Financial sanctions FAQ

Financial sanctions are restrictions put in place by the UN or UK to achieve a specific foreign policy or national security objective.

The Sanctions and Anti-Money Laundering Act 2018 provides the main legal basis for the UK to impose, update and lift sanctions.

Some sanctions measures apply through other legislation, such as the Immigration Act 1971, the Export Control Order 2008 and the Terrorist Asset-Freezing etc. Act 2010.

This legislation allows the government to impose:

• targeted asset freezes
• restrictions on particular financial markets and services (e.g. investment bans, restrictions on access to capital markets, directions to cease banking relationships and activities etc.)
• directions to cease all business: these will specify the type of business and can apply to a specific person, group, sector or country.

The sanctions regime imposes serious and extensive restrictions on dealing with people or entities who are listed as “designated persons”.

Failure to adhere to sanctions requirements is a serious offence which may result in a criminal prosecution or a significant monetary penalty.

UK financial sanctions apply to all persons within the territory and territorial sea of the UK and to all UK persons, wherever they are in the world. This means that:

• All individuals and legal entities who are within or undertake activities within the UK’s territory must comply with UK financial sanctions that are in force.
• All UK nationals and legal entities established under UK law, including their branches, must also comply with UK financial sanctions that are in force, irrespective of where their activities take place.

Please be aware that your firm may also be subject to other sanctions regimes, including US sanctions.

Sanctions restrictions means you cannot:

• receive payment from or make funds available to persons on the sanctions list
• deal with their economic resources
• make even legitimate payments to those persons

Furthermore, there is a wider restriction: practices 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”.

Restrictions apply to a wide range of legal work, both in- and out-of-scope of the Money Laundering Regulations.

We are aware that many of our members may not be affected by current sanctions restrictions due to the nature of their business and clients held.

To be clear, Russian and Belarusian sanctions restrictions continue to affect a designated minority of individuals and entities – details of which can be found on the UK Government website.

If you are satisfied that your client is not on the list, you can continue with the relationship, although you should monitor this position on an ongoing basis.

Scottish solicitors who may hold relationships with potentially sanctioned, high-risk or politically exposed Russian/Belarusian clients must continue to conduct robust risk assessment, along with substantive update and review of due diligence material held.

This will enable effective screening against the latest sanctions lists (and any possible future additions to those lists).

The situation is extremely dynamic, reflecting the evolving international response – therefore it is critical that ongoing monitoring and screening of higher-risk clients is undertaken.

For further information and guidance regarding risk assessment and client due diligence please refer to the UK Legal Sector Affinity Group AML guidance.

OFSI has issued General License INT/2022/2252300 under Regulation 64 of the Russia (Sanctions) (EU Exit) Regulations 2019 and Regulation 32 of the Republic of Belarus (Sanctions) (EU Exit) Regulation 2019.

General License INT/2022/2252300

Under General License INT/2022/2252300, provided that one of the sets of conditions in one of parts A or B of the General License are complied with in full, any Person or Relevant Institution may receive payments from a DP; make payments (directly or indirectly) for or on behalf of a DP; make payments for the benefit of a DP; process payments which relate to a DP; and any Person or Relevant Institution may carry out any other act which is reasonably necessary to give effect to this.

Any activity conducted under General License INT/2022/2252300 must be reported to HM Treasury within 7 days, with the details and supporting evidence requested in Part A or Part B. The reporting forms referenced at 9.4 of Part A and 11.5 of Part B of General License INT/2022/2252300 may be downloaded from the OFSI website.

OFSI has also published a blog post which provides further details about the Legal Fees General License INT/2022/2252300.

As the sanctions regime is absolute, practices should have robust procedures in place to identify clients who may be “designated persons” under sanctions restrictions. These measures should be proportionate to the size and nature of your practice.

Decisions made in respect of the nature, depth and level of screening tools and systems deployed should include consideration of the size and nature of the practice unit.

Small firms, with limited exposure and lower risk profiles may deploy open source, free or off the shelf sanctions, Politically Exposed Persons (PEPs)and adverse media screening tools and solutions. Those practices with higher exposure or risk profiles should consider more complex, comprehensive or bespoke solutions.

Factors that may increase the risk of a person being on the sanctions list and so increase the reason for checking the list include:

• clients or transactions with links to jurisdictions subject to sanctions, even if the clients are based locally
• transactions or matters involving higher-risk clients or politically exposed persons (PEPs) from jurisdictions subject to sanctions
• higher-risk or complex transactions (particularly those that could be used to obscure ownership) where there is a link to sanctioned or higher-risk jurisdictions.

Further information regarding screening considerations, and links to sanctions watchlists can be found under FAQ “Further Sources of Support & Guidance”.

