UK lawyers banned from advising on Russian-linked business deals

The illegal Russian invasion of Ukraine in 2022 prompted a swift and powerful response from governments around the world. Without wishing to engage in direct military conflict with Russia, many opted to attempt to impact the funding of the military operation via a varied and frequently co-ordinated set of sanctions.

Although a range of sanctions had been in place since Russia illegally annexed Crimea in 2014, the full-scale invasion of Ukraine saw a significant tightening in the restrictions being imposed, and according to a UK government report published in June 2023, there are 1,601 individuals and 228 entities now subject to UK sanctions.

A similar range of sanctions was set in place by the EU following the invasion of Ukraine, and these included a ban on the provision of legal advisory services to Russia, introduced in December 2022.

The UK government announced similar plans in October 2022, and these plans came to fruition on 30th June 2023 with amendments made to the Russia (Sanctions) (EU Exit) Regulations 2019, commonly known as the Russia Regulations.

But what are the Russia Regulations, and how do they impact the legal sector in the UK? Here we assess the current restrictions.

Russia Regulations

Under the Russia Regulations, UK lawyers are banned from advising Russian firms in specific business deals. In general terms, the new regulations state that a person must not provide – directly or indirectly – ‘legal advisory services’ to any non-UK person in relation to, or in connection with, any activity which would be prohibited under the wider Russia Regulations.

Prior to the change in the law, it was expected that any ban would relate only to services provided directly to Russian companies, but by applying to any non-UK persons the ban put in place is actually wider and needs to be carefully considered by anybody providing legal advisory services on a multi-national basis.

The Explanatory Memorandum published by the UK government appeared to state that the intention of the ban was to target activity that could feasibly circumvent the existing sanctions. Said sanctions already prohibited the provision of professional services aimed at the enabling or facilitating of sanctions breaches, as well as ancillary services related to any trade of sanctioned goods and services.

Initially, however, these bans and prohibitions only applied to activity undertaken in the UK or by a UK person, leaving a loophole that meant that a UK lawyer could provide advice to an affiliate company incorporated outside the UK relating to an activity that would be an offence if it occurred inside the UK.

The new legislation is intended to close that loophole, with the total scope of the ban only limited by the definition of ‘legal advisory services’ and a few specific exemptions.  Legal advisory services are defined in the legislation as follows:

“the provision of legal advice to a client in non-contentious matters, involving any of the following— (i) the application or interpretation of law; (ii) 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; (iii) the preparation, execution or verification of a legal document.”

Since the definition contained within the legislation specifically excludes services – including advice, representation, preparation or verification of documents – provided during or in anticipation of actual legal proceedings, it seems unlikely that the ban will impact on contentious issues, i.e. those involving litigation. Other express exemptions set out in the legislation cover the following:

  • Acts that are necessary for the official purposes of a diplomatic mission or consular post in Russia
  • The discharge of or compliance with UK statutory or regulatory obligations
  • Acts done prior to 29 September 2023 in satisfaction of an obligation under a contract concluded before 30 June, where notification is made to the Secretary of State
  • Advice as to whether an act or proposed act complies with the Russia Regulations

This last exception means that UK-based lawyers or compliance officers, or those UK nationals working overseas, are allowed to offer advice on compliance with the Russia Regulations.

In practice, however, most lawyers and compliance officers employed to provide advice on matters such as the interpretation of the Russia Regulations will also be called upon to provide practical guidance above and beyond the Russia Regulations.

The advice for any lawyers and law firms concerned that they may be involved in activities that run the risk of breaching this new ban is to urgently review any existing client relationships to ensure that they comply with the new regulations from 30th June 2023 onward.

The risk of breaching the ban is one of facing a criminal prosecution which would be career-ending, and although there has been little by way of enforcement action to date, it can be expected that the completion of the process of turning aspiration into reality by way of the new regime will see a renewed focus on enforcement.

Further advice would be to be on the lookout for further clarification from the UK government on the issue of how the new regime will impact on multinational law firms dealing with complex issues involving commercial negotiations, for example, for non-UK entities which are part of the wider group, if the transaction or contract in question would breach UK sanctions if done in the UK or by a UK person.

Compliance

Interestingly, a review of sanctions compliance carried out by the Bar Standards Board (BSB) and published on 28th June 2023 looked into the degree to which commercial barristers were aware of the risks of engaging with a person designated by the sanctions without being in receipt of a licence from the Office of Financial Sanctions Implementation (OFSI).

Looking at 31 chambers which are members of the Commercial Bar Association (and thus more likely to risk dealing with clients who are subject to the sanctions regime) the report found that an air of caution had prevailed since the initial imposition of sanctions when it came to accepting instructions from a source which could be a designated person. This caution applied whether the designation was direct or in light of the ultimate beneficial owner of an entity.

The report also states that chambers are well aware of the methods used by designated individuals to dodge the sanctions regime, methods which included hiding assets in companies registered in the British Virgin Islands, Russians being based in Dubai and creating trust funds and Chinese nationals (also subject to longer term sanctions) instructing law firms based in Hong Kong.

The BSB also found that the question of risk assessment was left to individual barristers, with questions of confidentiality often given as a reason.

The review recommends, however, that best practice in the future would involve the management committee, senior staff, and head of chambers playing a key role in promoting sanction compliance, with a chambers-wide policy in place and a risk assessment carried out, rather than relying on the due diligence of the solicitors instructing them.

The same advice is easily transferable to law firms, with a top-down, risk-averse culture of sanctions compliance in place across the board rather than a reliance on piecemeal compliance on a lawyer-by-lawyer basis. By implementing an organisation-wide approach of this kind, law firms are far less likely to find themselves unwittingly breaching the latest legislation.