The world has witnessed the deplorable humanitarian consequences which have resulted from Russia’s invasion of Ukraine, but there are commercial consequences too. Almost no area of the UK economy is exempt from new rules designed to severely restrict Russian interests. These sanctions affect the legal sector in particular.

Most UK-based firms have swiftly terminated their activities in Russia, but all firms have had to respond to the new sanctions rules which have been hurriedly introduced.

What are the new sanctions rules?

The new rules are too wide ranging, lengthy and complicated to set out in detail in this alert.

Financial sanctions are likely to have the most pronounced impact on the activities of law firms. They have the effect of prohibiting law firms from dealing with the funds or economic resources of their clients, or counterparties to a transaction, in the event that the person is sanctioned or (in the case of a company) owned or controlled by a sanctioned person. It may also prohibit law firms from receiving payment from their clients or third parties who are affected by sanctions unless the firm benefits from a licence issued by HM Treasury to permit the transaction.

Law firms should also note that they fall within the definition of a “relevant firm” for the purposes of Part 8 of the Russia Sanctions Regulations. This is of critical importance because it means that they have a reporting duty to the HM Treasury Office for Financial Sanctions Implementation (OFSI) in circumstances in which they know, or have reasonable grounds to suspect that a person is a sanctioned person and/or has breached sanctions.

It is a criminal offence to fail to make a report where you, as a relevant firm, have such knowledge or reasonable grounds for suspicion. While the disclosure obligation does not require disclosure of information which is privileged, the drafting of the Regulations as to what information is, and is not, exempt from the obligation to report on the basis of legal privilege may be interpreted more narrowly than the description in the Proceeds of Crime Act.

We predict therefore that OFSI could argue that a solicitor’s knowledge or suspicion based upon information firms obtain which is not otherwise privileged, for example, information obtained by solicitors from publicly available sources when advising a client about sanctions compliance

(in an otherwise privileged lawyer-client relationship), may in certain circumstances be reportable.

We also consider that if a firm has breached the sanctions regime, even inadvertently, this would trigger the obligation to self-report under the STaRs.

What has been the SRA’s response?

The Regulator has regularly updated its online guidance in response to the rapidly changing situation. It is key, however, for firms to develop and enforce policies to ensure compliance with the sanctions legislation and regular checks of sanctions list must be completed. As a general rule, we recommend that every time a payment is made to a third party, or a new client is on-boarded, firms check the sanctions list and record the fact that they have done so on their individual matter files.

It is critical that sanctions lists are checked contemporaneously as they are constantly changing.

Even firms who outsource sanctions checks cannot relax – the SRA has confirmed that firms using electronic verification systems for CDD and sanctions checks must ensure that the sanctions lists used are refreshed with “sufficient frequency”. What precisely that means is unclear, but we recommend that lists are checked on a per transaction basis and the audit trail is recorded.

It has been reported that the SRA is carrying out targeted spot checks of firms. Whilst firms who unintentionally and inadvertently fall foul of the sanctions regime are less likely to face sanctions themselves from OFSI and potentially the SRA, the most serious punishment is likely to be faced by firms who have completely failed to take the necessary action, or cannot demonstrate that they have at least tried to comply.

Can firms continue to act for Russian nationals?

The SRA has not told firms not to act for Russian nationals. For the SRA to do so would be contrary to the rule of law. It has, however, provided new guidance, we assume not coincidentally, on conduct in disputes. In particular, it has reminded firms that their duties to clients must not take priority over their public interest obligations. This follows concerns over “strategic litigation against public participation” or “SLAPPs”. Further legislation is likely to follow in this area, prompted partly from attempts by Russian oligarchs to use litigation as a weapon.

Firms cannot always, as a matter of contract, terminate their retainers and must be able to demonstrate that they have a good reason for doing so. The SRA, understandably but unhelpfully, says that each case will depend on its individual circumstances. If there are risks in continuing to act for an individual, which would include a risk of money laundering or a breach of the sanctions rules, firms should tread carefully.

As firms are becoming increasingly conscious of their ESG credentials, we predict that most will look to distance themselves from Russian clients, and that the SRA is unlikely to intervene where they do so.

Where can firms get help?

The Law Society and the SRA are regularly issuing guidance, as are the OFSI, so lawyers responsible for their firm’s risk management should consult those resources regularly.

Our white collar crime experts are advising on sanctions issues and can assist firms alongside our specialist solicitors’ regulatory team. For more information, please contact us.