How accountants need to respond to the crisis in Ukraine

Accountancy practices and finance teams must follow regulations relating to sanctions against   – or they could face legal penalties.

The effort required to comply with sanctions is worthwhile. Doing so will protect your businesses, brands, staff, clients and the profession from the risk of exposure to designated individuals and entities, their funds or investments. You will also be supporting the embattled people of Ukraine.

The UK’s sanctions

“The thrust of the UK sanctions regime is to prevent the making available of an economic resource to a designated person or entity,” says David Gomez, ICAEW’s senior lead, ethics.

The sanctions broadly target individuals and entities involved in destabilising Ukraine and, since February this year, those involved in obtaining a benefit from or supporting the Russian Government – such as Russian oligarchs.

The current sanction regime against Russia has been in place since 2019 and include the following prohibitions:

  • Asset freeze
  • Dealing with transferable securities and money market instruments
  • Loans and credit arrangements
  • Investments in relation to Crimea
  • Travel ban
  • Trade in military and dual-use items
  • Trade in energy-related goods and related services
  • Imports of any items originating in Crimea
  • Trade in infrastructure-related goods with Crimea
  • Infrastructure and tourism services to Crimea
  • Movement of cruise ships to Crimea

The regime has been amended eight times, six this year in response to Russia’s actions in Ukraine:

  1. 31/12/2021: Technical tweak
  2. 31/12/2021: Technical tweak
  3. 10/02/2022: Change to the designation criteria
  4. 01/03/2022: Financial sanctions
  5. 01/03/2022: Trade sanctions
  6. 01/03/2022: Transport sanctions in relation to vessels
  7. 01/03/2022: Financial prohibitions relating to the central bank
  8. 08/03/2022: Aviation and trade prohibitions

You can stay up to date with changes and amendments to the sanctions list by subscribing to the free Office of Financial Sanctions Implementation (OFSI) e-alert. Subscribe here.

Belarus sanctions

Sanctions against Belarus are conducted under the Russia sanctions regime and currently target the Belarusian chief of the general staff, three other deputy defence ministers and two military-affiliated enterprises.

US and EU sanctions

Businesses need to bear in mind that the US and EU are also imposing sanctions. Therefore, UK businesses with exposure to and dealings with US and EU entities will have an obligation to consider the prohibitions imposed by these jurisdictions. Also, be mindful of the extraterritoriality of the US dollar in relation to US sanctions.

First things first – ethics

The Consultative Committee of Accountancy Bodies (CCAB) published guidance on the Ukraine crisis on 2 March. First and foremost, it reminded accountancy professionals of their ethical obligations under the IESBA Code of Ethics and individual codes of the professional bodies:

  • Act in the public interest
  • Apply fundamental principles:
    • integrity
    • objectivity
    • Competence and due care
    • Professional behaviour, including complying with relevant laws and regulations, and avoiding conduct that would discredit the profession
  • Quickly respond to non-compliance with laws and regulations

Rule of thumb

Accountancy professionals, particularly leaders, should be fully aware of and keep up-to-date with sanctions, including their scope and potential impact, as they apply to their business, workforce and clients. This can be done by checking the relevant lists of sanctions and sanctioned individuals and entities published by authorities in their respective jurisdictions.

For the UK, these are the key sources of information:

Use existing compliance procedures

The recent sanctions announcements are an iteration of the existing regime. Similarly, the UK’s Anti-Money Laundering (AML) regime is unchanged. So firms should already have the compliance procedures they need.

“The starting position is that the new sanctions imposed on Russia and Belarus should not require a major transformation of the procedures that firms are required to already have in place,” said Gomez.

Firms should already review their client bases for politically exposed persons (PEPs), and now ought to be even more vigilant.

“In terms of internal processes, it’s important to ensure staff are trained and alert to the risks and that they know who to consult within the firm if they have concerns when on-boarding a new client or dealing with an existing one that might have overseas links. Firms need to ensure that any new risks are flagged quickly and action taken where appropriate,” says Gomez.

Practices: review client base

Firms should review their client base afresh in the light of world developments to comply with regulations and protect their reputation. The updated sanctions may cause clients to become newly classified as PEPs. It is the responsibility under the AML Regulations 2017 of practices to conduct risk assessments and perform Enhanced Due Diligence (EDD) checks.

If you have clients, potential or existing, identified as high risk, it’s critical that you fully understand their source of funds and wealth. As many people subject to sanctions may also be PEPs, it’s imperative your procedures are in place and up-to-date to identify whether a client, or the beneficial owner of a client, is a PEP or a family member or known close associate of a PEP.

You should assess the level of risk associated with high-risk clients and those identified as PEPs and tailor your EDD accordingly. You should also continue to apply EDD for at least 12 months after a client ceases to be a PEP – longer if necessary to address the risk of money laundering or terrorist financing.

Specialised software and tools are available with ranging costs, or you may seek to consult legal or expert advice, depending on the scope and size of the firm. It is for businesses to decide what is appropriate for their risk exposure and business model as to how much screening and due diligence they undertake.

Open source checks are encouraged on existing and prospective clients. This requires going deeper than simply ‘taking the client’s word for it’, verifying their identity or a quick Google search. Information that exists in the public domain can provide a more complete picture of an individual, helping you to make better decisions early on.

