On 21 July 2022, the UK sanctions regulations (Russia (Sanctions) (EU Exit) Regulations 2019 (the “Regulations”)) were amended by virtue of The Russia (Sanctions) (EU Exit) (Amendment) (No.14) Regulations 2022 to include, amongst other things, a prohibition on the provision of certain professional and business services to Russia.

Ban on export of professional and business services to Russia

The services affected are:

  1. “accounting services”;
  2. “business and management consulting services”, and
  3. “public relations services”.

Regulation 54C prohibits the provision of these services, directly or indirectly, to a person “connected with Russia”.  Regulation 54B defines the relevant services as follows:

  1. Accounting services
  • accounting review services, which are services involving the review by a person of annual and interim financial statements and other accounting information, but excluding auditing services;
  • compilation of financial statements services, which are services involving the compilation by a person of financial statements from information provided by a client, including preparation services of business tax returns when provided together with the preparation of financial statements for a single fee, but excluding such preparation services of business tax returns when provided as a separate service;
  • other accounting services such as attestations, valuations, preparation services of pro forma statements;
  • bookkeeping services, which are services consisting of classifying and recording business transactions in terms of money or some unit of measurement in the books of account, but excluding bookkeeping services related to tax returns;2. Business and management consulting services
  • advisory, guidance and operational assistance services provided for business policy and strategy and the overall planning, structuring and control of an organisation, which includes (but is not limited to) management auditing; market management; human resources; production management and project management consulting3. Public relations services
  • services provided by a person related to improving the image of their clients and their relationship with the general public and other institutions, but excludes planning and creating services for advertising or public opinion polling services.

A person who contravenes any of the prohibitions in Regulation 54C commits a criminal offence. However, it is a defence for that person to show that they did not know and had no reasonable cause to suspect that the person to whom the services were provided was connected with Russia.

It is also worth noting that circumvention of the prohibitions set out in the Regulations amounts to a criminal offence. In the context of trade sanctions, the relevant regulation (Regulation 55) is far-reaching in that it prohibits intentionally participating in any activities knowing that the object or effect of those activities is, whether directly or indirectly, to circumvent any of the prohibitions, or to enable or facilitate the contravention of those prohibitions.

Person connected with Russia

In order for Regulation 54C to bite the banned services must be provided to a “person connected with Russia”. Regulation 21 provides that a person is to be regarded as “connected with” Russia if the person is –

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

Whilst the introduction of these Regulations has dispelled some of the uncertainty that has gripped the relevant sectors for almost three months (i.e. following the government’s announcement on 4 May 2022 that the export of certain professional services to Russia would be banned), some questions remain.

There is little guidance currently available as to the meaning of “connected with”, however, given the foreign policy objectives it is likely to be interpreted broadly. Furthermore, OFSI has indicated in the context of financial sanctions that prohibitions will be interpreted widely (UK financial sanctions: General guidance for financial sanctions under the Sanctions and Anti-Money Laundering Act 2018, updated in July 2022).

Companies and individuals providing the prohibited services to any entity or individual potentially connected with Russia ought to exercise extra diligence, being particularly mindful of falling foul of the prohibitions when dealing with complex corporate structures.

Extra-territorial application

The Regulations are extra-territorial in nature in that they apply to all persons within the United Kingdom and its territorial sea and to all United Kingdom persons wherever they may be located (Regulation 3). A “United Kingdom person” means a UK national (including British Overseas Territories citizens) or a body incorporated or constituted under the law of any part of the United Kingdom (section 21, Sanctions and Anti-Money Laundering Act 2018).

Exceptions and licensing grounds

Regulation 60DA provides for the following exceptions to the prohibitions in Regulation 54C:

  • where the prohibited services are carried out in satisfaction of an obligation –
  • not arising under contract and in relation to the discharge or compliance with UK statutory or regulatory obligations;
  • arising under a contract concluded before 20th July 2022 (or an ancillary contract necessary for the satisfaction of such a contract) provided the obligation is satisfied before 20 August 2022, and the service provider has notified the Secretary of State no later than the day 10 working days before the day on which the act is carried out.
  • Where the prohibited act is necessary for the official purposes of a diplomatic mission or consular post to Russia or of an international organisation enjoying immunities in accordance with international law.

The activities prohibited by Regulation 54C may also be licensable. The overall responsibility for trade sanctions licences lies with the Department for International Trade (DIT).  Licences may be granted in the following circumstances (see the Statutory Guidance, Russia: sanctions guidance, updated 21 July 2022):

  • for the delivery of humanitarian assistance activity.
  • for the production or distribution of food provided that this is for the benefit of the civilian population
  • or medical and pharmaceutical purposes, provided that this is for the benefit of the civilian population
  • or civil society activities that directly promote democracy, human rights or the rule of law in Russia.
  • for services required by non-Russian business customers in order to divest from Russia, or to wind down other business operations in Russia.
  • for services to a person connected with Russia by a UK parent company or UK subsidiary of that parent company.

It should be noted that the licensing grounds are relatively narrow and will not apply in the majority of cases. Those affected by the prohibitions should not therefore engage in prohibited activities on the assumption that a licence will be granted. Each licence application will be assessed by the DIT on a case-by-case basis to ensure that the proposed activities are consistent with and do not offend the foreign policy objectives.

Future developments

On 29 June 2022, the UK government announced that it will be introducing new measures that will prevent Russia from accessing UK trusts services. The announcement describes trusts services as services “which allow a person or business to manage the assets of another”. The legislation giving effect to this prohibition has yet to come into force and as such there is little clarity as to the scope of these new measures. It remains to be seen therefore whether these new measures will be closely aligned with those already in force in the EU and US.

For further information on the issues raised, please contact Tatyana Talyanskaya or Joseph McCormick at:

tt@branchaustinmccormick.com

jm@branchaustinmccormick.com

Branch Austin McCormick LLP
32 St James’s Street
London
SW1A 1HD