Guidance on Complying With The UK’s Financial Sanctions Regime

In January 2024, the SRA announced it had written to over 1,000 law firms to provide guidance on complying with the UK’s financial sanctions regime. The Office of Financial Sanctions Implementation (OFSI) has a wide range of financial sanctions in place against countries ranging from Afghanistan to Zimbabwe. The firms that the SRA wrote to had been identified as having inadequate financial sanctions controls in place and where it believes that improvements are needed.

Why Has The SRA Written To Law Firms Regarding Financial Sanctions?

One of the primary drivers that has compelled the SRA to write to law firms with poor financial sanctions management appears to be the ongoing war in Ukraine by Russia. According to Juliet Oliver, the SRA’s Deputy Chief Executive, “Strengthening the financial sanctions regime is an important part of the government’s response to war in Europe, and law firms have a key role to play”.

Over recent months, the SRA has been conducting on-site sanctions inspections of law firms to test their overall compliance with the financial sanctions regime, and they have plans for a wider programme of “proactive desk-based reviews” later in 2024.

The financial sanctions letters provided to law firms included:

• Guidance on complying with the UK sanctions regime
• Guidance on carrying out firm-wide sanctions risk assessments
• A risk assessment template

The main guidance on complying with the UK sanctions regime was originally published by the SRA in November 2022 and was aimed at all SRA-regulated firms, solicitors, registered European lawyers and registered foreign lawyers. The guidance sets out the SRA expectations of law firms on how to work within the regime and, ultimately, to avoid sanctions being imposed.

What Is The Financial Sanctions Regime?

Sanctions are restrictive measures that are put in place by the government and are intended to achieve a specific foreign policy or national security objective (e.g. to put pressure on Russia to bring to an end its war in Ukraine). The UK government imposes a range of sanctions – the following are types of sanctions measures:

• Financial sanctions – this includes the freezing of assets and is overseen by the Office of Financial Sanctions Implementation (OFSI)
• Trade sanctions
• Immigration sanctions, and
• Transport sanctions

A breach of UK sanctions is a criminal offence and may lead to a substantial fine and/or imprisonment.

The financial sanctions regime, in particular, is focused on preventing money flows to and from certain designated persons. As the guidance of the financial sanctions regime explains, “designated persons may seek to hide or misrepresent their identity in order to circumvent the sanctions regime. This is why it is generally not enough to take a client’s identity at their word without further checking. Similarly, it is why you cannot assume that a non-natural person does not have links of ownership or control with a designated person”.

The guidance also sets out what the SRA sees as the main features of effective financial sanctions regime compliance:

• An assessment of the sanctions risks to which the firm may be exposed
• A written and implemented set of policies, controls and procedures to identify all clients and counterparties and verify their identities
• A record of any assessments of sanctions risk carried out for each client and/or matter which identifies any indicators of higher sanctions risk.
• A documented and implemented policy and procedure to monitor clients on an ongoing basis
• Training on the sanctions regime and related internal compliance procedures
• Regular reports to senior management on the sanctions risks and performance of the controls in the firm
• A form of regular independent audit of the firm’s compliance regime and
• Specific controls and protocols on what to do if a designated person or likely designated person is identified.

Who Must Adhere To The Financial Sanctions Regime?

The guidance makes clear that “all firms are subject to the sanctions regime, regardless of the types of services they offer”.  Juliet Oliver has also stated, “The sanctions regime applies to all firms that provide legal services, not just those that are captured by the anti-money laundering regulations”.

The SRA also acknowledges the challenges presented by the regime; “Working within the sanctions regime is complex and challenging, and firms should not seek to provide these services without first gaining the necessary expertise to do so correctly”.

Final Words

The SRA has stated its clear intention to ramp up financial sanctions regime compliance checks for law firms, including desk-based reviews. This is now an opportune time for all firms to review their systems, policies, and procedures, in addition to internal training, to ensure ongoing compliance. The starting point should be a firm-wide risk assessment to identify any gaps which may lead to non-compliance.

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