In a significant (and in some important respects, ill-thought through) development in the UK's sanctions landscape, the government has brought into force amendments to the Russia (Sanctions) (EU Exit) Regulations 2019 prohibiting lawyers providing ‘legal advisory services’ to non-UK persons in certain circumstances. The new prohibition means UK law firms can no longer advise such clients on certain trade or financial activity, if that activity were carried out either by a UK person or in the UK.
According to the government, this new wide-ranging prohibition is designed to strengthen the UK's ability to prevent non-UK individuals and entities from circumventing its sanctions by seeking legal advice from UK law firms. It reflects the government's commitment to maintaining the integrity and effectiveness of its sanctions policies, ensuring that “wealthy individuals and businesses linked to the Russian regime will be further restricted from accessing UK legal expertise to carry out deals that could bolster the nation's war chest".
The extent to which it will achieve this aim is questionable; the Law Society, in its Parliamentary briefing (12 July 2023), identifies the serious, unintended consequences which it considers will ultimately damage non-Russian business more than Russian ones. It has therefore called for amendments to be made to the Russia Regulations and, in the interim, for the urgent issuance of a general licence to mitigate some of the unintended overreach it identifies (as to which see below).
Understanding the detail
The Russia (Sanctions) (EU Exit) (Amendment) (No. 3) Regulations 2023 (SI 2023/713), expands the professional service prohibitions in chapter 6B of the Russia Regulations with the creation of a new prohibition on the provision of certain ‘legal advisory services’ provided by UK law firms to non-UK persons.
(New) Regulation 54(D) prohibits persons from directly or indirectly providing any legal advisory services to non-United Kingdom (UK) persons in relation to, or in connection with, any relevant activity, if the activity it would be prohibited were it to be conducted in the UK or by a UK person.
Taking each condition in turn:
- A UK person is defined in section 21 of the Sanctions and Anti Money Laundering Act 2018 and includes: UK nationals (including British citizens, British overseas territory citizens, British National (Overseas) or British Overseas citizens); bodies incorporated or constituted under UK law; and persons who are British protected persons or British subjects under the British Nationality Act 1981. If a prospective client has dual nationality, say Russian and British, their British nationality would render them a UK person.
- Legal advisory services is defined in Schedule 3J, paragraph 8A and covers non-contentious advice to a client concerning the application or interpretation of (any) law, acting on behalf of a client, or providing advice on or in connection with, a commercial transaction, negotiation or any other dealing with a third party or the preparation, execution or verification of a legal document. Advice given in a contentious context is expressly excluded, with the result that representation, advice, preparation or verification of documents undertaken as part of legal representation services provided in or in anticipation of proceedings before administrative agencies, courts, official tribunals, arbitrations and mediations, all fall outside of the prohibition. Legal representation services expressly incudes advice in relation to disputes and potential disputes, including their settlement, whether or not proceedings have commenced.
- Client is not defined within the Russia Regulations, whose focus is on the person receiving advice. It may therefore extend beyond external clients to those receiving sanctions-related advice from in-house lawyers and risk and compliance teams.
- Relevant activity is defined as: (1) finance activities prohibited under regulations 11-18C Russian Regulations; (2) trade activities prohibited under Chapters 2-6 and 6B Russian Regulations; or (3) intentionally engaging in activities which have the object or effect of circumventing any of these prohibitions.
- The phrase “in relation to, or in connection with” is not defined but is plainly widely drawn. In practice, lawyers will need to give careful consideration to the extent of the nexus required before any advice is given.
- Regulation 60DB provides for four limited exemptions to the trade activities (not the finance activities):
- the advice is necessary for the official purposes of a diplomatic mission or consular post in Russia, or of an international organisation enjoying immunities in accordance with international law; or
- the advice is provided in relation to the discharge of [the client’s] UK statutory or regulatory obligations; or
- the advice is about compliance with UK sanctions [not the sanctions regimes of other jurisdictions, (as to which see below)]; or
- the advice is delivered under a contract entered into before 30 June 2023 and carried out before 30 September 2023 and the Secretary of State has been notified.
- A licence may be obtained permitting relevant activity (see below)
Challenges for law firms
Law firms are used to screening for DP status and ensuring compliance with the UK sanctions as they relate to Russia. Firms now need to be aware of their limited scope to act for non-UK persons in non-contentious matters involving Russia.
The new prohibition raises several important considerations for legal professionals:
- Scope of application: The prohibition extends to any person in the UK giving advice on UK law, and any UK person, irrespective of where they are, giving advice on UK law. In this context it is important to determine whether either the law firm retained by the client and the individual working on the case is a UK person. This can create particular problems for firms with an international footprint. For example, a dual qualified lawyer (say UK and French) who is not a UK person can in principle give advice on UK sanctions compliance from the Paris office of their firm but not the London one. However, whether the firm for which that lawyer works is in breach of the regulation depends on whether it is a UK person. As the Law Society points out, this is plainly damaging to the competitiveness of the UK legal services sector.
- Identification of Non-UK Persons: Determining whether a client is a non-UK person is not necessarily straightforward. Law firms must review these processes for identification of the nationality, residency, and legal status of their partners, staff and clients to determine whether the prohibition applies.
- Sanctions compliance advice: The sanctions compliance exemption applies only to the provision of legal advice regarding compliance with the Russia Regulations and therefore, to advice on UK sanctions. It is hoped that the much-anticipated general licence will temper the harshness of this position by permitting concurrent advice to be given on other UK legal obligations (such as those concerning anti-money laundering laws) and overseas sanctions regimes.
- Wind down provision: firms looking to rely on the wind down period (29 September 2023) need to ensure they notify the Secretary of State.
- Licences: firms can apply for a licence for the provision of legal advisory services: (1) where a licensing ground would apply to the prohibited activity in respect of which the legal advice is being given; or (2) a licensing ground would apply to the activity in relation to which the legal advice is being given, if the relevant activity was done by a UK person or taking place in the UK.
Clearly law firms need to review their risk assessments and sanctions screening to ensure compliance with the new regulations, as now the rules are here, the focus henceforth will be on enforcement of the new regime.
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