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14 November, 2022

Daniel Powell

Legal access for sanctioned entities and the unclear effects on investors

The UK Office of Financial Sanctions Implementation general licence is a move in the right direction, but legal access for sanctioned entities remains shrouded in uncertainty.

While the Ukraine-Russia conflict continues, the prospect remains of the UK and EU strengthening sanctions on Russian entities, likely in cooperation with the US. The sanctions implemented so far are wide-ranging, applying to many commercial areas, including financial services.

These wide-ranging sanctions can often create significant obstacles in respect of commercial transactions and investment. The broad reach of these sanctions can lead to difficulties for investors and business executives who have invested monies into a company that is now impacted by sanctions, and which may moreover be subject to asset freezes. Governments that have invested public money into a venture that has links to Russia are also at risk of financial reputation and political harm. There is little indication that current sanctions will be removed anytime soon, and it is therefore essential that businesses have legal access to advice and, where appropriate, access to the courts.

UK licence offers some reprieve

The UK Office of Financial Sanctions Implementation, or OFSI, has now issued a general licence enabling designated persons to make payments for legal services. Provided the terms of the general licence are complied with, law firms are no longer required to conduct the time-consuming and burdensome process of applying for a specific licence for each matter. This general licence follows the EU exemption, implemented in Council Regulation 2022/1269, permitting sanctioned parties the opportunity to fund legal proceedings. As there are potentially now fewer obstacles to lawyers receiving fees from designated persons as a result of the general licence, investors in both the UK and EU jurisdictions should now have greater opportunity to seek advice from law firms and, where necessary, to conduct litigation.

However, there are limits to this licence. Hourly rates of lawyers are capped, lawyer and counsel fees combined cannot exceed £500,000 and permitted expenses on a claim are also limited. This may prove problematic when a very large investment is impacted by sanctions and expensive litigation is required. Further sanctions have been recently introduced by the UK and EU. In October, the UK broadened the current sanctions to include a wider range of companies that provide loan arrangements that will now come under sanctions on Russia. The EU in early October also implemented sanctions that prohibit legal advice to Russians in non-contentious work such as advising on commercial transactions. The UK, while having expressed an intention to do likewise, has yet to publish the text of those restrictions.

It should be emphasised that the effect of the general licence is only to make possible the payment of reasonable legal fees. It does not itself vary the scope of any economic or trade-related restrictions already in place. Moreover, transactional, advisory legal services may likely themselves become a target of UK sanctions for a yet undefined subset of certain transactional services. This will potentially hinder the completion of pending commercial transactions and create further obstacles to new investment agreements.

The general licence is certainly an improvement. The opportunity to fund legal services does at least permit those potentially affected by sanctions to seek advice. However, considering its limitations, and the fact that it is currently set to expire in April 2023, combined with the uncertainty of the UK imposing further restrictions to the provision of legal advice for certain legal services, the practical extent of this benefit to investors and companies remains to be seen.

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