The Guide to Sanctions – Third Edition

Introduction

Lawyers advising on sanctions must not only navigate the risks their clients face, but also manage their own risks when providing legal services. Just as professionals must guard against the misuse of legal services in other contexts, sanctions lawyers must take care to understand who their clients are and why they are seeking legal advice. As a general rule, the provision of legal services would not breach sanctions. There may, however, be circumstances in which legal services could amount to prohibited or restricted forms of services and may require a licence.

Where legal services are sought for unlawful purposes, such as to conceal or disguise a sanctions breach, it would clearly be improper for the lawyer to act. The general guidance on financial sanctions produced by the UK’s Office for Financial Sanctions Implementation (OFSI) warns lawyers to carefully consider whether their legal advice is properly helping a client to comply with sanctions or amounts to improper participation in, or facilitation of, a sanctions breach. To illustrate the point, OFSI distinguishes between permissible advice to a client on the effects on business of prohibitions against raising capital on financial markets and assistance in preparing documents to raise the capital; the latter may amount to an attempt to circumvent sanctions. OFSI’s separate enforcement guidance makes it clear that failure by regulated individuals to meet regulatory and professional standards may be considered an aggravating feature of a financial sanctions breach.

The need to combat the perceived involvement of lawyers and other professionals in sanctions evasion and circumvention has emerged as a political priority. In March 2022, a Russian Elites, Proxies and Oligarchs Task Force was set up by the G7 members, the European Union and Australia, to take action against the assets of key Russian elites and proxies and to act against their enablers and facilitators. In support of this initiative, the UK’s National Crime Agency has established a Kleptocracy cell to investigate sanctions evasion, with a specific focus on professional enablers. Finally, there have been calls for lawyers to be designated as sanctions targets on account of their provision of legal advice to, and representation of, clients in connection with specific forms of legal proceedings.

When coupled with public criticism of law firms and individual lawyers for acting for specified categories of clients, including sanctioned clients, these developments may discourage law firms and individual lawyers from representing designated persons or advising clients who are located in, or otherwise connected in some way with, sanctioned regimes.

The ability of a designated person to access legal representation is, however, a fundamental element of the rule of law. Access to legal advice is necessary to ensure that sanctions prohibitions and restrictions are understood and complied with. All asset freezes adopted by the UN, EU and UK to date are understood to have allowed licences or other forms of authorisation to be granted to permit frozen funds to be used in payment of legal fees. The Explanatory Notes to the Sanctions and Anti-Money Laundering Act 2018 (SAMLA) confirm that licensing grounds for the purpose of the UK’s new autonomous sanctions may include reasonable professional fees and the reimbursement of reasonable and necessarily incurred expenses associated with the provision of legal services; and all regulations adopted under SAMLA have expressly included provisions to this effect. The types of legal services that can be licensed are unrestricted, but OFSI’s general guidance states that legal fees and disbursements must relate specifically to the provision of legal advice or involvement in litigation or dispute resolution.

The legal services that designated persons are expected to seek fall into three broad categories. First, designated persons will seek legal advice for the same reasons as anyone: to exercise their legal rights and to protect their lawful interests, unrelated to their status as designated persons. Second, designated persons would be expected to seek sanctions compliance advice to understand their obligations under the prohibitions and restrictions, and to obtain assistance with licence applications. Finally, designated persons would be expected to seek legal advice and representation in order to request an amendment to, or a revocation of, their designation.

This chapter identifies some of the main issues that are likely to arise in the legal representation of designated persons.

Legal expenses licences

A legal expenses licence is not a prerequisite for legal advice or assistance to be provided to a designated person. The provision of legal services cannot directly or indirectly make economic resources available to a designated person in breach of an asset freeze if the designated person is not likely to exchange legal services for, or use legal services in exchange for, funds, goods or services. It is equally difficult to see how the provision of legal services, in itself, could be considered to make economic resources available for the benefit of a designated person, in the sense that the designated person thereby obtains (or is able to obtain) a significant financial benefit, including the discharge (or partial discharge) of a financial obligation for which they are wholly or partly responsible.

OFSI’s general guidance confirms that a licence is not required to provide legal advice to, and act for, a designated person; although lawyers are strongly encouraged to apply for a licence in advance of providing substantive legal services to have certainty as to the fees that will be recoverable while the designated person remains listed.

