After the United Kingdom imposed new restrictions on legal advisory services on 30 June 2023, it is becoming increasingly more complicated for organizations to gauge what kinds of legal advice they are able to provide with respect to Russia. As these restrictions apply to in house legal and compliance functions as well as law firms, it is important to know where these lines are drawn for the various sanctions regimes. Although there are still many outstanding questions about the scope of these restrictions, the current limits on legal advisory services in the EU, UK and the U.S. is summarized below.
The United Kingdom
The new UK Regulation 54D provides that a UK person cannot give legal advice on non-contentious matters, if the underlying transaction would be prohibited (if hypothetically a UK person were involved or the activity were in the UK).
Legal advice is cast broadly, including (i) the application or interpretation of law; or (ii) acting on behalf of a client or providing advice on or in connection with commercial transactions. However, it does not cover contentious work – including advice in anticipation of any proceedings.
The Regulation is subject to a number of exceptions, including:
- Regulation 60DB(3); “The prohibitions in regulation 54D are not contravened by any act done by a person for the purpose of providing legal advice to any person as to whether an act or a proposed act complies with these Regulations”, which the UK Government has framed as the “compliance exception.”
- Regulation 60DB(4); The prohibitions in regulation 54D are not contravened by any act done by a person (“P”) in satisfaction of an obligation arising under a contract concluded before 30th June 2023, or an ancillary contract necessary for the satisfaction of such a contract, provided that—
- the act is carried out before the end of 29th September 2023, and
- P notifies the Secretary of State of the provision of the services, before or after the act is carried out, by the end of 29th September 2023.
The potential scope of this restriction has caused concern in the legal and compliance sectors, where compliance functions are necessarily cross jurisdictional. As a consequence, the UK Government held a webinar to attempt to provide clarity. The most salient points arising from this were as follows (noting this was non-binding guidance from the Government):
- The intention was to restrict UK legal advisors assisting in the structuring of transactions that would otherwise be prohibited as a matter of UK sanctions relating to Russia.
- The restrictions target in-house legal and compliance functions as well as external legal advisors.
- They do not restrict English law qualified attorneys, who (i) are not UK persons and (ii) are practicing in a non-UK territory.
- They do not prevent UK persons from advising on activities licenced by the UK.
- The restrictions are not intended to hamstring compliance functions.
- To the extent the Regulation 60DB(3) exception is defective the UK Government is working on a General Licence in tandem with the Law Society.
- It was suggested that the wind down contained within Regulation 60DB(4) for contractual obligations pre-dating 30 June 2023, might in the meantime provide comfort.
In terms of where that leaves a UK person providing compliance/sanctions advice, it is defensible to provide compliance advice (i.e. whether an activity complies with sanctions) to a ‘client’ that abides by UK sanctions irrespective of applicability of such UK sanctions. For almost all international players this will be the case given financial covenants, insurance arrangements etc.
If an activity is not permitted as a matter of UK sanctions, a UK person cannot go on to give advice on how the transaction may be structured so that UK sanctions can be avoided (for example, recusal policies, foreign subsidiary etc.).
The restriction would also not prohibit a UK person providing advice on transactions that are not restricted as a matter of UK law
To the extent reliance on the GL/wind down is anticipated, there are Spire reporting requirements.
Everyone should watch this space, where the UK Government has indicated that; a) a general licence will be issued, which will allow a UK person to provide sanctions compliance advice with regards to other sanctions regimes, even when such advice would normally be restricted; b) there may be amendments to the UK Russia Regulation; and c) guidance may be promulgated.
The European Union
Article 5n of EU Regulation 833/2014 makes it illegal to provide legal advisory services directly or indirectly to the Government of Russia as well as legal persons, entities or bodies established in Russia. In other words, the EU restriction only targets “entities” as opposed to individuals. An indirect provision of legal advisory services is constituted when another operator than the recipient of the services (i.e. the entity established in Russia) is also benefitting from them.
The EU FAQ defines legal advisory services to include the following:
- the provision of legal advice to customers in non-contentious matters, including commercial transactions, involving the application or interpretation of law;
- participation with or on behalf of clients in commercial transactions, negotiations and other dealings with third parties; and
- preparation, execution and verification of legal documents.
