Sanctions risk assessment should be compulsory

The Solicitors Regulation Authority (pictured) is failing solicitors in its recently published guidance (23 January) on the application of a sanctions risk assessment regime. Instead of recommending solicitors implement a firm-wide risk assessment as best practice when they perceive the firm as higher-risk, the SRA ought to grasp the nettle and advise solicitors to treat the requirement as compulsory in all cases. It is the case that, where a firm of solicitors does not see itself as likely to be exposed to the sanctions regime, it is most at risk. 

The risk lies in the fact that a solicitor may become involved in assisting a designated person in circumstances where the designated status has been missed. What is more, the risk is not limited to the need for a solicitor to obtain a licence to act or make required reports about the client to the authorities. There is also a significant risk from third parties involved in a transaction. In this instance, it is not so much the possibility that the client’s designation may have been overlooked during the client identification and due diligence process, but more that the designated status of a counterparty may not have been spotted. Since a breach of the sanctions regime is punishable by a raft of strict liability criminal offences with sentences of up to seven years’ imprisonment, a solicitor’s vulnerability is obvious.

Suppose a solicitor acts for a client acquiring a leasehold interest in a suite of rooms in a large office block in the centre of London. The freehold is owned by a company which is part of a large group of companies, and ultimately a percentage of the beneficial interest in the group company is held by a person designated under the Russia (Sanctions) (EU Exit) Regulations 2019 (the Russia sanctions). Conceivably, when paying a premium or rent, the client and solicitor may be unwittingly making funds available to a designated person, contrary to regulation 12 of the Russia sanctions.  

In the context of counterparty risk, the position is more complicated where beneficial ownership of the counterparty is obscured. Regulation 7 of the Russia sanctions provides that ownership and control of a company can be determined where a designated person holds more than 50% of the shares. But if a shareholding is smaller, ownership and control can still be established where it is reasonable to expect a designated person can ensure a company’s affairs are conducted in accordance with his wishes.

In practice, this is far from straightforward. However much due diligence is done, almost inevitably a solicitor suffers an information deficit when determining the extent of a designated person’s influence and what transpires behind closed doors. This is true when a solicitor is seeking to determine the beneficial ownership of a client company. It is doubly true when the beneficial ownership of a counterparty company is uncertain.

In this connection, the SRA guidance contains a salutary warning: ‘Relying on the other side in a transaction, or third parties, to have effective systems in place to screen for designated persons is unlikely to provide you with a complete defence if you breach the sanctions regime.’

There is more. An additional layer of complexity is added if a party decides to locate assets in jurisdictions such as the UAE, Turkey, China, Brazil, India and some former Soviet Union countries where sanctions have not been implemented. Caution must be exercised. Sanctions apply to a ‘UK person’ (as defined by section 21 of the Sanctions and Anti-Money Laundering Act 2018) who acts ‘wholly or partly outside the United Kingdom’ (regulation 3 of the Russia sanctions). Also, a solicitor must steer clear of regulation 19 of the Russia sanctions, which stipulates that a person commits a criminal offence where they intentionally participate in activities knowing that the object or effect of them is (whether directly or indirectly) to circumvent any of the sanctions prohibitions or enable or facilitate the contravention of any such prohibition.

The challenges presented by the sanctions regime are bound to grow. As the Office of Financial Sanctions Implementation Annual Review 2022/23 reported, ‘economic statecraft will remain a cornerstone of challenging a more contested and volatile world’. In 2022/23, 800 people were added to the UK’s list of designated persons. On 31 March 2023, there were 3,883 designated persons subject to an asset freeze across 35 regimes. In response to Russia’s invasion of Ukraine, 653 persons were designated under the Russia sanctions regime for the purposes of an asset freeze. This included 574 individuals and 79 entities. Over 90% of the Russian banking sector is sanctioned and combined net wealth of around £145bn belonging to oligarchs is frozen.

To mitigate the risks of a sanctions breach, the SRA suggests that if a firm of solicitors is subject to the Money Laundering Regulations 2017, ‘[it] may wish to consider sanctions risks under [its] existing firm-wide risk assessment as part of a single document, rather than creating a separate risk assessment’.

This understates the position. To protect against liability for breach of sanctions, all firms of solicitors should treat the SRA guidance as mandatory. Experience suggests that fully fledged procedures running side by side with established anti-money laundering practices are needed if sanctions breaches are to be avoided.

Jonathan Fisher KC practises at Red Lion Chambers in London. He is a senior fellow (and visiting professor in practice) at the London School of Economics