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UK and EU sanctions: recent developments
On 3 June 2022, the EU adopted its 'sixth package' of sanctions in response to Russia's invasion of Ukraine, primarily through Regulation (EU) 2022/879, which amended Regulation (EU) No 833/2014. We have previously discussed amendments to the sanctions targeting trusts and similar legal arrangements: EU sanctions: tweaking sanctions against trusts (shlegal.com). In this article, we look at some of the other elements of Regulation 2022/879, together with recent strengthening to the penalties for breach of sanctions in the UK and EU.
Accountancy, management consulting and PR services
Regulation 2022/879 introduced a prohibition on the provision of the following services to the Russian government or to legal persons, entities or bodies established in Russia: accounting, auditing, bookkeeping, tax consulting, business/management consulting and public relations services (Article 5n of Regulation 833/2014). Recital 26 to Regulation 2022/879 provides further detail on the services covered:
Accounting, auditing, bookkeeping and tax consultancy services cover the recording of commercial transactions for businesses and others; examination services of accounting records and financial statements; business tax planning and consulting; and the preparation of tax documents.
Business and management consulting and public relations services cover advisory, guidance and operational assistance services provided to businesses for business policy and strategy and the overall planning, structuring and control of an organisation. Management fees, management auditing; market management, human resources, production management and project management consulting; and advisory, guidance and operational services related to improving the image of the clients and their relations with the general public and other institutions are all included.
The prohibition does not apply to the following services:
- Services strictly necessary to enable a contract that does not comply with Article 5n to be terminated by 5 July 2022 (provided that such a contract was entered into prior to 4 June 2022) or of ancillary contracts necessary for the execution of such contracts. The term "ancillary contract" is referred to in a number of the exceptions to the prohibitions in Regulation 833/2014 but is not defined. The European Commission has recently issued guidance stating that it is "a contract necessary for the execution of another (principal) contract, that is, a contract without which the main contract cannot be executed, such as insurance, financing etc."
- Services strictly necessary to enable the exercise of the right of defence in judicial proceedings and the right to an effective legal remedy.
- Services intended for the exclusive use of legal persons, entities or bodies established in Russia that are owned by, or solely or jointly controlled by, a legal person, entity or body which is incorporated or constituted under the law of an EU Member State.
Unlike some of the other measures in Regulation 833/2014, Article 5n does not expressly target subsidiaries of Russian entities or those acting on behalf or at the direction of Russian entities. However, service providers should be alive to the risk of circumvention (Article 12 of Regulation 833/2014).
Addition of the UK and South Korea as partner countries
Regulation 2022/879 also added the UK and South Korea to the list of 'partner countries' in Annex VIII of Regulation 833/2014, which previously included only the USA (from 25 February 2022) and Japan (from 8 April 2022). 'Partner countries' are those that are deemed to have in place a set of measures similar to those set out in Regulation 833/2014.
The EU will exchange information with such countries with a view to supporting the effectiveness of the measures set out in Regulation 833/2014, and such countries can now obtain the benefit of derogations from some of these measures that are otherwise only available to EU Member States. For example, Articles 2 and 2a prohibit the sale, supply, transfer or export of certain goods and technology to Russia. However, authorisation for any such sale, supply, transfer or export can be sought where the goods or technology are intended for non-military use and the exclusive use of a non-military entity owned, or solely or jointly controlled by, a legal person, entity or body which is incorporated or constituted under the law of an EU Member State or of a partner country. Notably, some derogations are available to persons and entities from EU Member States only, such as the exception to the Article 5n prohibition referred to at point 3 above.
Strengthening penalties for breaches of sanctions in the UK and EU
The EU's 'sixth package' also clarified and strengthened the provisions on national penalties for breaches of EU sanctions against Russia1 and Belarus2 by requiring EU Member States to: (i) introduce and implement criminal penalties for breaches; and (ii) provide for appropriate measures of confiscation of the proceeds of such breaches. This complements the European Commission's recent proposals to: (i) introduce a Directive on Asset Recovery and Confiscation; and (ii) revise Article 83(1) of the Treaty on the Functioning of the European Union to add the violation of sanctions to the list of EU crimes. Note that these measures are directed at the confiscation of the proceeds of sanctions breaches, not the automatic confiscation of (frozen) assets of designated persons.
Effective and dissuasive penalties have also been a focus in the UK following Russia's invasion of Ukraine – see our previous article on the Economic Crime (Transparency and Enforcement) Act 2022 (the "ECA"). Chapter 1 of Part 3 of the ECA, which relates to monetary penalties imposed for breaches of financial sanctions, came into force yesterday, 15 June 2022. Of particular note, the previous position has been amended in the following ways:
- Previously, in order for OFSI to impose a monetary penalty, it had to be satisfied on the balance of probabilities that a person or body knew or had reasonable cause to suspect that they had breached financial sanctions. The ECA removes this requirement, creating a 'strict civil liability'. It is important to note that the removal of this requirement applies only to breaches that occur on or after 15 June 2022.3 OFSI has recently updated its guidance to make clear that, even then, it will be a relevant factor in assessing the proportionality of OFSI's response to the breach.
- OFSI now has the ability to publish details of breaches of financial sanctions where no monetary penalty has been imposed publicly. OFSI suggests one reason for doing so is when there are valuable compliance lessons for industry. If OFSI does decide to publish details of a breach, the relevant person will be given 28 working days in which to make any representations in relation to the finding of a breach and publication of the case summary and, if OFSI upholds its decision, the written case summary will be shared with the relevant person in advance of publication. There is no saving provision for this amendment in the legislation, although the guidance suggests it only applies to breaches that occur on or after 15 June 2022.
1 Both Regulation 833/2014 and Regulation (EU) No 269/2014, which imposes asset freezing measures on designated persons
2 Regulation (EC) No 765/2006, which includes export controls and asset freezing measures
3 Regulation 3, The Economic Crime (Transparency and Enforcement) Act 2022 (Commencement No. 2 and Saving Provision) Regulations 2022
