By Legal Futures Associate Legl
The UK government and governments around the world have imposed additional and far-reaching sanctions with the aim to persuade Russia to withdraw their position threatening the stability and sovereignty of Ukraine.
Obligations in relation to financial sanctions is not a new burden on UK law firms. Firms should already have robust policies, controls and procedures in place to prevent breaches of sanctions legislation.
What is new, brought about by Russia’s invasion of Ukraine in recent weeks, is the rapid pace of amendments to existing legislation resulting in an unprecedented increase in individuals and entities added to sanctions lists and well as the fast-tracking of the Economic Crime Bill which received Royal Assent on 15 March 2022.
The importance of law firms understanding this area
Understanding obligations in this area is critically important for law firms as a breach may put firms and individuals at serious risk of regulatory action and criminal prosecution.
Sanctions restrictions are absolute and mean that law firms cannot receive payment from, or make funds available to, those individuals or entities named. This includes dealing with their economic resources or even making legitimate payments. There is also a wider restriction that firms must not “knowingly and intentionally participate in activities that would directly or indirectly circumvent financial restrictions or enable or facilitate the commission of any sanctions offence.”
Breach of the sanctions regime could lead to maximum prison sentences of 7 years and substantial fines.
In addition to the sanctions regime, which this article focuses on, law firms need to consider the effect of this situation in respect of their anti money laundering obligations, particularly around acting for PEPs or Known Close Associates of PEPs.
Financial Sanctions Regime
The Sanctions and Anti-Money Laundering Act 2018 provides the main legal basis for the UK to impose, update and lift sanctions. This legislation resulted in the Russia (Sanctions) (EU Exit) Regulations 2019 which came fully into force on 31 December 2020.
Since then there have been further instruments that have made amendments to it including amendments in 2020 and the recent tranche of amendments this year (6 so far). These instruments should be read alongside the original instrument. Amendment 2 and Amendment 5 relate to financial sanctions.
The restrictions apply within the territory of the United Kingdom and in relation to the conduct of all UK persons, including body corporates, wherever they are in the world.
Firms may also need to consider other sanction lists outside the UK such as EU and US sanctions and this will depend on the firm’s exposure to US or EU entities as there will be an obligation to consider those other jurisdictions’ sanctions prohibitions.
OFSI is responsible for monitoring compliance for assessing suspected breaches. It also has the power to impose monetary penalties for breach and to refer cases to law enforcement agencies for investigation and potential prosecution.
It is possible to apply for a licence to undertake certain activities that would otherwise be prohibited. However firms should consider the risk on their firm of continuing to act even if a licence is obtained including moral issues that could lead to negative PR and issues relating to their professional indemnity insurance. This is a serious decision with serious implications if a firm gets this wrong.
Firms are legally obliged to report to OFSI if they know or suspect that a breach of financial sanctions has occurred, that a person is a designated person, or you hold frozen assets and that knowledge or suspicion came to you while conducting your business. In any of these scenarios firms must contact OFSI at the earliest opportunity.
Economic Crime (Transparency and Enforcement) Act 2022
The Economic Crime Bill received Royal Assent on 15th March 2022. New measures include:
- a beneficial ownership register for overseas entities holding UK real estate
- a strengthening of unexplained wealth orders (UWOs)
- methods to make it easier to prosecute anyone involved in sanctions-busting
The Law Society of England and Wales published a practice note in relation to this on 16th March 2022 titled Economic Crime Act: what does it mean for law firms?
What the legal sector regulators are saying
A number of UK Legal Sector Regulators have made official statements condemning Russia’s invasion of Ukraine. Both The Law Society of England and Wales (LSEW) as well as The Law Society of Scotland (LawScot) have publicly expressed their positions.
I. Stephanie Boyce, President of the LSEW, has stated, “We stand in solidarity with the Ukrainian people, the Ukrainian National Bar Association and the Ukrainian Bar Association. We also stand with the Russian people who oppose their government’s illegal invasion of Ukraine, and lawyers who are defending the rule of law in the region. We condemn the actions of the Russian Federation, which are in contravention of international law. There is no doubt that these actions are a direct threat to the rule of law.”
Ken Dalling, President of LawScot, has said: “The Law Society of Scotland condemns the use of force by Russia against Ukraine. International Law is clear that such actions are both legally and morally reprehensible.”
Guidance on what is expected from law firms has been published by LSEW, LawScot, the SRA and the CLC. In particular the SRA has issued a warning: “If firms have undertaken sanctions checks as part of customer due diligence when taking on the client and there has then been a period of time before a transaction takes place, we would remind firms that it’s helpful to re-check the sanctions list ahead of the transaction completing because individuals may have been added to the list in the interim.
If your firm is using an electronic verification system for customer due diligence and sanctions checks, check they are refreshing sanctions lists with sufficient frequency.
As this is a fast-moving situation, you can sign up to receive alerts on the latest sanctions changes on the OFSI website.”
The Legal Sector Affinity Group (LSAG) guidance covers a law firm’s obligations in relation to anti-money laundering legislation and also provides guidance in relation to sanctions. Sanctions and AML should not be conflated, but there are naturally touch points – and robust PCPs should encompass both.
What is clear is that law firms must have robust policies, controls and procedures in place to identify individuals and entities under sanctions as well as PEPs and known close associates of PEPs. Such controls should be proportionate to the size and nature of the firm applying a risk based approach.
For example, small firms, with limited exposure and lower risk profiles may elect, following risk assessment, to apply manual checks of free sanctions lists whereas firms with a higher exposure and higher risk profiles will likely need to consider more complex, comprehensive or bespoke solutions. In either case technology can add efficiencies to enhance and embolden a firm’s approach.
The role technology can play
In order to manage risk, firms need to have reliable data and efficient ways to analyse and monitor that data in order to take the necessary steps to mitigate risk and be compliant. Technology can help law firms to manage their risk in this area and reduce the occurrence of breach caused by human error.
Technology solutions can help firms apply consistent processes across the practice reducing the occurrence of fee earners following their own perhaps less robust practices. Good technology solutions will allow oversight and visibility of risk centrally allowing MLROs and other managers to monitor and take action where required.
It can provide a single source of truth for client due diligence throughout the client lifecycle with ongoing PEPs and sanctions screening. Comprehensive audit trails are available across all clients of the firm, and escalation to MLRO or other designated supervisor can be simplified and made more efficient.
For further information, chapter 7 of LSAG guidance is dedicated to technology.
How Legl is assisting their law firm clients
Legl partners with leading AI-driven financial crime and regulatory reporting tools and sources to provide real-time ongoing risk monitoring.
These tools provide ongoing watchlist screening, capturing updates automatically to provide accurate and up to date coverage.
Data sources are refreshed on an ongoing basis which enables law firms to stay up to date and continue to make informed decisions around sanctions and AML risk.
Legl’s Ongoing Monitoring customers receive daily alerts within the app about any changes on their monitored contacts, including if they are added to, or removed from, a sanctions list. They also receive a weekly summary report of any activity.
What law firms should do right now in relation to sanctions
- Risk assess your firm, relevant clients and matters
- Ensure policies, procedures and controls to prevent your firm breaching sanctions including how technology could help reduce risk
- Train your staff in relation to sanctions checking including screening, restrictions and reporting obligations
- Identify, verify and screen your clients and beneficial owners against sanctions lists with ongoing monitoring