Jonathan Fisher KC
Today, the risk of sanctions is an area of major concern, not only for HNWIs participating in investment and commercial transactions, but also for solicitors advising them. With the possibility of up to seven years imprisonment hovering in the background where a sanction is contravened, it is unsurprising that some solicitors may be choosing to advise their clients cautiously.
Hedging advice with caveats may limit the scope of a solicitor’s exposure, but from a HNWI’s perspective the practice is frustrating since it reduces the value of the advice.
The high watermark of the problem for solicitor and client alike lies in a criminal provision inserted into most sanctions regulations which is known as “the circumvention offence”.
A typical example of the circumvention offence can be found in regulation 19 of the Russia (Sanctions) (EU Exit) Regulations 2019. This provides that “a person must not intentionally participate in activities knowing that the object or effect of them (whether directly or indirectly) is (a) to circumvent any of the [sanctions] prohibitions or (b) to enable or facilitate the contravention of any such prohibition.”
There are several points to note about the width of this offence.
First, the offence applies to the actions of any person. This means that the offence can be committed by a solicitor as well as a client in circumstances where the solicitor is acting on behalf of a client in a transaction where a designated person is involved.
Secondly, the activity captured by the criminal offence is the participation in any activity which circumvents a breach of sanctions. Potentially, a solicitor who advises a client how to structure a transaction in a way which avoids a breach of sanction would be caught as an offending activity.
Thirdly, although usually a provision which restricts the application of a criminal offence, the level of mental awareness to be established by the prosecution is low. This is because the mental ingredient is referable not to an intention to break the law, but rather an intention to ensure that a contravention of the law, in this case a sanctions prohibition, is not committed.
In a case where a solicitor advises a client how to structure a transaction which avoids a breach of sanctions, the solicitor will almost certainly know and intend this outcome as a consequence of their actions.
Fourthly, it is possible for the circumvention offence to be committed where the indirect effect of the activity is to side-step the application of a sanction. The width of this language, with its reference to indirect effect, exposes both a solicitor and HNWI client to the commission of the offence where the circumvention is no more than a helpful by-product of their activities.
Two years ago, the National Crime Agency (NCA) issued a “red alert”, warning that some Russian designated persons were using a range of techniques designed by “elites and enablers” to evade the effect of sanctions. Typically, these techniques involve transferring assets to trusted proxies, divesting investments in company shares to ensure ownership stakes fall below the 50 percent threshold and placing assets in complex and opaque offshore trusts.
The NCA identified solicitors as key professionals who needed to ensure that they did not become unwittingly complicit in the commission of a circumvention offence. The red alert added that designated persons tend to transfer assets and funds directly and indirectly to jurisdictions where sanctions are not in place, such as the UAE, Tukey, China, Brazil, India and the former Soviet Union (excluding the Baltic States and Ukraine).
More recently, at the end of January 2024, the Solicitors Regulation Authority repeated the warning, telling solicitors that they must take preventive action to identify emerging risks and avoid committing the circumvention offence.
In a warning which will have a chilling impact, the SRA reminded solicitors that as well as a sanctions risk when representing a HNWI who is a designated person, there is also a counterparty risk. “The strict liability of the sanction’s regime does not distinguish between clients, counterparties or third parties. It is also possible to breach the sanctions regime in relation to a party who is not a client”.
Against this background, it is no wonder that some solicitors may be shying away from giving unambiguous advice to HMWI’s where the advice or transaction may involve a designated person.