be a matter for all firms to review for themselves.
Terms of Business
Infolegal is in the process of updating its materials to take account of the revised SRA Guidance. We have already published a revised Factsheet (number 37) entitled “Sanctions Controls in Legal Practice” and we are reviewing and updating our template Terms of Business and office procedures manuals.
If discovering that the firm is acting for a designated person under the sanctions regime, it may not then continue to act on a paid basis, and even if continuing to act unpaid it must not be at risk of circumventing the sanctions regime. It follows that either ceasing to act, or putting the matter on hold for several weeks while a licence to be able to continue to act is sought from OFSI, are likely to be the only sensible options in most cases. On this point the SRA comment upon the professional position of ceasing to act for a client once a retainer has been agreed which was reviewed in the case of Buxton v Mills-Owen [2010} EWCA Civ 122. The outcome of this case was that, in effect, it is possible to sack the client but all depends upon the facts of each case.
The SRA have therefore made the suggestion that the firm’s Terms of Business might be amended to preserve the right to cease acting for the client in the event that they prove to have been, or later become, a designated person. Our Terms of Business will be amended in the light of this.