Professional Services Denied As Scope Continues to Widen - Association of Certified Sanctions Specialists

By David Williams ACSS Editor
June 18, 2022

Wealthy Russians have fewer professional services to rely on following decisions by governmental offices to thwart their ability to evade sanctions.

The Office of Foreign Assets Control (OFAC) is tightening the screws on Russian elites by denying them access to accountancy, trust and corporate formation, and management consultancy services. This follows Executive Order (EO) 14071 and EO 14024 issued in April that broadly prohibit the exportation, re-exportation, sale, or supply, directly or indirectly, from the US or by a US person, wherever located, to any person in the Russian Federation of any service as determined by the Secretary of the Treasury. The prohibition took effect on June 7.

The UK was not far behind. The Office of Financial Sanctions Implementation (OFSI) barred Russia’s businesses from UK accountancy, managing consultancy and PR services, calculated to equal about 10% of Russian imports in these sectors.

UK Business Secretary Kwasi Kwarteng said: “Our professional services exports are extraordinarily valuable to many countries, which is exactly why we’re locking Russia out. By restricting Russia’s access to our world-class management consultants, accountants and PR firms, we’re ratcheting up economic pressure on the Kremlin to change course.”

The EU followed suit, announcing in a press release dated June 3 a sixth package of sanctions against Russia. The professional services restrictions covered accounting, auditing, statutory audit, bookkeeping and tax consulting services, business and management consulting, and public relations services to the Russian government, as well as to legal persons, entities or bodies established in Russia.

OFAC Turns Off the Tap

OFAC’s action prevents Russian elites from tapping into US professional services to circumvent its sanctions program. “Wealthy Russians have relied on US expertise to set up shell companies, move wealth and resources to alternate jurisdictions, and conceal assets from authorities around the world,” says OFAC in a press release.

“In addition, Russian companies, particularly state-owned and state-supported enterprises, rely on these services to run and grow their businesses, generating revenue for the Russian economy that helps fund Putin’s war machine,” OFAC says.

OFAC’s action includes:

  • accountancy services, such as measuring, processing and evaluating the economic data of entities;
  • the formation of trusts and corporations, which lawyers can create as well as trust and corporate service providers; and
  • management consultancy, including strategic business advice, developing and evaluating companies, M&A and brand management.

OFAC is issuing new guidance and general licenses authorizing certain transactions.

Commenting on the action, Secretary of the Treasury Janet L Yellen said: “Preventing Russia from accessing the United States’ valuable professional services increases the pressure on the Kremlin and cuts off its ability to evade sanctions imposed by the United States and our partners.”

Breadth of Accountancy Services

Accountancy services include tax preparation and filing services, to any person in the Russian Federation, unless otherwise exempt or authorized by OFAC.

As noted in FAQ 1067, OFAC’s determination does not prohibit the export, re-export, sale, or supply, directly or indirectly, of tax preparation-related software to the Russian Federation, as distinct from tax preparation and filing services. Providing services associated with the export of such software, such as software design and engineering, is lawful, as long as they “do not fall within the categories of management consulting, accounting, or trust and corporate formation.”

OFAC would allow the following.

  1. A US software company signs a contract with a Russian company located in the Russian Federation for designing, engineering, licensing, and delivering software that the Russian company uses to perform its internal accounting. As part of the contract, the US company provides continuing updates and technical support services related to the software, such as setting up new users and troubleshooting errors.

OFAC would prohibit the following.

  1. A US management consultancy firm signs a contract with a Russian company to help it select enterprise application software. This contract includes assessing the needs of the Russian company by providing a list of software choices and continuing advisory services on implementing and using the software to optimize the Russian company’s profits.

OFAC goes on to say in FAQ 1059 that it “would not consider to be prohibited the provision of services to a non-Russian company that has a physical presence and operations outside the Russian Federation, including such a company owned or controlled by persons located in the Russian Federation, provided that the services will not be further exported or re-exported to persons located in the Russian Federation.”

The following are examples of OFAC prohibitions.

  1. A US corporate service provider administers a trust established under the laws of a US state, where the trust exists predominantly to hold, sell, or purchase assets for a settlor, trustor, or beneficiary who is an individual ordinarily resident in Russia.
  2. A US corporate service provider registers a limited liability company in a third country for an individual ordinarily resident in Russia to hold real estate assets, and this company has no other physical presence or operations in the third country.

OFAC says that the supply of services is allowed to persons outside the Russian Federation, provided they are not an “indirect export to a person located in the Russian Federation.” OFAC interprets indirect provision “to include when the benefit of the services is ultimately received by a person located in the Russian Federation.”

The following are examples of services to a non-Russian subsidiary of a Russian person that OFAC allows.

  1. A US accounting firm provides tax advisory and preparation services to the US subsidiary of a Russian company. This US subsidiary has an office and employees in the US and conducts business in the US, and the services will not be exported or re-exported to the Russian parent company.
  2. A US management consulting firm provides strategic business advice to the subsidiary of a Russian company located in a third country. This subsidiary has an office and employees in the third country and conducts business in this third country, and the services will not be re-exported to the Russian parent company.

Legal Services Bans to Come?

Certain legal services that could help to evade sanctions are not banned yet. A director in a sanctions advisory team of an international bank questions the merit of taking that action. “It is important to allow those subject to sanctions to challenge their designation, or to seek to rearrange their affairs to comply with the sanctions.”

The director, who asked not to be identified, said he recognized this can obstruct the objective of the sanctions. “There remains a risk that Russian companies and wealthy individuals can use their financial firepower to abuse the legal system, harass their adversaries, or frustrate sanctions pre-emptively. This is not a new concept – the Iranian Transactions and Sanctions Regulations address these concerns.

“If there were to be a prohibition on the provision of legal services in Russia, I would expect to see it accompanied by similar licenses and exceptions to avoid unintended consequences,” the director said.

In the UK, lawyers have been complaining of government inaction for the failure to obtain licenses to represent Russian clients on the sanctions list. Holders of a license can lawfully receive “reasonable fees for the provision of legal advice.”

But the Treasury said OFSI did not grant one license from January to April. OFSI did not reply to an enquiry for an update of these figures at press time on June 17.

Russians have been among the top six users of London’s commercial courts for the past 10 years. According to the tenth Portland Commercial Courts Report published this year, after the UK, Russia had the most litigants in UK courts – 41 – overtaking the US, in third place with 31.

Banning legal services is a sensitive issue on a scale much wider than the loss of legal fees. Representation is seen as a human right. “Access to justice and protection of rights is a hallmark of any open democracy,” the sanctions advisory team director said. “Even if the people who hold those rights may be unpopular.”

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