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Reference Guide:

  • The UK will ban providing professional services to Russia in key sectors.
  • The sanctions are aimed at undermining Russia’s heavy reliance on imported Western services.
  • The scope, timing and potential impact of the new legislation are not yet clear.

On September 30, the UK announced a series of significant additional sanctions in response to Russia’s illegal annexations of Ukraine following internationally condemned sham referendums.

The latest sanctions will prohibit the provision of IT consultancy, architecture, engineering, advertising, auditing and certain transactional legal consultancy services by UK individuals or entities to Russia, a move that will impact considerable impact on UK professional services firms. The measures strengthen existing penalties on the provision of accounting services (which had expressly excluded auditing), business and management consulting, and public relations services directly or indirectly to “people related to Russia“, which came into force in July 2022.

The new legislation has not yet been implemented and it is unclear when it will come into force. While the precise scope of these sanctions is therefore unknown, they are expected to have a wide impact on Russian and UK businesses, with UK businesses no longer able to provide the services required by Russian businesses. . As with previous legislation,people related to Russia” (as defined in Regulation 21(2)) are likely to be covered – this will prevent the named services from being provided to persons (individuals and entities) ordinarily resident in Russia, located in Russia, incorporated under under Russian law or domiciled in Russia – including persons temporarily outside the jurisdiction.

To further disrupt Russia’s supply chain and cut off Russia’s development from the rest of the world, the new UK measures will also ban the export of nearly 700 goods described as critical to Russia’s manufacturing sector and its industrial and industrial capabilities. technologies. The ban will likely also cover the export of additional aeronautical products, electronic parts and specific chemical substances, exports which the EU announced it would ban in its proposed eighth sanctions package, as well as the supply of certain professional services. . The sanctions proposed by the EU seem more aggressive than the British measures, which also propose to ban EU nationals from serving on the management bodies of Russian state-owned companies in a bid to prevent Russia from benefiting from the knowledge and European expertise. Aggressive additional sanctions were also recently announced by the United States, in a concerted effort to intensify international pressure on President Putin, in line with multilateral measures imposed since the Russian invasion of Ukraine in February 2022.

Comment

The purpose of the services sanctions is clear: to cut off Russia’s economy – isolate its key industries and make President Putin too poor to finance the war in Ukraine. Additionally, sanctions, while not intended to punish or affect the ordinary citizens and residents of a sanctioned country, can sometimes contribute to increasing internal domestic pressure on a regime from its population becoming frustrated. by shortages or an inconsistent supply of goods and services.

Russia imports 67% of its services, relying heavily on services from sanctioning countries. Estimates suggest that 80% of Russian imports in accounting, auditing, bookkeeping and tax consultancy come from the UK, EU and US. Notably, Russia imports 85% of its legal services from G7 countries, with the UK accounting for 59% of that figure.

Interestingly, the new UK legal services measures will cover “transactional legal services for certain commercial activitiesonly. At the time of writing, no details on the exact legal activities this will cover have been released. However, it is expected that guidelines will be updated and released alongside regulations for assist businesses in their risk assessment efforts.Taking as a comparison the recently implemented ban on the provision of business advisory and management services, the guidance defines and links the provision of such services to the “Extended Classification Balance of Trade Payment Services” 2010 (EBOPS). After review, detailed “classifications” and “sub-classes” allow businesses to assess whether their business activities may fall within prohibited services. For example, EBOPS classifies business and management services as “including advisory, guidance and operational assistance services provided to businesses for policy and business strategy and the overall planning, structuring or control of an organization” – a long and difficult definition to manage. The subcategory, however, identifies these activities as including the preparation of management reports and audits.

Notably, the new measures against the provision of professional services, particularly legal services, do not appear to go as far as those proposed in recent calls to Parliament. A parliamentary debate on September 22, 2022 called on the UK government to prevent Russian state entities, such as Gazprom and VTB Bank, from using UK courts to “effectively waging a form of war against Ukraine”. The reasoning is that damages obtained by Russian entities in litigation in the UK will ultimately fund the invasion of Russia, thwarting the regime’s purpose, efforts and spirit of British sanctions against Russia. It has also been proposed that additional action be taken against UK law firms and banks that fail to comply with existing sanctions regimes, with managing partners to be held individually responsible for their work in the event of breaches. ; and a direct ban on UK law firms representing entities in which Russia has a significant or majority stake.

A dramatic deterrent proposed in Parliament calls for legislation that compels “all UK professional adviserswho made business with a sanctioned person to provide their books to authorities, to help track funds through complex front companies. Although such a drastic measure has yet to be introduced, a call for a crackdown on the apparent circumvention of sanctions regulations appears to be gaining traction around the world. For example, the EU announced that it would list those circumventing the regime by buying goods in the EU, shipping them to third countries and exporting to Russia from there. Participants from the G7, Australia and the European Commission also met as part of the Russian Elites, Proxies and Oligarchs (REPO) Task Force on September 30 to discuss joint efforts against Russian elites. and their cronies for complicity in the Russian-Ukrainian war, including at “confiscate assets used to facilitate sanctions evasion.”

Such proposals could negatively but unnecessarily limit the right to legal representation to challenge government claims. Although intended for altruistic and humanitarian purposes, these purposes may be best served by freezing judgments or settlement amounts as escrow assets so that the funds do not benefit sanctioned Russian entities or individuals.

conclusion

It remains to be seen how the UK’s latest sanctions announcement will be implemented and what the ramifications will be for UK professional services. In addition, as in previous rounds of sanctions implementation in the UK, there may be a significant time lag between announcements and the actual adoption of sanctions measures. For example, in June 2022, the UK indicated that it would introduce measures preventing Russia from accessing UK trust services, a major component of UK financial services. However, months later, the UK failed to introduce such measures despite restrictions already imposed by the EU and US. More measures are likely to be implemented in the future, but it is difficult to predict how quickly or whether the UK’s restrictions will take on the more onerous regimes imposed by its counterparts. This brings up an interesting side note, which is that by making the announcement, but without legislation in quick succession, the UK is effectively giving the sanctions target (and potential enablers and enablers) a preview of the restrictions to come and allows time for the sanctioned target to change relationships, supply channels, suppliers of goods and services, without facing sanctions. It also allows those who act in good faith and those who agree to abide by the laws and sanctions in particular to begin terminating relationships or transactions that may become inadmissible once the measures are fully adopted. Historically, sanctions (particularly in the US) are handed down with an element of surprise to minimize the risk of asset flight, corporate restructuring and other evasion techniques being deployed. It will be interesting to monitor whether the delay between declarations and implementation has an impact on the opportunities for the application of sanctions in the United Kingdom.