The only exception to this general rule is where legal services are paid for and provided ‘on credit’, which in OFSI’s view would require a licence. In the absence of any explanation it is unclear what is meant by the provision of legal services on credit. OFSI’s guidance is clearly predicated on the assumption that licences will be sought and granted for legal services already rendered, and OFSI routinely grants legal expenses licences to permit lawyers to issue bills on this basis.

A legal expenses licence permits the use of frozen assets as payment for legal services or the use of unfrozen funds as payment for legal services rendered to a designated person. In other words, regardless of who pays, a licence is required to receive payment for any work on behalf of a designated person and any related disbursements. Interestingly, although court fees will ordinarily be considered a disbursement related to the provision of legal services, OFSI’s general guidance suggests that a licence is only required if court fees are ‘significant’, which is a question of fact. By contrast, OFSI expects a legal expenses licence to be sought before any payment is made into court as security for costs. OFSI takes the view that some licensing ground other than legal expenses needs to be identified to pay security for damages into court; according to OFSI, the ground that will apply depends on the specific circumstances of the case.

The issues that typically arise in practice include the length of time it can take for legal expenses licence applications to be processed, the amount of information that must be disclosed to OFSI as part of the application process and the ongoing compliance risks once the licence has been issued. Breaches of licence conditions are strict liability criminal offences and any ongoing reporting requirements imposed in a legal expenses licence must be carefully monitored.

General legal expenses licences

There is likely to be a considerable amount of preliminary work involved in identifying the activities that would need to be licenced and preparing the corresponding application, in circumstances where there is no applicable general legal expenses licence already in place. OFSI has been reluctant to grant general legal expenses licences, and has, at the time of writing, done so on a few occasions only.

• Legal aid payments for representation of clients designated under antiterrorist sanctions: until recently, the only general licence issued by OFSI under SAMLA for legal services was limited to legally aided work for clients sanctioned under antiterrorist sanctions regimes. A general licence issued at the beginning of 2021 authorises the government agencies involved in administering legal aid to make payments to solicitors acting for clients designated under any of the specified regimes, and for the solicitors to receive these payments, provided that no funds are paid directly or indirectly to the designated person. It replaced a broader general licence, which extended to private third-party payments for the representation of persons designated under the UK’s domestic antiterrorism legislation, together with a parallel general licence for insurance (both now revoked).
• Payments by specified entities or their subsidiaries: in March 2022, OFSI, for the first time, issued a general licence authorising specific entities – UK subsidiaries of designated persons VTB Capital plc and Sberbank CIB (UK) Ltd – to make payments of reasonable professional fees for the provision of legal services or reasonable expenses associated with the provision of legal services. Notification must be provided to OFSI within seven days of any payments made in reliance on the licence, and supporting records must be kept for a minimum of six years.
• A further general legal expenses licence permits legal fees to be paid by an interim manager or a trustee when acting as receivers and managers in respect of the property and affairs of a charity. Records of any activity conducted in reliance on the licence must be kept for a minimum of six years.

Specific legal expenses licences

Applications for specific legal expenses licences are made using the general form for licence applications. The reason why these applications tend to be time consuming is the requirement to demonstrate the reasonableness of any amounts sought to be licensed. As explained by OFSI in a June 2021 blog post, OFSI is legally obliged under SAMLA to ensure that legal fees and expenses are ‘reasonable’. The requirement of reasonableness is in fact imposed in the regulations adopted under SAMLA rather than in SAMLA itself. However, neither SAMLA nor the regulations define what is to be considered reasonable for this purpose. Instead, OFSI’s general guidance explains that the burden of demonstrating reasonableness of legal fees and disbursements falls on the applicant and that OFSI will take as its benchmark or starting point the rates applied when costs orders are made in civil proceedings, as governed by the Supreme Court Cost Guidelines. The blog post expands further on this general guidance by warning that OFSI will require a significant level of evidence when scrutinising the reasonableness threshold, and will consider the following factors: (1) whether the work has already taken place or if it is anticipated; (2) what the work will involve or has involved; (3) which fee earners will be, or have been, involved in the work (and their positions or roles within the firm, including relevant experience); (4) the fee earners’ hourly rates; (5) how many hours each fee earner will be estimated to spend, or has already spent, on each workstream; (6) any supporting evidence as to why the involvement or the number of hours of the particular fee earner is reasonable or proportionate to the nature and complexity of the work; (7) any expenses that are expected and have been paid out; and (8) if any expenses are expected, why they are necessary. Applicants are also warned to not assume that OFSI understands the process and practice of the legal profession. The obvious difficulty for many applicants, however, will be to provide all the details sought by OFSI without disclosing information protected by legal professional privilege (LPP). The blog post pre-empts this issue by confirming that OFSI does not generally consider fee notes and narratives of work (in generic terms) to be privileged, as they do not constitute the giving or obtaining of legal advice, stressing that OFSI will be unable to undertake a reasonableness assessment without having a breakdown of the legal costs for each area of work. It is not clear why OFSI has chosen to publish its policy position in the form of a blog post or how it is compatible with judicial authorities on the circumstances in which fee notes can attract LPP. What is clear, however, is that OFSI will not issue a legal expenses licence unless the specified details are disclosed. This potentially creates a conflict with the duty of regulated legal professionals to advise their clients on their entitlement to assert LPP, which is recognised under English law as a fundamental common law right as well as a human right.

