Sanctions: Russia is the main but not only regime to worry about
Most sanctions non-compliance by UK legal services providers is due to breaches of Office of Financial Sanctions Implementation (OFSI) licence conditions, it has revealed.
OFSI’s newly published legal services threat assessment report revealed that, since Russia’s invasion of Ukraine in February 2022, the legal services sector has submitted 16% of the suspected breach reports, second only to the financial services sector (65%).
Solicitors’ firms and barristers’ chambers submitted 98% of these reports, and OFSI said it was “highly likely” that UK trust and company services providers have not self-disclosed all suspected sanctions breaches.
While Russia remained a priority and the main cause of reports, other sanctions regimes where OFSI has recently identified threats to compliance included those relating to Libya, global human rights, Belarus, global anti-corruption, Myanmar and South Sudan.
While reports from lawyers were typically timely, in some cases there were “significant delays”, particularly arising from the Myanmar and Libya regimes.
OFSI judged it as “almost certain” that most non-compliance by UK legal services providers has occurred due to breaches of the conditions of an OFSI licence – these allow people to carry out an act that would otherwise contravene sanctions.
While most reports made by providers concerned suspected breaches by clients operating in other sectors, “OFSI has observed areas in which sanctions compliance by legal services providers themselves could be strengthened”.
Specific issues included billing sanctioned clients (so-called designated persons, or DPs) more than the value limits set in their licence, or after the licence has expired, and how firms wound down their operations in Russia – top City firm Herbert Smith Freehills was last month fined £465,000 for this.
The report said: “OFSI has also observed legal services providers failing to adhere to asset freeze prohibitions, including through delays in freezing funds belonging to DP clients and by transferring frozen funds into accounts other than those specified in specific OFSI licences.”
OFSI highlighted too how complex corporate structures, including trusts, linked to Russian DPs and their family members “have obfuscated the ownership and control of assets which could be frozen under UK financial sanctions”, making lawyers’ job of assessing this more difficult.
It encouraged providers to report any suspected breaches arising from non-designated individuals or entities dealing with frozen assets held through these complex structures.
Relatedly, it was likely that Russian DPs have transferred the ownership and control of assets to non-designated individuals and entities. In some cases, this could breach sanctions.
The report highlighted a series of red flags for lawyers to look out for, especially when an “intermediary jurisdiction” was involved as well, most notably the British Virgin Islands, Cyprus, Guernsey and Switzerland.
“OFSI has also observed links between suspected breaches involving UK legal services providers and the Isle of Man, Jersey, Cayman Islands, Austria, and the United Arab Emirates.”
The report said that, in providing services to DPs, “legal services providers are uniquely positioned to identify suspected breaches”.
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