Clients, sanctions and the new ban on accountancy services to Russia

In the first of a two-part series, we look at the latest regulatory changes in light of the Ukraine crisis

Russia’s invasion of Ukraine prompted a wave of new sanctions against Russian individuals and Russian-controlled organisations and assets. This has been the global backlash against what was generally accepted as an unforgivable act.

Western governments have scrambled to beef up existing regimes and introduce new measures to choke off the flow of capital into Russian hands. But this is not the end of reprisals.

In a recent and major escalation, Foreign Secretary Liz Truss decided the UK will prohibit the provision of accountancy services to Russia. The change is being made under the banner of Russia Cut Off, and is intended to deny the aggressor state any access to accountancy, consultancy and PR services.

The ban on accountancy services

The ban came into effect at midnight on 21 July 2022. It is further evidence of the seriousness of the Ukraine crisis and the unprecedented level of scrutiny on UK businesses and their dealings with clients in Russia and beyond.

“This is a broader prohibition than the current restrictions on dealing with persons who are ‘designated persons’ and placed on a sanctions list,” explains David Gomez of the Consultative Committee of Accountancy Bodies (CCAB).

“The profession will need to exercise caution in dealing with persons and businesses that may potentially have links to Russia and dealing with jurisdictions that are known to have a significant presence of Russian business or which have been placed on the black or grey lists by the Financial Action Task Force.”

Same game, higher stakes…

However, the current crisis shouldn’t be seen as a complete game-changer.

The new sanctions are an iteration of the existing UK Sanctions Regime and the UK’s AML Regime.

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 by the Money Laundering Regulations 2017 and the Anti-Money Laundering Guidance issued by the CCAB.

In other words, firms should already have in place these procedures to ensure they are operating on the right side of the law.

… but with onerous new twists

However, there are new aspects to the regime that accountants should be aware of.

The Government’s recent introduction of strict liability for breach of sanctions by the Economic Crime (Transparency and Enforcement) Act 2022 is a particularly important new factor to consider.

“The Office for Financial Sanctions Implementation [OFSI] no longer has to prove knowledge or suspicion,” says Gomez. “They simply have to prove that on the balance of probabilities, a breach of sanctions occurred. The act also extends the powers of OFSI to issue a public report about breaches (even when no fine is imposed).

Careful client vetting is crucial

“That means you’ve got to be on top of your client list and make sure everything’s up to date,” says Jackson Quaker, professional standards policy development manager at AAT. Most of these checks should have been done when on-boarding new clients anyway, he notes. “That means, if you’re up to speed, it should be fairly seamless – and this shouldn’t be the start of the process – it should have started when you on-boarded them.”

This is serious: beyond AML and politically exposed persons (PEPs), breaching a sanction is a criminal offence that could lead to a custodial sentence and/or monetary penalties, says Gomez.

“It is imperative for firms to be tracking their client base against any sanctioned individuals or entities,” he says. “Bear in mind the dual reporting obligations – the requirement to make any suspicious activity reports to the NCA and the requirement to notify OFSI of any breaches in relation to sanctions.”

Ignorance is no defence for a breach

As with any breach of compliance, ignorance is no defence.

“We need to be aware of our responsibilities and as accountants, we have to be sure that the money’s going to the right places,” says Christina Philippou, Director of Postgraduate Courses in Accounting and Financial Management and a former forensic accountant. So whether that means staying in touch with the legal department or to external legal advisers, “accountants must be ready to seek the right advice as and when necessary,” she explains.

In practice, Philippou advises to keep an eye out for practical signs:

“Changes of ownership are always something to look out for, along with changes in where the money is going, and any new payment structures that might come in – generally any changes to the working relationship should raise a query. In the vast majority of cases there’s nothing in it, but it’s always worth looking at.”

This may entail making careful checks of shell companies and the ultimate beneficial owner (UBO). “That’s not always easy to do,” she says. “We’re increasingly seeing things rooted across the world and then it becomes harder.” 

So the best advice is to be alert, aware of the changing landscape and prepared to go that bit further with due diligence.

Next time: we look at how to approach conversations with sanctioned clients.

Words: Christian Doherty

Photo: Richard Gleed

AAT Comment offers news and opinion on the world of business and finance from the Association of Accounting Technicians.