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Legal and financial businesses are dissatisfied with the UK's ambiguous sanctions guidelines

After years of advising British firms to fill their coffers with Russian money, the British government appears incapable of assisting the City in understanding the new marching orders.

According to insiders, the legal and financial sectors are grappling with the wave of Russia and Belarus-related sanctions implemented after the invasion of Ukraine in February 2022, as different interpretations of the law are permitted to stand amidst confusion over government advice.


The intricacy of the new laws poses a threat to small and medium-sized firms that are unable to recruit the compliance teams necessary to avoid unintentional sanctions violations.


Mike Miller, economic crime manager at the Institute of Chartered Accountants in England and Wales, the largest trade organization in the United Kingdom in charge of supervising its members for anti-money laundering and sanctions compliance, said that abruptly severing ties with Russia can be difficult at times.


Miller continued, "We need stronger guidance from HMG [Her Majesty’s Government] that allows firms to carry these sanctions out in practice, especially smaller firms without large in-house legal teams."


While the EU and U.S. created loopholes for professional services to be provided to Russia-operating companies headquartered in their respective jurisdictions, no such allowance was made in the UK. As a result, if a British corporation wishes to wind down its Russian business in response to the invasion, it will likely be unable to find a British accounting firm to assist it.


Miller stated, "EU and US guidance is clearer. The standard line from our government is to seek your own legal advice."


The concerns affect both the exchanging of products and services. "The sanctions space is increasingly problematic with both financial and trade sanctions changing at pace."


"There have been instances of OFSI general licenses being changed without public notification and instances of general licenses and sanctioned entity lists not providing clear direction, causing businesses to be caught in grey areas, slowing down trade, costing money and potentially increasing their risk profile," according to a spokesperson for the Institute of Export and International Trade in the United Kingdom.

However, attorneys and their banker clients are the most puzzled.


Maya Lester KC, a renowned sanctions expert with Brick Court Chambers, praised the government for passing "an unprecedented test" in introducing new sanctions legislation between Brexit, the pandemic, and the Russian invasion of last year.


The barrister stated at the City and Financial Economic Sanctions Summit 2023 in London at the end of January that the government complied with "incredible political pressure to list as many people as possible, to strengthen sanctions in whatever way it is possible, in multiple different rounds and in an amazingly short timescale."


She continued, "I think that background is reflected in some of the problems we are now seeing and it’s pretty understandable.” Having acted both for and against the government on matters related to sanctions, Lester said “there is no other area of law I know of where there is so much uncertainty on really key points ."


Lester remarked that "very divergent views are taken by reasonable lawyers and others just trying to do the right thing" on certain aspects of the sanctions regime. "It’s not great for legal certainty or effectiveness of sanctions or the operation of the market."


The criminal offense of circumvention has not yet been thoroughly tested in court, and "no-one really knows what circumvention means," according to Lester, who added that it is "really hard to advise whether there is likely to be liability or not."


In addition, it was unclear how to interpret "strict liability" for those who know or have cause to believe a breach of sanctions.


This "mental element" conflicts with other regulations regarding the interpretation of sanctions, which permit lawyers to abstract from the strict liability clause, except that, according to Lester, "it’s really hard, in fact it’s impossible," to know when to "delete" each aspect of the law from your interpretation in order to avoid civil penalty.


She also cited issues around "ownership and control" of assets belonging to sanctioned entities, notably people and organizations that are regarded sanctioned – or not, depending on the circumstances – but are not labeled by the government as sanctioned.


Under the threat of strict liability, on the one hand, or civil claims from clients, on the other, it is up to the industry to evaluate whether highly complex multinational corporate organizations may be subject to sanctions. This creates an unequal playing field for the imposition of sanctions and provides obvious possibilities for those wishing to avoid them.


Lester cautioned, "The problem exists in a really acute form in the UK because the test for whether somebody is controlled is an extremely broad one and relies on unknowable, often, information."


"Different lawyers have different views on quite how much digging it is reasonable or expected to be done to work out the answer to this," she said, adding that, more alarmingly, banks, which are responsible for locating and freezing funds, have differing opinions on which companies are owned and controlled by designated individuals.


Under the sanctions regime, the government will not answer specific queries about who owns and controls certain enterprises in the United Kingdom for fear of legal repercussions. Lester stated, "They take the view that this is for lawyers to try to work out."


Lester stated that the guidance issued by the Office for Financial Sanctions Implementation (OFSI), a division of the Treasury Department responsible for sanctions, frequently does not follow the law.


Moreover, a glaring loophole in UK regulation allows corporations mainly owned by sanctioned individuals to stay unsanctioned, but the US and EU do not allow this.


The OFSI is the same organization that thought it proper t o grant Yevgeny Prigozhin, the warlord who owns the Kremlin-affiliated mercenary brigade known as the Wagner group, permission to sue Eliot Higgins for defamation, prior to the invasion of Ukraine.


Prigozhin denied his status as a warlord at the time, despite the fact that he was already under sanctions for Wagner's role as prolific pillagers, human rights violators, and war criminals across Africa, with probable ties to the death of three journalists in CAR.


With the invasion, Prigozhin's UK libel attack dogs at Discreet Law quit his service, and shortly thereafter, he came out publicly as Wagner's true and proud owner, sending to the European parliament the gift of a bloody sledgehammer in a violin briefcase, a symbol of how Wagner gruesomely murders, tortures, and desecrates the corpse – on camera – of anyone perceived to have betrayed them.


In defense of the United Kingdom, EU countries face similar dysfunction in their Russian sanctions regimes, but without the paradoxical interaction between penalties and antiquated defamation laws.


Lester stated that different national-level authorities on the Continent hold "diametrically opposed views" about the ownership or management of companies by designated individuals. "That’s really not satisfactory."


In effect, large portions of the industry have been compelled to shun anyone having even a tenuous link to Russia or Belarus, even if only by name or birth.


However, attempting to "de-risk" (i.e., terminate) entire categories of clients based on nationality entails its own liability, as equalities standards prohibit such discrimination, and Russians in the United Kingdom who are not subject to sanctions have already filed cases against consulting firms.


Treasury officials did not respond to requests for comment on the record, but they concede there are unsolved difficulties. Treasury officials said they are already working to enhance the ownership and control part of sanctions policy, including with regard to political comments about who is and is not in charge of sanctioned firms. The OFSI will have discretion in pursuing fines against companies so long as they are forthright in their communications with the government, according to the official.


In a private meeting, an expert from one of the Big Four consulting firms assessed the current state of UK sanctions guidelines as follows: "It’s a mess."


And there are no indications that it will be resolved soon.

By fLEXI tEAM


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