Furthermore, the FAQ explicitly excludes the provision of services that are strictly necessary for the exercise of the right of defence in judicial proceedings and the right to an effective legal remedy; or to ensure access to judicial, administrative or arbitral proceedings in a Member State, or for the recognition or enforcement of a judgment or an arbitration award rendered in a Member State, provided that such provision of services is consistent with the objectives of this Regulation and of Council Regulation (EU) No 269/2014.
Unlike with the other regimes, there is also an exemption for Russian entities owned/controlled not only by EU persons, but also those owned/controlled by persons from the EEA, Switzerland, Japan, South Korea, the U.S. or the UK. To benefit from this exception, it must be the case that the services are used “exclusively” by that Russian entity; however, the exempted jurisdiction companies do not have to own the entity by 100%. As per the EU FAQs, it is sufficient that the Russian entity is at least partly owned/controlled by the exempt jurisdiction companies. For example, the exemption may apply when a Russian company is jointly controlled by an EU company and a company that is neither from the EU nor from a partner country.
The United States
The U.S. sanctions regime does not have an explicit “legal” services restriction like the UK or the EU. In 2017, however, OFAC also issued a legal services Compliance Guidance, which clearly states that a U.S. person may opine on the legality of a transaction under U.S. sanctions laws, including by providing a legal opinion, certification, or other clearance as to the legality of such transaction, where it would be prohibited for a U.S. person to engage in the transaction, unless such person is an SDN. However, despite the comfort from the Compliance Guidance, there are still potential areas of sanctions exposure when engaging in Russia-related work.
On May 8, 2022, the U.S. issued a determination pursuant to Section 1(a)(ii) of Executive Order 14071 that prohibits: “the exportation, reexportation, sale, or supply, directly or indirectly, from the United States, or by a United States person, wherever located, of accounting, trust and corporate formation, or management consulting services to any person located in the Russian Federation.”
OFAC FAQ 1058 clarifies that a “person located in the Russian Federation” means “individuals ordinarily resident in the Russian Federation, and entities incorporated or organized under the laws of the Russian Federation or any jurisdiction within the Russian Federation.” However, it is also clarified in the same FAQ: “OFAC interprets the ‘indirect’ provision of such services to include when the benefit of the services is ultimately received by a person located in the Russian Federation.” In pertinent part, the covered services are “accounting,” “trust and corporate formation,” and “management consulting.” In FAQ 1034, OFAC defines these terms as:
- “Accounting sector” – includes the measurement, processing, and evaluation of financial data about economic entities.
- “Trust and corporate formation services sector” – includes assisting persons in forming or structuring legal persons, such as trusts and corporations; acting or arranging for another person to act as directors, secretaries, administrative trustees, trust fiduciaries, registered agents, or nominee shareholders of legal persons; providing a registered office, business address, correspondence address, or administrative address for legal persons; and providing administrative services for trusts.
- “Management consulting sector” – includes strategic business advice; organizational and systems planning, evaluation, and selection; development or evaluation of marketing programs or implementation; mergers, acquisitions, and organizational structure; staff augmentation and human resources policies and practices; and brand management.
The terminology used is very broad, and provides a great deal of discretion for OFAC to potentially find that services rendered by a company or law firm will fall into one of these categories.
Finally, according to Section 1(a)(i) of EO 14071, U.S. persons (and non-U.S. persons using U.S. dollars) are prohibited from engaging in new investment in Russia. FAQ 1049 clarifies that OFAC views “investment” as the commitment of capital or other assets for the purpose of generating returns or appreciation. Examples are wide-ranging, and include:
- The purchase or acquisition of real estate in the Russian Federation, other than for non-commercial, personal use;
- Entry into an agreement requiring the commitment of capital or other assets for the establishment or expansion of projects or operations in the Russian Federation, including the formation of joint ventures or other corporate entities in the Russian Federation;
- Entry into an agreement providing for the participation in royalties or ongoing profits in the Russian Federation;
- The lending of funds to persons located in the Russian Federation for commercial purposes, including when such funds are intended to be used to fund a new or expanded project or operation in the Russian Federation;
- The purchase of an equity interest in an entity located in the Russian Federation (see FAQs 1054 and 1055); and
- The purchase or acquisition of rights to natural resources or exploitation thereof in the Russian Federation.
Therefore, legal advice provided that relates to “new investment” runs the risk of a sanctions violation, as having facilitated a transaction that is otherwise prohibited for a U.S. person to undertake.
If you have any further questions relating to these restrictions, please contact one of the members of the Reed Smith team below.