Timing of licence applications

The time taken by OFSI to process legal expenses licences can be considerable. According to its general guidance, OFSI aims to ‘engage’ on the substance of a completed application in four weeks, but warns that this does not mean that a licence will necessarily be issued in that period. In practice, OFSI will typically request further information around four weeks after receipt of an application. An application is only considered ‘complete’ once OFSI considers that it has received all the information that it needs. There are no publicly available statistics on the average processing times for licences, and no distinction is drawn between legal expenses licences and other categories of licences. Only cases that involve a risk of harm or a threat to life will be expedited as ‘urgent’, according to OFSI’s general guidance. A response to a Freedom of Information Act request reported by the Law Society Gazette in April 2022 revealed that OFSI had granted no legal expenses licences between 1 January and 10 March 2022, despite having received 15 applications relating to Russian individuals and entities. The time taken for legal expenses licences to be processed will clearly bear directly on access to justice, and specifically the designated person’s access to the courts as a fundamental right protected by the common law as well as under the Human Rights Act 1998 (HRA). The hurdles created for designated persons to access legal services are compounded by the limitations imposed by OFSI on the duration and amounts authorised by licences, which means that multiple consecutive licence applications may need to be submitted for the same legal proceedings or the performance of the same instructions, adding not just to the length of time spent on making applications but also to the costs of legal representation.

Challenges to licensing decisions

It is, in theory, possible to judicially review OFSI’s refusal to process or grant a legal expenses licence application or its failure to consider it within a reasonable period. However, a legal expenses licence would be required to enable payment of lawyers for advising on and bringing the challenge. Unsurprisingly, the UK courts have heard very few challenges to licence determinations to date, even though these challenges would have been possible prior to the expiry of the Brexit transition period, as licensing decisions are always made by the national competent authorities rather than at EU level.

Instead, it has fallen to the EU court to clarify the obligations of the national licensing authorities. In Peftiev, the Court of Justice of the European Union (CJEU) identified the considerations that would arise if a legal expenses licence were refused altogether by a national licensing authority, specifically on account of concerns that the frozen funds might represent the proceeds of crime. The court concluded that the licensing authority’s discretion was tempered by the obligation to respect the fundamental human rights of the applicant, which, in the case of a target of EU sanctions, included the indispensable nature of legal representation in bringing an action challenging their lawfulness. The court rejected the suggestion that a lawyer could be paid what they are owed once sanctions have been lifted, finding that it was not open to Member States to require a legal services professional to bear such a risk and financial burden. The court also rejected the suggestion that the designated person could be forced to resort to legal aid instead. As for the suggestion that the funds in question had been unlawfully acquired, the court stressed that the nature of an asset freeze is different in kind from seizure or confiscation and the purpose of sanctions is not to penalise the unlawful acquisition of funds. This is why there is no carve out from the right to apply for a legal expenses licence, whether on account of the origin of the funds in question or their possible unlawful acquisition.

The position is the same for UK licensing bodies, even after the UK’s departure from the EU. As ‘public authorities’ for the purposes of Section 6 of the HRA, they are obliged to act compatibly with rights afforded under the European Convention on Human Rights (ECHR) when processing and determining legal expenses licence applications.

Representing a designated person in applications for revocations or variations of a UK designation

The legal work that a legal expenses licence is typically sought for includes requests for a ministerial revocation or variation of a designation, or a request that the Secretary of State use their best endeavours to request a reconsideration of a UN designation. The process for these specific representations is governed by SAMLA Sections 23 to 40 and the Sanctions Review Procedure (EU Exit) Regulations 2018 and supported by guidance and a standard sanctions review request form published by the Foreign, Commonwealth and Development Office. The SAMLA provisions governing judicial proceedings on challenging ministerial decisions are supplemented by the Civil Procedure Rules 1998 and related Practice Directions.

