In July we featured an article on the need for risk assessments and control provisions in relation to the risks of sanctions liability – SRA Sanctions Questionnaire. At the distinct risk of providing too much of a good thing, as some might see it, we need to return to this topic this month as hard on the heels of that article the SRA have just issued updated and more extensive guidance on this topic. This is a development which all firms, regardless of size or work type, need to be aware of.
By way of a quick reminder the sanctions regime was introduced a few years ago through the Sanctions and Money Laundering Act 2018. This made it an offence to have any financial dealings with a client who was a designated person if done intentionally or recklessly, but subject to the poorly defined defence of legal professional privilege. The regime became greatly more burdensome, however, through the coming into force of the Economic Crime (Transparency and Enforcement) Act 2022 which made having any such dealings a matter of strict liability, but still subject to privilege – albeit explained in the most reluctant of terms. More concerningly these duties were applied not just to clients but now to all counterparties as well.
Revised Guidance Note
The SRA has been made responsible for the enforcement of these provisions with the profession and so its guidance should be taken into consideration as firms decide what to do in relation to addressing the new levels of risks that are now in force. Unfortunately there is little to cheer in the revised guidance note of the 5th August [1] and, inevitably perhaps in the light of the SRA’s responsibilities in this regard for law enforcement, the compliance level that is recommended is by and large the strictest interpretation possible as opposed to one that could be judged to be more permissive. It has to be faced that the risk of likely exposure for most firms – and whether based on the high street or in a major commercial centre – could all too easily be dismissed. Sooner or later, however, some firms will become involved and will then have to hope that the precautions they had in place will be sufficient to satisfy the regulator at that time.
In this regard the degree of screening for this with clients may be one thing, and then perhaps the idea of not relying on other firms to have done likewise with their clients, but the suggestion that when sanctions change – as they will do so regularly in the current environment – that firms should then consider checking against “all clients and related parties (beneficial owners and counterparties) and re-examine all money (including money for fees or disbursements) held across accounts where sanctions status might have changed, or risk has increased” will sound to be wishful thinking at best.
Having so said there is no substitute for those with compliance responsibilities reading through this, rather sadly, lengthy guidance note but in order to assist a few of the more novel points now made should be stressed here.
The More Important Points to Note
First, the level of CDD checking in the early days of the AML regime of merely viewing a passport or driving licence along with a piece of address evidence should in any event no longer be regarded as being adequate in all cases. Now to add to this there are the risks that the subject of the checks could be deemed to be a politically exposed person or a sanctions target, which will only be likely to come to light if an e-verification check is then conducted. So far as non-clients are concerned these may be checked for their possible status under the sanctions regime by the consolidated search facility on the Office for Financial Sanctions Implementation (OFSI) at https://sanctionssearchapp.ofsi.hmtreasury.gov.uk/. Not only is this quick and easy to use but it provides a “fuzzy” search and so should pick up on near spelling mistakes as well.
As to the range of counterparties these are not limited to opponents in litigation or other parties in transactions but would extend to beneficiaries in wills who receive a gift on a distribution or those receiving a payment of damages or compensation in personal injury matters or other types of successful claims. For these reasons It is best to see the risks of involvement with the sanctions regime as being generic to all legal services.
Another potentially useful point now to be made is that if a client becomes a designated person then any debt due to the firm should not be written off as this could be taken to be conferring a financial benefit upon them. Where a counterparty becomes subject to an order it might be possible to make that payment to their other UK based lawyers but otherwise the funds should be retained in some form of suspense account while awaiting further instructions.
The Three in One Risk Assessment Form
And finally to stress the advice provided in last month’s compliance bulletin, although it is not mandatory to do so we would recommend that you conduct a sanctions risk assessment for the firm using our template “three-in-one” risk assessment form that combines the AML risk assessment with the related issues of proliferation finances and sanctions exposure as well. The SRA has issued a more detailed specialist sanctions risk assessment form[2] which will be found on its website. This is more detailed than our template form but our simpler version should prove to be adequate for those firms facing little real risk of exposure to involvement with sanctioned persons.
Above all, be aware of these risks and consider carefully how best and most realistically to respond. Should the worst ever arise having a credible policy in place and being able to point to a prior and well-reasoned risk assessment may well make the difference between receiving a penalty as opposed to being exonerated.
Finally, the issue of sanctions compliance is also included in the SRA’s AML Data Collection Exercise 2024 on which please see out other item this month.
[1] https://www.sra.org.uk/solicitors/guidance/financial-sanctions-regime/
[2] https://www.sra.org.uk/solicitors/guidance/sanctions-regime-firm-wide-risk-assessments/