Banks stopping law firms with licences acting for sanctioned people

Sanctions: New guidance

There have been “numerous scenarios” where banks have stopped solicitors working under government licences for those subject to UK sanctions by refusing to process transactions, the Solicitors Regulation Authority (SRA) has said.

It also said that solicitors should warn sanctioned clients that their indemnity insurer must obtain its own licence from the Office of Financial Sanctions Implementation (OFSI) before paying out on any claim.

Law firms can act for those designated under the UK sanctions regime, subject to certain limitations and conditions, under a ‘legal fees general licence’ introduced by OFSI last month.

In new guidance on complying with the UK sanctions regime, the SRA noted that, though often talked about in conjunction with anti-money laundering, sanctions compliance was different in several important ways.

These included: all firms, not just those providing services within the scope of AML regulations, were covered; it applies to legal fees as well as clients’ assets; and it is strict liability, rather than risk-based.

The SRA said that having an OFSI licence “permits certain actions but does not compel third parties to take or facilitate” them.

“While you may seek to challenge a bank that is refusing to process a licensed transaction relating to a designated person, we have encountered numerous scenarios where the refusal of the bank was an insurmountable obstacle.

“You should consider the risk of this happening before providing services to a designated person. If you have been assigned a relationship manager or lead contact with your bank, you should consult them as early as possible to understand your bank’s approach to these scenarios.

“You should closely monitor such situations as they may undermine the financial viability of your firm.”

The SRA also said that sanctioned people should be warned that the law firm’s indemnity insurer may not pay any claim they might make against the firm, because to do that the insurer would need a license from OFSI.

“In our view, it is ultimately the duty of the insurer to apply for the licence and the decision of OFSI whether to grant one.

“For this reason, when providing legal services to a designated person, you should be upfront with them about the risk that your insurance may not be able to legally pay out in the instance of a successful claim.”

Under the SRA’s indemnity insurance minimum terms, insurers cannot be forced to pay claims where doing so would be illegal, not just under the UK sanctions regime, but those in the EU, USA and Australia.

The regulator said that when law firms found out that a client was a designated person, “either because their status has changed or they are a new client”, they were under “a clear duty” to report this to OFSI.

Although this duty did not “override or supersede” legal professional privilege (LPP), OFSI had said that “any attempt to take a blanket approach to LPP preventing any sharing of information” was likely to be challenged.

The SRA said that ‘red flags’ that indicated that law firms should make a report to OFSI or “exit the client relationship” included clients who were “aggressive or in some way resistant to the application of controls” or “unusual, opaque, complicated or particularly large” transactions.

Other flags were a client who “changes their name by deed poll without a reasonable explanation”, “sham litigation” or manufactured disputes where the transfer of assets is facilitated by settlement and “restructuring without a clear business rationale”.

Paul Philip, chief executive of the SRA, said: “The changing regime means that firms have to keep up-to-date and our guidance will help them to do that.

“The sanctions regime applies to all firms that provide legal services, not just those that are captured by the anti-money laundering regulations. So some firms will need to take a closer look at, for example, implementing effective client due diligence measures.”

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