Responding to the recent sanctions imposed on Russian-linked entities and individuals has been challenging for accountants, due to the sheer volume and speed at which they are being imposed.
Most firms and practices are now undertaking thorough reviews of their client bases to ensure no links to any sanctioned entities or individuals, ensuring that the information that they hold about their clients is up to date and that any clients with connections to Russia are identified. Once identified, if not already done, firms will be screening or rescreening for sanctions.
The sanctions are a very complex legal area, explains Angela Foyle, Head of Risk Management and Economic Crime at BDO. In some cases firms may have to seek legal advice. Larger international networks are likely to be considering not just UK sanctions, but also those imposed in other major jurisdictions. They will also be re-examining ownership and control structures to ensure that all possible links to sanctioned persons or entities are identified.
“A lot of smaller firms would say, what has this got to do with me? And for some of them, if they’ve got an entirely local client base, it’s probably nothing. But I think it’s still that opportunity to reflect and make sure your client base is clean. Some people who may be closely linked to sanctioned individuals might possibly use a small local firm for some aspects of their compliance – or possibly as a registered office address.”
The Economic Crime Act, which came into law this week, has changed the penalty regime for sanctions breaches. That puts an extra emphasis on the need to make sure your sanctions compliance is appropriate, says Foyle.
“If you are in breach of sanctions, then you’re potentially open for a penalty. They have also widened the conditions for the public disclosure of people who have breached sanctions. Previously, it was only if you’d been investigated and the Office of Financial Sanctions Implementation (OFSI) levied a penalty that you would be publicly named. Now, they have the power to publish names even if no penalties have been levied, but they’re satisfied there was a breach of sanctions. So the reputational risks of breaching sanctions are much higher.”
Failure to provide information on breaches can also be a criminal offence in its own right. In some circumstances, financial sanctions legislation requires relevant firms to send OFSI information about the client and how they believe a financial sanction may have been breached.
The Economic Crime Act will make a difference, but to fully combat the economic criminals that the government wants to target, Companies House reform will be required. This is on the way – the government has issued a White Paper outlining its final response to consultations on the topic. Legislation is expected to follow.
“In an ideal world, it would have been much better to have the two together,” says Foyle. “However, given the detail and the technicalities of the Companies House reform, one can understand why the government wanted to act quickly in closing the specific loopholes in relation to registration of overseas property holding companies, sanctions and unexplained wealth orders. We look forward to them introducing the Companies House reform proposals into law, which will ensure that we have an effective enforcement regime.”
As for the longer-term legacy of this crisis, it’s somewhat of a wake-up call for firms; an opportunity to review and overhaul their systems and processes when it comes to economic crime compliance.
“Are there systems, processes and standards that you’ve wanted to put in place? Now is the time to do it. When things like this occur, there is an expectation that accountants take account of their public interest obligations. This may go beyond the law. It brings into very sharp focus the need to understand clients and their control and ownership structures. As well as other associations they may have that could have an impact on reputation.”
When looking at people who are ultra-wealthy, particularly where they are connected to certain regimes, you have to ask yourself the question: how did they get their money, and how do they make sure they keep it?
“It’s that reputational test that firms need to put in place. We all need to remain sceptical in scrutinising the people we deal with and take any concerns identified seriously until resolved, no matter how small they may appear.”
ICAEW latest on Ukraine and Russia
ICAEW latest on Ukraine and Russia
Ukraine crisis: central resource hub
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Resources for members
Chartered Accountants from across the membership have reached out to share how they are responding to the sanctions. Many are re-screening all clients with connections to Russia. Here are some of the key resources to help you respond to clients' concerns.
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ICAEW's Library and Information Service produces guides for members who are considering doing business in overseas countries. There are separate guides for Ukraine and its neighbours, all of which include updates on the latest sanctions and restrictions.