A preliminary issue that typically arises in connection with these challenges is whether legal advice and assistance is required in the first place. There is no procedural requirement for legal representation, whether at the ministerial review stage or at the court stage, and the standard form is clearly intended to enable designated persons to apply without recourse to legal advice and assistance. However, designated persons are typically located outside the UK and are unlikely to be familiar with the UK’s autonomous sanctions regime. While litigants in person can ordinarily represent themselves in any court and in any case, sanctions designation challenges will inevitably raise complex issues of public law. Article 6 of the ECHR confers a right to legal representation in the determination of civil rights and obligations, in circumstances where a lawyer is indispensible for effective access to a court. The ability of a designated person to obtain legal representation of their choosing is also key to the legitimacy of any sanctions regime. It is therefore important that this right is effective and available in practice.

There is still limited experience of ministerial reviews of UK autonomous designations or judicial challenges to ministerial decisions. While the UK was an EU Member State, requests for reconsideration would need to be addressed to the Council and applications to annul a designation directed to the General Court of the CJEU. Challenges to EU sanctions would not be heard by the UK courts unless they involved a decision by a UK public authority – such as a decision to request a person’s designation or a refusal to request the removal of a designation. In one of the earliest, unsuccessful, examples, a minister’s refusal to request a delisting was considered a matter of foreign policy and, as such, unsuitable for judicial review. A subsequent judicial authority concluded that it would be possible, albeit difficult, to challenge ministerial decisions to designate as well as to refuse to seek the removal of a designation.

The new regime created by SAMLA for challenging UK autonomous sanctions has not improved the prospect of judicial scrutiny of designation decisions. Judicial review applications are likely to remain infrequent for the following reasons.

• No variation or revocation can be made by a UK minister to designations based on UN listings. An early challenge to the compatibility of this restriction with the designated person’s Convention rights was rejected by the High Court in Youssef, despite a precedent seemingly to the contrary from the European Court of Human Rights in Al-Dulimi. Instead, the only remedy available for UN designated persons is to request the Secretary of State to use their best endeavours to secure their removal from the UN list, and any refusal to do so can be challenged on judicial review principles.
• In accordance with a partial ‘ouster clause’ in SAMLA, no court can hear a delisting application until the ministerial review process has been exhausted. There are no time limits for ministerial decisions on revocation requests beyond a general requirement that they are to be made as soon as reasonably practicable on receipt of the information needed for making them.
• A prerequisite to challenging any public act is the ability to understand the case against the designated person. Yet, they may not know the basis for their designation. There is a duty on the minister to provide a statement of reasons for designating a person by name under the standard procedure, and this statement would ordinarily be expected to be reproduced in the Consolidated List of Financial Sanctions Targets in the UK. There is, however, no legal obligation to provide a designated person with a copy of the evidence relied on in support of that statement of reasons. Designated persons may invoke their rights as data subjects to obtain copies of their personal data, but this is an entirely separate process governed by data protection legislation.
• The designated person may not always be in a position to understand why a revocation request has been refused by the minister. Any matters can be excluded from the reasons for a refusal where the minister considers that they should be excluded in the interests of national security or international relations, for reasons connected with the prevention or detection of serious crime or in the interests of justice. The courts may similarly hear sensitive evidence not disclosed to the applicant, in a ‘closed material’ procedure imported from domestic antiterrorist legislation.
• Even where the designated person is in possession of the evidence relied on in support of their designation as well as the full reasons for the minister’s refusal of a revocation request, the grounds for challenge are limited. Although a minister may vary or revoke a designation at any time, there is only an obligation to do so if the necessary conditions cease to be met. Those necessary conditions have been further limited by amendments to SAMLA introduced by the Economic Crime (Transparency and Enforcement) Act 2022 (ECTEA), which enable ministers to conclude that any sanctions adopted for a discretionary purpose are appropriate without first satisfying themselves that there are good reasons to pursue the purpose for which the sanctions are to be adopted and that the imposition of sanctions is a reasonable course of action for that purpose.
• Judicial review proceedings are expensive to bring. Following amendments to SAMLA by ECTEA, the ability of a court to order damages in the event of a successful challenge is now confined to circumstances where a designation is found to have been adopted in bad faith. Any damages award made may also not exceed any amount specified by a minister in regulations adopted for this purpose.
• Finally, there appears to be nothing in SAMLA to prevent a designation from being remade on different grounds, even after it has been revoked by the minister or declared unlawful by a court.

