Russia and Belarus sanctions: are you sure you are not affected?

First published on 29 March 2022 by Alastair
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Here’s how to ensure due diligence.

Following the invasion of Ukraine by the Russia’s military and the daily acts of barbarism perpetrated by her forces, the West’s response has been, as we know, both military (shipping weapons to help Ukraine’s army defend their country) and, overwhelmingly, economic.  The introduction of sanctions on Russia by the West and other countries was announced on 22nd February and swiftly extended to her satellite state, Belarus. While there is yet more the West can (and might have to) do, the impact of what has been agreed to date is substantial and has had a major impact on the Russian economy.  But what does this mean for accountancy firms and their clients in the UK?

Firstly, for our clients, it’s vital that if you have any connections with Russia or even with other firms that have (had) business connections with Russia or sanctioned Russian individuals or companies, you must make sure you know the specifics of the sanctions being imposed at present (and any ramped-up sanctions that may be imposed in the future).  Accountancy firms like M&S are expected to have (we do!) established systems and controls to counter the risk of financial crime, including compliance with financial sanctions obligations. The Institute of Financial Accountants has recently offered five tips to ensure that firms’ due diligence is up to date (what follows is taken virtually verbatim from a recent article in the Accountancy trade press).

  1. Don’t ignore the sanctions

Anyone caught breaching sanctions can be prosecuted. Breaching financial sanctions is a criminal offence and can result in a civil monetary penalty being imposed on your business or you, with imprisonment of up to seven years. 

  1. Carry out a sanctions risk assessment

Firms (including sole practitioners) conducting an anti-money laundering (AML) risk assessment, should also consider how likely it is that their clients may be on a sanctions list.  A firm may apply a risk-based approach to checking clients against a sanctions list.  This risk assessment should consider exposures of clients to the sanctions’ regime. The risk assessment should be looking for connections of clients to jurisdictions in the sanctions’ regime. Factors that increase the risk of a person being on a sanctions list, and therefore increase the reason for checking the list, include:

  • clients or transactions with links to jurisdictions subject to sanctions, even if the clients are based in the UK. UK nationals and UK residents can be on the sanctions list, so your firm may still be at risk if client checks are focused on nationality or country of residence.
  • clients or transactions involving politically exposed persons (PEPs) from jurisdictions subject to sanctions.
  • clients or transactions involving complex business structures and ultimate beneficial owners in jurisdictions in the sanctions’ regime.
  • clients who seem not to be able to evidence the source of funds or wealth.
  1. Check clients against sanctions lists

Depending on the information you are looking for, you should either refer to the UK Sanctions List, which covers all sanctions made under the Sanctions and Anti-Money Laundering Act 2018, or the OFSI Consolidated List of Financial Sanctions Targets, which covers all financial sanctions designations.

If your firm has clients that are low risk for sanctions, you can directly check against the above sanctions list by using Ctrl+F. If a client comes up as a possible sanctions match, it is important that the identity of the client is also verified to avoid a false positive identification. The UK sanctions list includes information on name, date of birth, nationality, passport or identify card numbers and last known address.  If your firm has higher risks for dealing with clients on a sanctions list, it may be more appropriate to check your client list against a sanctions list on a database which uses an e-verifier to check identify information.

  1. Report to OFSI

You are legally obliged to report to Office of Financial Sanctions Implementation (OFSI) if you know or suspect that a breach of financial sanctions has occurred; if a person you are dealing with, directly or indirectly is a designated person; if you hold any frozen assets; and if knowledge or suspicion of these come to you while conducting your business. Failure to notify OFSI is a criminal offence and therefore it’s imperative to contact OFSI at the earliest opportunity.

If a known or suspected breach has taken place, the firm must contact OFSI with the following information: 

  • information on which knowledge or suspicion is based; 
  • any information that the firm holds on the relevant person by which they can be identified; 
  • where relevant, the nature and amount of funds or economic resources the firm holds for the relevant person. 
  1. Apply for a licence for clients on sanctions list

If the firm wants to continue to act for a client on a sanctions list, the firm will have to apply for a licence before proceeding. The most relevant licensing authority for the accountancy professional is likely to be OFSI for asset freezes and other financial measures (OFSI@hmtreasury.gov.uk). However, it is important to note that other licensing authorities exist which deal with trade and transport measures. 

Having applied for a licence from OFSI, the firm must:

  • suspend the transaction while waiting for advice from the licensing authority;
  • contact the licensing authority to deal with the funds; and
  • consider whether the firm needs to make a suspicious activity reportfor money laundering or terrorist financing to the National Crime Agency (NCA).

Note that discussions with OFSI regarding a client’s sanctioned status are not subject to ‘tipping off’ regulations, since the sanctions lists are public information.

Where transactions give rise to concerns about sanctions evasion or money laundering you should also consider your obligations to report to the UK Financial Intelligence Unit (UKFIU) at the NCA under the Proceeds of Crime Act 2002.

Details on financial sanctions can be obtained by contacting OFSI or, for trade and export sanctions, contact the Department for International Trade’s Economic Control Joint Unit. Applications must be made in advance of any business agreement or transaction taking place. 

Ashley Marshall, M&S Accountancy & Taxation

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