Firms are required to apply for an Office of Financial Sanctions Implementation (OFSI) license should they wish to continue doing business with sanctions targets or in order to receive fees in respect of work undertaken. You must suspend the transaction while you wait for advice/a license from OFSI to proceed
Firms are required to contact OFSI even if they decide not to act for a person they know, or have reasonable cause to suspect, is a designated person.

Firms are also required to report breaches of sanctions legislation to OFSI if they know, or have reasonable cause to suspect, that someone:

• has committed an offence under the financial sanctions and asset freezing regimes or
• is a designated person listed in OFSI’s consolidated list of financial sanctions targets

Firms are required to contact OFSI even if they decide not to act for a person they know, or have reasonable cause to suspect, is a designated person

It should also be noted that OFSI operates a general license scheme which governs certain situations – details of which can be found here.

Firms are also required to report breaches of sanctions legislation to OFSI if they know, or have reasonable cause to suspect, that someone:

• has committed an offence under the financial sanctions and asset freezing regimes or
• is a designated person listed in OFSI’s consolidated list of financial sanctions targets

Information on how to do this can be found on the UK Government website.

Legal professional privilege - you do not have to report information protected by legal professional privilege although you must be able to show and document clearly why you believe LPP applies. Privileged status may be challenged by Office of Financial Sanctions Implementation (OFSI).

Suspicious Activity Reports (SARs) are a crucial part of UK law enforcement and are a legal obligation for those working in the regulated sector. Any suspicious activity must be reported to the NCA via the SARs process.

Over and above OFSI reporting requirements, you should consider whether you have a suspicion of money laundering or terrorist financing which requires a report to the National Crime Agency (NCA) and can find further information and guidance on our website.

Should a Practice submit a SAR in relation to Russian sanctions violations, they should use the SAR Glossary Code "XXSNEXX", which relates to suspicious activity consistent with money laundering and linked to entities sanctioned by the UK, US, EU and other overseas jurisdictions as a result of the Russian invasion of Ukraine.

Sanctions Guidance

• OFSI website
• OFSI General Guidance
• UK Government Sanctions Guidance
• OFSI Reporting Obligations and Guidance
• OFSI General Licenses
• OFSI Contact Details
  
• OFSI Russia Sanctions Guidance
• OFSI enforcement and monetary penalties for breaches of financial sanctions
• Trading under sanctions with Russia
• Ransomware and Sanctions Guidance on Ransomware and Financial Sanctions

Email: ofsi@hmtreasury.gsi.gov.uk
Telephone: 020 7270 5454.

Sanctions Lists

• The UK Consolidated Sanctions List
• The Open sanctions website (free open-source searches of global sanctions databases and watchlists)
• The Foreign, Commonwealth, Development Office UK Sanctions Search function

Broader Anti-Money Laundering Guidance

• Legal Sector Affinity Group AML Guidance including information regarding:
  • Risk Assessment – S. 5
  • High-risk clients/transactions & Politically Exposed Persons - Enhanced Due Diligence & when to apply Enhanced Due Diligence – s. 6.18 & 6.19
  • Sanctions, Politically Exposed Persons (PEPs) & Adverse Media screening considerations – s.7
  • Suspicious Activity Reporting – s.11
• Law Society of Scotland AML Toolkit
• Russian invasion of Ukraine: UK government response

Suspicious Activity Reporting Guidance

• Law Society of Scotland SAR webpage
• National Crime Agency (NCA) SAR webpage
• National Crime Agency (NCA) SAR online portal
• National Crime Agency (NCA) SAR glossary codes

JMLIT ALERT: Financial Sanctions Evasion Typologies: Russian Elites and Enablers

The Joint Money Laundering Intelligence Taskforce (JMLIT) has issued a Red-Alert aimed at promoting awareness and bringing about preventative action in relation to Financial Sanctions Evasion Typologies: Russian Elites and Enablers. 

The alert has been published by the JMLIT + Sanctions Facilitators Cell for the Money Laundering Public Private Threat Group (PPTG) and can be found here.

The purpose is to provide information from law enforcement and the legal and financial services sectors as to some common techniques Designated Persons (DPs) and their UK enablers are suspected to be using to evade financial sanctions. The alert looks to provide the regulated sector with details of how DPs are using a range of techniques in order to evade sanctions impacting on their personal and commercial holdings. While this behavior has generally occurred prior to sanctions being imposed on the DP, it is also happening shortly afterwards.

Foreign, Commonwealth & Development Office 

The Foreign, Commonwealth & Development Office has launched an email subscription system. Practices can get the latest UK sanctions information from the FCDO direct to their inbox by subscribing via this link. The FCDO are also present on social media platforms and more information can be found on their website here.