Concurrent designations in multiple jurisdictions create additional issues that need to be factored in when advising designated persons, particularly in connection with legal and administrative challenges to designation decisions. The proliferation of sanctions designations worldwide has increased the likelihood of the same person being designated in more than one jurisdiction. Indeed, the recently introduced ‘urgent’ procedure for temporary UK designations is predicated on a prior designation by one of the specified jurisdictions. Simultaneous designation challenges raise complex strategic considerations as well as practical coordination challenges, not least as licences may need to be sought from multiple authorities.

Considerations arising in all legal work for designated persons

Any legal work for designated persons will expose a lawyer to a heightened risk of committing financial sanctions breaches, including by participating in or facilitating circumvention offences. It may not always be clear, however, what activities could potentially amount to unlawful facilitation and circumvention. OFSI’s enforcement guidance explains that facilitation of a financial sanctions breach is a form of circumvention, and that individuals who act on behalf of or provide advice to others as part of their job may be considered professional facilitators. In OFSI’s view, simply discovering a potential sanctions breach when acting for a client does not automatically make a professional adviser party to it, but they may become so if their subsequent actions amount to collusion in the breach.

Lawyers are also exposed to criminal liability for failing to comply with their reporting obligations in connection with the representation of designated persons. In addition to any reporting obligations imposed under legal expenses licences, firms and sole practitioners providing legal or notarial services to other persons, by way of business, are ‘relevant firms’ obliged under each SAMLA regulation, in accordance with information provision obligations adopted pursuant to Section 16 of SAMLA, to inform the Treasury as soon as practicable if they know, or have reasonable cause to suspect, that a person is a designated person or has committed any criminal breach of financial sanctions. Where a designated person is a client, relevant firms are also required to report on the nature and extent of any frozen assets held on that client’s behalf. OFSI has published a standard ‘compliance reporting form’ on its website for this purpose. Where the designated person is a client, the obligation to report knowledge that a person is a designated person and the obligation to report on the nature and extent of any frozen assets held would in any event be discharged when submitting a legal expenses licence application. Relevant firms are also separately obliged to provide information about frozen funds in response to OFSI’s annual frozen assets reviews. Finally, SAMLA regulations confer powers on the Treasury to request any person to provide specified information or to produce specified documents, in any manner specified, for a specified purpose. A failure to comply with any information provision obligation, without reasonable excuse, is a criminal offence and the obligation may be enforced by court order.

There is a limited carve out from the information provision obligations in SAMLA regulations for information that is protected by LPP, when it is in the possession of a person who has acted or is acting as counsel or solicitor for any person. The identity of a client may, in certain circumstances, be protected by LPP. However, the requirement to report knowledge or reasonable cause to suspect that a person is a designated person is in any event understood to be confined to individuals and entities on the Consolidated List of Financial Sanctions Targets in the UK (as opposed to entities owned or controlled by designated persons) and directed at circumstances where the designated person in question is seeking to disguise their identity and designated status. It would present an obvious obstacle to access to justice if lawyers were required to report the fact that they had been approached by a designated person lawfully seeking legal assistance, in circumstances where they decline instructions or are not retained to act.

Finally, lawyers acting for designated persons must of course observe their professional conduct obligations. Lawyers in the UK have been warned by their professional representative bodies and regulators to comply with sanctions, as part of the general obligation on lawyers to keep up to date with, and follow, law and regulation relating to their work; law firms are also expected to operate appropriate policies to ensure compliance with sanctions legislation. Comparatively less attention has to date been paid to the importance of observing the same professional obligations in connection with the representation of designated persons as those that apply to the representation of non-designated clients. In an early news release, the Solicitors Regulation Authority stated that it is highly unlikely to be a regulatory matter where firms decline instructions from clients they do not feel comfortable acting for, even if they are not designated, provided that the reason is not unlawful, whether under equalities legislation or otherwise. Whether a current retainer is terminated for ‘good reason’ is ultimately a question of common law for the courts to determine on a case-by-case basis. However, designated persons would of course face the same obstacles identified in this chapter in bringing any legal challenge to the termination of their retainer.

Footnotes