Sanctions – A New Era of Compliance for Accountants and Auditors

Published 7 February 2023

Throughout 2022,  the international community’s response to Russia’s invasion of Ukraine dominated global politics. With indications from the Kremlin that it will fight on until its aims are achieved, this conflict will remain top of the international agenda in 2023.

The UK continues to focus on the way in which non-military pressure can be applied to the Russian Government through measures which seek to adversely impact the Russian economy and in turn, the ability of Russia to operate effectively.

Since 10 February 2022, the UK has expanded its  economic sanctions on a wider category of individuals and entities, in addition to expanding significant restrictions on a variety of UK businesses exporting and providing goods and services to Russia.  More recently, sanctions were introduced prohibiting the provision of professional services (including accountancy services) to ‘persons connected with Russia’.  The UK’s Russian sanctions regime is set out in the Russia (Sanctions) (EU Exit) Regulations 2019 (“the Regulations”) as amended by the 2022 Regulations.

What do these sanctions mean in practice for accountants and auditors, and what can you and your compliance team do to mitigate the risk of falling foul of the ever-evolving sanctions regime in the UK and across the globe?

What are ‘Sanctions’?

In simple terms, sanctions are measures aimed at imposing restrictions either on dealing with specified individuals or entities or on exporting certain goods or services to particular jurisdictions or to particular persons, usually in reaction to a geo-political event, military aggression or human rights breaches.

There are a number of different types of sanction that can be imposed, including immigration, trade, shipping and aircraft sanctions.

Restrictions on ‘accounting services’

Since 21 July 2022,  the UK has banned the direct or indirect provision of ‘accounting services’ and ‘business and management consulting services’ to a person connected with Russia.

‘Accounting Services’ is broadly defined and includes:

1. Accounting review services - reviewing financial statements and accounting information;
2. Compilation of financial statements services, including preparation services of business tax returns when provided together with the preparation of financial statements for a single fee, but excluding such preparation services of business tax returns when provided as a separate service;
3. Other accounting services such as attestations, valuations and preparation of pro forma statements; and
4. Bookkeeping services.

On 16 December 2022, the Regulations were broadened to include a ban on the provision of “auditing services”.  The Regulations define “auditing services” services as the examination of accounting records and supporting evidence of an organisation for the purpose of expressing an opinion on financial statements and operational results in accordance with generally accepted accounting principles.

The difficulty for accountants, auditors and their compliance departments is unlikely to be assessing whether or not they are providing services which satisfy these definitions. Rather, the difficulty will be identifying whether the individual or entity they are dealing with might be considered to be a ‘person connected with Russia’ once it has been established that there is at least a risk that they are so connected.

The Regulations state that a person is ‘connected with’ Russia if they are:

1. In the case of an individual or individuals:
1. ordinarily resident in Russia, or
2. located in Russia.
2. In the case of a corporate entity:
1. incorporated or constituted under the law of Russia, or
2. domiciled in Russia.

Unfortunately, there is  – as with many sanctions related concepts – a lack of guidance to assist firms when interpreting and applying the Regulations to their business. Instead, firms are left with the significant challenge of having to extrapolate rules and guidance from other regimes (such as tax related rules on domicile/residence)  to assess the level of risk they face and whether or not they have sufficient details about their clients to ensure adherence to the restrictions.

This challenge is compounded for firms that have a global presence, with both the US and the EU imposing similar – but not identical – prohibitions. For example, the EU’s prohibition includes an express ban on providing ‘tax consulting’ services to persons, entities or bodies ‘established’ in Russia, but the UK’s Regulations do not. Accountants with UK and EU offices will need to proceed carefully given the different prohibitions, possibly unravelling multi-jurisdictional and multi-service client engagements. 

Ultimately, given the complexities of navigating these issues and concerns over noncompliance, many firms may choose to simply terminate relationships.

Financial Sanctions and Reporting Obligations

Financial Sanctions  

There are also a number of finance related activities  which are prohibited by the Regulations including ‘investment bans’ and restrictions on dealing with certain financial securities issued by specified entities as well as restrictions on entering into correspondent relationships or providing loan or credit facilities.

As of 16 December 2022, the Regulations also prohibit the provision of trust services to persons connected with Russia, unless the services relate to the provision of ongoing trust arrangements in existence before this date. Unsurprisingly, ‘trust services’ is a broadly defined concept and includes:

 (a) the creation of a trust or similar arrangement;

(b) the provision of a registered office, business address, correspondence address or administrative address for a trust or similar arrangement;

(c) the operation or management of a trust or similar arrangement; or

(d) acting or arranging for another person to act as trustee of a trust or similar arrangement, where “trustee”, in relation to an arrangement similar to a trust, means a person who holds an equivalent or similar position to a trustee of a trust.”

‘Asset freeze’ elements of financial sanctions (which prohibit anyone from ‘dealing with’ the assets of a sanctioned person) are the most pervasive form of sanction, along with prohibitions that make it an offence to make funds or ‘economic resources’ available to a sanctioned person. These broad restrictions which – at their most basic – prohibit receiving payment for services from sanctioned individuals (unless done under cover of a licence issued by the UK Treasury), have the greatest potential to restrict the activities of a wide range of UK businesses across industry sectors.

Reporting Obligations

‘Relevant Firms’ – which include those providing accountancy services – are required to report to OFSI (the UK’s financial sanctions regulator) for as little as being aware of a sanctioned person, including their own customers. Failure to do so is a criminal offence.

 A (tricky) way forward…

‘Risk Assessment’, ‘AML’, ‘customer due diligence’ and ‘KYC’ are just some of the concepts that will be all too familiar to your internal compliance teams, risk owners and fee earning accountants alike. Although such concepts have been around for some time, the swift development of sanctions laws globally is driving a new era of compliance and an additional layer of work required in order to risk assess new clients and to protect firms and its employees from committing a sanctions offence.

Where a financial or trade sanctions risk is identified among a firm’s client population, the priority must be securing proper identification of the client. While this may be nothing new for accountants used to conducting due diligence in order to comply with obligations under the relevant Money Laundering Regulations, such checks may not yield sufficient detail in order to further assess any potential sanctions risks which - if improperly handled – may lead to criminal sanctions.

In addition to further and ongoing due diligence checks on high risk clients, firms should consider updating their onboarding systems and controls to ensure they accommodate the ever-changing regulatory and sanctions landscape. Proactive sanctions screening on prospective clients and their directors/shareholders is a must and such checks should be supplemented by appropriate terms of engagement that clearly define the nature of the work being provided, bearing in mind the wording and definitions of relevant prohibitions, including those referred to above.

If any substantive sanctions issues are identified, they should be investigated immediately before considering the extent of any obligations the firm may have to liaise with the relevant regulators.