Russian Sanctions: Accountancy and management consultancy services
On 4 May 2022, Foreign Secretary Liz Truss announced the UK Government’s intention to prohibit the provision of accountancy, management consultancy and public relations services to Russia. This has now been brought into legal effect through The Russia (Sanctions) (EU Exit) (Amendment) (No. 14) Regulations 2022 and which became effective from 21 July 2022
The UK and other jurisdictions continue to widen the scope of trade sanctions imposed on Russia in response to the invasion of Ukraine earlier this year. One of the latest trade sanctions to be imposed by the UK Government is in relation to certain professional and business services, which specifically includes ‘accountancy services’ and ‘business and management consulting services’. Despite being announced in early May, it is only from 21 July that the prohibition became legally in force. Similar prohibitions are already in force through EU sanctions (Regulation (EU) 2022/879) and US sanction (Executive Order 14071).
The UK’s prohibition is introduced by The Russia (Sanctions) (EU Exit) (Amendment) (No.14) Regulations 2022 (‘the 2022 Regulations’) and came into force on 21 July 2022. The 2022 Regulations amend the Russia (Sanctions) (EU Exit) Regulations 2019 (‘the Regulations’) in several respects.
The prohibitions set out in the Regulations apply to firms established or operating in the UK as well as overseas operations of UK established firms.
Extent of prohibition
One of the biggest questions which was unanswered by the initial announcement was the extent of services which would be caught under prohibition. Only now that the legislation has been published has the extent of the prohibition been able to be established.
The Regulations now provide under regulation 54C that a person must not directly or indirectly provide, to a person connected with Russia—
(a) accounting services;
(b) business and management consulting services; ….
‘A person connected with Russia’ is defined by Regulation 21(2) and means:
(a) an individual who is, or an association or combination of individuals who are, ordinarily resident in Russia;
(b) an individual who is, or an association or combination of individuals who are, located in Russia;
(c) a person, other than an individual, who is incorporated or constituted under the law of Russia;
(d) a person, other than an individual, who is domiciled in Russia.
Providing such services is now a criminal offence other than where a special licence is obtained from the Office of Financial Sanctions Implementation (OFSI) or in certain other limited circumstances defined under new Regulation 60D of the Regulations. Regulation 54C (3) also provides that it is a defence for a person to show that they did not know and had no reasonable cause to suspect that the person to whom the services were provided was ‘a person connected with Russia’.
Service provisions affected
The 2022 Regulations introduce a new regulation 54B to the Regulations which defines for the purposes of Russian sanctions what is meant by ‘accounting services’ and ‘business and management consulting services’.
For the purposes of Russian sanctions, ‘accounting services’ means—
(a) accounting review services, which are services involving the review by a person of annual and interim financial statements and other accounting information, but excluding auditing services;
(b) compilation of financial statements services, which are services involving the compilation by a person of financial statements from information provided by a client, 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;
(c) other accounting services such as attestations, valuations, preparation services of pro forma statements;
(d) bookkeeping services, which are services consisting of classifying and recording business transactions in terms of money or some unit of measurement in the books of account, but excluding bookkeeping services related to tax returns.
Similarly, ‘business and management consulting services’ means advisory, guidance and operational assistance services provided for business policy and strategy and the overall planning, structuring and control of an organisation, which includes (but is not limited to) management auditing; market management; human resources; production management and project management consulting.
Advisory services in relation to corporate restructuring and strategy where they relate to certain specified goods or technology are already covered by separate sanction provisions relating to financial services.
It should be noted that ‘audit services’ are specifically excluded from the definition of ‘accounting services’ but ‘management auditing’ is included within the prohibition of ‘business and management consulting services’. Broadly therefore, statutory auditing will not be caught by the trade sanction but internal audit services are prohibited.
Statutory guidance on the sanctions relating to Russia is published on gov.uk website and gives further information on the implementation of the prohibitions and compliance with them.
Beyond where a licence has been obtained from OFSI, regulation 60DA of the Regulations introduced by the 2022 Regulations provides an exemption from the prohibition on providing accounting services in respect of any act that is carried out:
- in relation to the discharge or compliance with UK statutory or regulatory obligations (other than obligations arising under contract); or
- in relation to contractual obligations that arise under a contract concluded before 20 July 2022, or an ancillary contract necessary for the satisfaction of such a contract.
For the exemption to apply in relation to contracts concluded before 20 July:
- the act must be carried out before 21 August 2022 (the end of the period of one month beginning with the day on which the regulation comes into force);
- the person providing the accounting services must notify the Secretary of State no later than the day 10 working days before the day on which the act is carried out;
In addition to the above, an act necessary for the official purposes of a diplomatic mission or consular post in Russia, or of an international organisation enjoying immunities in accordance with international law which involves the provision of accounting services is also exempt from the trade sanction.
Steps to be taken
Firms dealing with Russian companies and individuals must be alert to ensure that they comply with all relevant sanction regimes and legislation in the jurisdictions in which they operate.
Accountancy firms have already been reviewing their business relationships and often disengaging with businesses and individuals connected to Russia. Firms should now consider whether a further review of their client base is required to ensure they are not falling foul of the new trade sanctions or to identify if they might need to apply for a licence to be able to continue some types of work.
The UK’s National Economic Crime Centre has recently published a Red Alert on Financial Sanctions Evasion Typologies: Russian Elites and Enablers which provides information on some common techniques which are being used to evade sanctions.