By: Michael Ruck, Rosie Naylor, and Laura Scott
In its first-ever threat assessment of the UK legal sector, the UK’s Office of Financial Sanctions Implementation (OFSI) has highlighted key findings surrounding suspected sanctions breaches involving UK legal services providers since February 2022 (the Assessment).
Why Did OFSI Focus on Legal Services Providers?
Legal services providers play a crucial role in ensuring UK and international clients (including UK Designated Persons (DPs)) comply with UK financial sanctions as well as other threats to compliance relevant to the United Kingdom.
OFSI’s Key Findings
The Assessment sets out four key findings relevant to the UK legal services providers from February 2022 to present.
- Underreporting of breaches
OFSI found it was highly likely that UK trust and company service providers (TCSPs) may not fully disclose suspected breaches. OFSI found that only 16% of suspected breach reports originated from the legal services sector, with most submitted by law firms and barristers. Only 2% of these were submitted by TCSPs and other types of legal services providers.
- Compliance failures
OFSI stated it was almost certain that most non-compliance by UK legal services providers has occurred due to the:
- Improper maintenance of frozen assets.
OFSI observed legal services providers failing to adhere to asset freeze prohibitions, including delays in freezing funds belonging to DP clients and transferring frozen funds into accounts other than those specified in OFSI licences.
- Breaches of specific and general OFSI licence conditions.
Specific compliance issues included billing DPs more than the value limits set in their licence or receiving payments after the licence has expired.
- Reporting.
OFSI encourages legal services providers to review licence reporting requirements, thereby ensuring compliance.
- Wind-down of Russia related operations.
OFSI stated that legal services providers must ensure that the winding down of operations in Russia were conducted in line with general and specific licence permissions and to report any suspected breaches which may have occurred as a result.
- Complex ownership and control structures
OFSI considered it was almost certain that complex corporate structures, including trusts, linked to Russian DPs and their family members have concealed the ownership and control of assets which should have been frozen under UK financial sanctions.
- Post-designation ownership and control transfers
OFSI considers it likely that Russian DPs have transferred the ownership and control of assets to related non-designated individuals and entities to circumvent UK sanctions.
Intermediary Countries
The Assessment highlighted a series of red flags for lawyers to look out for, especially when an “intermediary jurisdiction” was involved.
Practical Steps
Legal services providers should take the following steps, amongst others, to ensure compliance with the UK sanction regime:
- Monitor and identify any red flags;
- Update client due diligence going beyond basic ID checks to checking beneficial owners and connected parties;
- Screen every transaction against OFSI’s consolidated list (see here);
- Complete a tailored risk assessment; and
- Identify and comply with applicable licence requirements.
Conclusion
OFSI encourages legal services providers to both report now and retrospectively (using this channel), where appropriate and proportionate, if they suspect a breach has occurred.
For further information, please see our corresponding alert.