Sanctions Update: UK enforcement, international regulator collaboration and further restrictive measures taken in response to Russia's invasion of Ukraine

Since Russia's invasion of Ukraine there have been a number of pushes to restrict the provision of services to Russia generally. In May 2022, the UK Government announced that it intended to implement a ban on the provision of consulting, accounting and PR services, which was implemented through the Russia (Sanctions) (EU Exit) (Amendment) (No 14) Regulations 2022. A similar restriction was also implemented as part of the EU's sixth package of restrictive measures.

On the 30 September 2022, the UK Government published a statement outlining that it would prevent Russian access to:

• IT consultancy services;
• architectural services;
• engineering services;
• advertising services;
• transactional legal advisory services; and
• auditing services.

As part of the statement, it was emphasised that Russia is highly dependent on Western countries for legal services "with 85% of all legal services being imported from G7 countries" and the UK accounting for "59% of these imports." Only limited information has been published to date in relation to the new UK prohibition, other than that it will "cover certain commercial and transactional services and hamper Russia’s businesses’ ability to operate internationally."

Although this ban has not yet come into force, clues as to what approach the UK might take and the scope of the restrictions can be seen in the eighth package of EU sanctions, which was published on 6 October 2022. This included a ban on the provision of certain legal advisory services, subject to exemptions, to the Government of Russia or legal persons, entities or bodies established in Russia. 

• ‘Legal advisory services’ covers: the provision of legal advice to customers in non-contentious matters, including commercial transactions, involving the application or interpretation of law; participation with or on behalf of clients in commercial transactions, negotiations and other dealings with third parties; and preparation, execution and verification of legal documents.
  
  
• ‘Legal advisory services’ does not include any representation, advice, preparation of documents or verification of documents in the context of legal representation services, namely in matters or proceedings before administrative agencies, courts or other duly constituted official tribunals, or in arbitral or mediation proceedings.

There have been some suggestions in the media that the EU has taken a slightly different approach to the UK and US in relation to the prohibition, and that the EU restrictions will be wider than those planned in the UK and US. It is anticipated that the statutory instrument containing the UK prohibition will be introduced prior to Christmas, however that timeline is not currently clear given the significant amounts of uncertainty currently surrounding the UK's Government.

The impact such proposed measures could have on UK and international law firms providing legal services is significant, and it is anticipated that difficulties may arise in trying to delineate what is and is not prohibited. For example, would Russian-incorporated companies owned by non-Russians or non-Russian companies owned by Russians be in scope (noting that, for instance, the EU restrictions do not apply to the provision of services to entities established in Russia that are owned by, or solely or jointly controlled by, a person incorporated or constituted under the law of an EU Member State)?  

Some within the legal industry have expressed concern that there would likely be a legal response to the Government’s measures once they are formally introduced as regulation, citing the denial of access to justice and potential delays and complexities that could impact firms helping companies divest from their Russian operations.

In any event, the UK Government's statements further support the narrative that far from running out of options in terms of sanctions in response to Russia's invasion of Ukraine, allies of Ukraine are continually looking for novel ways of imposing restrictions on Russian's doing business with the wider world.

On 27 September 2022, the UK's Office of Financial Sanctions Implementation ("OFSI") published details of a monetary penalty of £30,000 against a UK registered company, Hong Kong International Wine and Spirits Competition Ltd (“HKIWSC”), for contravention of the Ukraine (European Union Financial Sanctions) (No.2) Regulations 2014 and Council Regulation (EU) No 269/2014 (Ukraine Misappropriation and Human Rights).

The penalty was imposed on 26 April 2022 and related to 3 payments and 78 wine bottles HKIWSC received from a designated entity, the State Unitary Enterprise of the ‘Republic of Crimea’ Production-Agrarian Union ("Massandra"), for entry into competitions between September 2017 and August 2020. The total cumulative value of tangible economic resources and funds received by HKIWSC was estimated to be £3,919.62. Additionally, HKIWSC made publicity, considered by OFSI to be an 'intangible economic resource', available to Massandra.

Since January 2019, OFSI has only imposed monetary penalties on eight occasions in total and therefore any publication containing details of OFSI's approach to enforcement is helpful. The enforcement decision is interesting for a number of reasons, including the fact that while four of the breaches related to the receipt of funds/wine bottles, the fifth breach that was identified related to the publicity that HKIWSC made available to the designated entity. The decision notice specifically states that OFSI "has determined this publicity to be an intangible economic resource, an asset which may be exchanged or used in exchange for funds – since it would likely be used by Massandra in exchange for funds on the basis that it is for the purpose of increasing sales of their wine."

The monetary penalty imposed on this occasion helps to clarify the relatively broad approach that OFSI will take when considering enforcement in connection with 'intangible' economic resources and acts as a reminder to businesses to not only consider the transfer of goods and money but other indirect services that are being provided (even where it is not possible to ascribe a specific financial value to that service).

Interestingly, on this occasion the initial report of a potential breach was submitted by a third party and OFSI used information powers to identify the further breaches (i.e. there was no voluntary disclosure). This means that no voluntary disclosure discount was provided in respect of these potential breaches and OFSI ends the notice by reminding businesses that "OFSI values voluntary disclosure and if done by the person who has committed a breach may be considered a mitigating  factor when OFSI assess the case."

In other UK enforcement news, this summer the National Crime Agency ("NCA") announced that it had arrested 10 individuals it suspected of assisting “corrupt elites’’ avoid sanctions. More recently, on 11 October 2022, the NCA arrested a UK individual, alleged to have assisted a sanctioned Russian national Oleg Deripaska conceal the ownership of properties. The NCA action was coordinated by its new 'Combatting Kleptocracy Cell' established in July 2022, which seeks to focus specifically on investigations into corrupt elites and Politically Exposed Persons (PEPs) laundering their assets within the UK.

The push by the NCA in this area suggests that we may see UK enforcement authorities seeking to increase their enforcement activities in the coming months, by further targeting those considered to enable the circumvention of sanctions, or indeed, breach sanctions. The 'legal services ban' section above provides further evidence of this approach being adopted on a wider basis.

On 17 October 2022, the Directors of UK's OFSI and the US Office of Foreign Assets Control ("OFAC") published a joint statement following a 'multi-date technical exchange' between the two bodies aimed at increasing "coordination and collaboration in the years to come." The statement provides some useful information, including reference to the fact that OFSI intends to "move to a larger and more proactive organisation" and that OFSI and OFAC officials will be working together on enforcement.

Although it has been clear since Russia's invasion of Ukraine in February 2022 that the UK and the US have been seeking to work together, along with other allies, in terms of sanctions enforcement, it is interesting to see OFSI and OFAC publicly announcing an intention to work together more closely over the coming years. While this may mean more enforcement is likely in the short-term as a result of the increased sharing of intelligence, it may also mean that unintended consequences of differences in enforcement between regimes may be avoided, which could, as noted in the statement, ease "the burden of compliance for business."