Here are a few tips from ICAEW on open source searches:

  • Undertake complex searches using strings of words, especially search terms that indicate relations to ‘Russia’ or ‘Russian companies’. Words that indicate undesirable relationships can also be used.
  • Newspapers, online news and subscription news services should also form part of due diligence. News aggregation services are also useful and reduce time spent scouring multiple outlets.
  • Review and document the information obtained and check for consistency with anything provided by the client while applying professional scepticism.
  • If alarm bells ring when you are conducting research, raise any concerns directly with the client. Information in the public domain can be discussed openly, and remember, the firm’s reputation could be at stake.

Finance teams: ownership, supply chains, trade, transport

Gomez’s topline guidance for CFOs and businesses is to obtain advice tailored to your specific circumstances. But as above for practices, much of the guidance revolves around knowing who you’re in business with.

It is vital to fully understand how an organisation is structured and where it is domiciled. “Who are the ultimate owners and beneficiaries? Difficulties might arise if the CEO is a sanctioned individual, or if subsidiaries are part-owned by sanctioned individuals or their associates,” said Gomez. OFSI has issued guidance on ownership and control, which should be consulted.

Consider too where payments come from and go to, or to whom? Are you exposed through your transactions to PEPs, or entities and individuals on the sanctions list? Companies with overseas subsidiaries or doing business in other jurisdictions will need to ensure that they comply with all relevant sanctions regimes (not just those imposed by the UK). Refer to section 3.6-3.8 of OFSI’s Monetary Penalty Guidance which relates to UK nexus: https://www.gov.uk/government/publications/financial-sanctions-faqs

As above, it’s critical to understand the owners of the entities and individuals that the business is dealing with. What is the source of the goods/materials being imported to UK, including where they originated or where they were consigned? What is the end use and destination of the goods being exported?

“If prohibited goods or services are being used somewhere in the business’s operation – or end up being used in a prohibited sector in Russia – this might be a potential breach of sanctions and deemed to be making available economic resources to prohibited persons,” said Gomez. The DIT recently issued a notice to importers and exporters.

There are specific exemptions and general licences that businesses may be able to use. Refer to the Export Control Joint Unit for guidance.

“Further down the line, Companies may wish to ensure that they have in place procedures to ensure that they and their suppliers can spot exploitation of Ukrainian refugees arriving in the UK,” said Gomez.

Lastly, how are your company’s goods being transported? Under what flag/registration? Where are the vehicles of the company (and any subsidiaries) located? Which ports have bans in place?

Effectively, the Department for Transport’s advice echoes that mentioned above – ensure you understand your operation (including ownership and control, supply chain and end user issues). Get to grips with the sanctions regime. Ensure you understand your legal and professional obligations.

Who to report to

You are legally obliged to report to OFSI if you know or suspect that a breach of financial sanctions has occurred, that a person is a designated person, or you hold frozen assets and that knowledge or suspicion came to you while conducting your business. Contact OFSI at the earliest opportunity using the reporting form on gov.uk.

If you suspect a client of money laundering or suspicious activity, you’re legally required to report them with a suspicious activity report to the National Crime Agency (NCA).

More to consider

OFSI licences

It is possible to apply for licenses through OFSI to work with designated individuals or entities. A licence from OFSI is written permission to carry out an act that would otherwise be in breach of financial sanctions prohibitions. Find an introduction to OFSI licensing here.

Asset offload

Adam Williamson, AAT’s Head of Responsible Business and Policy, says beware of those who have been sanctioned seeking to offload assets. “Vulnerabilities may occur for people who are less experienced and not used to dealing with such practices. They could be viewed as likely candidates for exploitation. So if you’re suddenly getting approaches from people outside of your normal client base or it’s unclear how they found out about you, be wary.”

Economic Crime Act

On 14 March 2022, the Economic Crime (Transparency and Enforcement) Act 2022 became law, following substantial amendments made by the House of Lords. While the transition period for the law is six months, it is important to understand the elements that relate to the Ukraine crisis:

  • An expansion of the Sanctions and Anti-Money Laundering Act 2018 to allow prohibitions against a wider range of persons.
  • Urgent procedures for the designation of individuals
  • New strict liability test and name and shame provisions
  • Register of overseas entities
  • Changes to Unexplained Wealth Orders regime

See the Government’s announcement here and appraisals by AAT and ICAEW (here and here).

Cyber security

The crisis has elevated the risk to cybersecurity, with experts warning of the potential for attacks large and small aimed at causing as much disruption to as many organisations as possible. Therefore, organisational resilience is crucial, particularly if your business has links to Russia. Even if not, it’s important that from the bottom up you know the risks and have taken actions to protect your business. ICAEW published an article called The Cyber threat from Russia is real.

Crypto

The Financial Conduct Authority highlighted in a recent statement that financial sanctions regulations do not differentiate between cryptoassets and other forms of assets. “The use of cryptoassets to circumvent economic sanctions is a criminal offence under the Money Laundering Regulations 2017 and regulations made under the Sanctions and Anti-Money Laundering Act 2018.”

Glossary

Designated entity –  is an individual, entity or body, listed under UK legislation as being subject to sanctions. 

Economic Crime (Transparency and Enforcement) Act 2022 – creates a new register of overseas property owners and revises Unexplained Wealth Order provisions.

The OFSI is the Office of Financial Sanctions Implementation.

PEP – a politically exposed person is an individual who is or has been entrusted with a prominent function. Many PEPs hold positions that can be abused for the purpose of laundering illicit funds or other predicate offences such as corruption or bribery.

Unexplained Wealth Orders (UWOs) give law enforcement an opportunity to confiscate criminal assets without ever having to prove that the property was obtained from criminal activity.

Neil Johnson is a freelance business journalist who contributes regularly to trade publications and member organisations, covering employability, recruitment, business trends and industrial analysis.

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