Since the introduction of severely restrictive sanctions against Russian interests, law enforcement have noted instances where current and potential future sanctioned individuals or entities have appointed or moved ownership of assets to non-sanctioned parties in order to circumvent sanctions restrictions.

These appointments could be to business associates, friends or family members for example, thus the sanctioned party can maintain indirect control of assets through voting rights, influence or relationships. Please refer to OFSI Guidance for assistance with ownership and control thresholds. Generally, an entity is owned or controlled directly or indirectly by a person in any of the following circumstances: the person holds (directly or indirectly) more than 50% of the shares or voting rights in an entity; the person has the right (directly or indirectly) to appoint or remove a majority of the board of directors of the entity; or it is reasonable to expect that the person would be able to ensure the affairs of the entity are conducted in accordance with the person’s wishes.

Law enforcement have also noted instances where assets are being moved through or to jurisdictions where Russia-related sanctions regimes are not in place, or are less restrictive, in order to circumvent Western sanctions prohibitions. Such jurisdictions may include Turkey, United Arab Emirates (including Dubai), Cyprus and former Soviet Bloc states.

If you suspect any of the above activity, you should consider submitting a Suspicious Activity Report in line with your reporting obligations and also consider reporting or liaising with OFSI. More information on reporting a breach to OFSI can be found here.

OFSI has published guidance in relation to ownership and control in UK sanctions regulations to ensure sanctions cannot be circumvented. This can be found here. OFSI expects firms and individuals to fully consider the risks of an entity being owners or controlled. This could include conducting your own research, requesting further information from the entity, and taking legal advice if unsure about your obligations.

The Russia (Sanctions) (EU Exit) (Amendment) (No.17) Regulations 2022 came into force in December 2022. This Statutory Instrument saw the introduction of new financial and trade sanctions. One restriction was the introduction of a ban on providing “trust services” to or for the benefit of a designated person and a ban on the provision of any new trust services to or for the benefit of a “person connected with Russia”.

“Trust services” means:

• (a) the creation of a trust or similar arrangement,
• (b) the provision of a registered office, business address, correspondence address or administrative address for a trust or similar arrangement,
• (c) the operation or management of a trust or similar arrangement, or
• (d) acting or arranging for another person to act as trustee of a trust or similar arrangement, where “trustee”, in relation to an arrangement similar to a trust, means a person who holds an equivalent or similar position to a trustee of a trust.

A “person connected with Russia” is defined at regulation 19A of the Russia (Sanctions) (EU Exit) Regulations 2019. A person is to be regarded as “connected with Russia” if the person is:

• (a) an individual who is, or an association or combination of individuals who are, ordinarily resident in Russia,
• (b) an individual who is, or an association or combination of individuals who are, located in Russia,
• (c) a person, other than an individual, which is incorporated or constituted under the law of Russia, or
• (d) a person, other than an individual, which is domiciled in Russia

• Guidance for the financial and investment restrictions in Russia (Sanctions) (EU Exit) Regulations 2019
• Guidance Sanctions: Trust Services
• Trust Services Sanctions Update
• OFSI Notice Financial Sanctions 21/03/2023
  
  

All practices must be aware of the announced ban on specific professional and business services to persons connected with Russia.

These measures apply to all services, products or activities related to these sectors. I.e. legal practices who provide (or are otherwise involved in) any such activity must consider sanctions risks and obligations, and should seek expert independent legal advice if and where appropriate.

We are also aware of an announced ban on transactional legal services and it is anticipated that this ban will come into force in the coming months. We will release more information when this announcement develops.

• The Russia (Sanctions) (EU Exit) Regulations 2019
• Statutory Guidance on the Russia (Sanctions) (EU Exit) Regulations 2019

Trade sanctions seek to deny access to goods, technologies and revenue necessary to fund illegal wars or regimes.

There are attempts however, to undermine trade sanctions, export controls and other restrictions. Awareness of this in the profession is important. Goods may be procured via other routes which may not be as obviously restricted.

True end-users of procured goods are unlikely to approach international suppliers directly or be named as end-users on paper. Organisations often conceal their procurement activities and so closer scrutiny of intermediaries and counterparties is required to uncover any discrepancies.

If counterparties are established/well-known, due diligence should be repeated at intervals to ensure that the risk has not changed.

The UK Government have produced Guidance in relation to Trade sanctions circumvention which can be found here: NTE 2023/08: Russia sanctions – Trade sanctions circumvention - GOV.UK (www.gov.uk).

Consideration should be given to the possibility of cover or front companies being used to circumvent sanctions, this Guidance lists key risk indicators for customer, product and geographic risks for consideration in risk assessments.