In May 2022, the UK Government announced its intention to prohibit the provision of accountancy, management consultancy and public relations services to Russia. The prohibition was part of the ongoing and increasing package of sanctions imposed by the Government on Russia, following the invasion of Ukraine earlier this year. These sanctions came into effect in July 2022.

On 30 September, the Government announced its intention to impose further restrictions on the provision of professional services, in response to Russia’s illegal annexation of the Ukrainian regions of Donetsk, Luhansk, Kherson and Zaporizhzhia.

On 15 December 2022, the Government laid new regulations in Parliament that extend the prohibition on the provision of professional services to include “auditing services”, subject to certain limited exemptions described below, and will take effect from today, 16 December 2022.

The new prohibition is introduced by the Russia (Sanctions) (EU Exit) (Amendment) (No.17) Regulations 2022. The regulations amend the Russia (Sanctions) (EU Exit) Regulations 2019 (‘the 2019 Regulations’) in a number of respects. The power to impose new sanctions derives from the Sanctions and Anti-Money Laundering Act 2018. 

The categories involved in this round of sanctions are the professional services relating to IT consultancy, architectural, engineering, transactional legal advisory, advertising, and agricultural as well as auditing. The Government's estimates suggest that Russia imports over two-thirds of these services from countries issuing sanctions. 

Around 80% of Russian imports in accounting, audit, bookkeeping, and tax consultancy services are said to come from the UK, EU, and US, major players in the sanctioning of Russia. The move aims to disrupt the effectiveness of Russian businesses on the global stage.

What is the prohibition?

New Regulation 54C of the 2019 Regulations now stipulates that:

(1) A person must not directly or indirectly provide, to a person connected with Russia:

1. accounting services,
2. advertising services,
3. architectural services,
4. auditing services,
5. business and management consulting services,
6. engineering services,
7. IT consultancy and design services, or
8. public relations services.”

Regulation 21(2) provides that ‘A person connected with Russia’ means:

• an individual who is, or an association or combination of individuals who are, ordinarily resident in Russia;
• an individual who is, or an association or combination of individuals who are, located in Russia;
• a person, other than an individual, who is incorporated or constituted under the law of Russia;
• a person, other than an individual, who is domiciled in Russia.

To whom does the prohibition apply?

The prohibitions set out in the 2019 Regulations apply to the UK and to the conduct of all UK legal persons (including companies and accountancy firms), wherever they are based in the world. 

In other words, the prohibitions and requirements imposed by the Regulations apply to all companies established in any part of the UK, and also apply to branches of UK companies operating overseas.

Criminal Offence

Members should note that Regulation 54C(3) makes it a criminal offence for any person to contravene any of the prohibitions set out in the 2019 Regulations. However, they contain a statutory defence if the person can show that they did not know and had no reasonable cause to suspect that the person to whom the services were provided was “connected with Russia”.

Firms that do not have previous (or extensive) experience of providing services to “persons connected to Russia” should exercise particular caution if they are approached to do so by new clients.

Recent guidance issued by OFSI and US authorities in relation to red flags for potential sanctions evasion, can be found at the National Crime Agency and FinCEN and Bis Joint Alert.

The Regulations contain limited circumstances in which a trade licence may be applied for. By Regulation 65, services provided under authority of a licence will not run counter to the prohibition. However, members should obtain legal advice on their particular circumstances to determine whether a licence application may be appropriate. Guidance on applying for a licence is available through gov.uk.

Definition of auditing services

Auditing services is now defined in paragraph 5 of new Schedule 3J to the 2019 Regulations:

5.  “Auditing services” means services consisting of examination of the accounting records and other supporting evidence of an organisation for the purpose of expressing an opinion as to—

1. whether financial statements of the organisation present fairly its position as at a given date, and
2. the results of its operations for the period ending on that date,
   in accordance with generally accepted accounting principles.

Exemptions to the prohibition relating to Auditing Services

New Regulation 60DA ((3) to (5)) now sets out the exemptions which will apply to the provision of “Auditing Services”:

(3) The prohibitions in regulation 54C, in so far as they relate to auditing services, are not contravened by any act done by a person (“P”) in satisfaction of an obligation arising from the appointment of P as the auditor of a parent undertaking (“C”) provided that—

1. where C is a credit institution, the auditing services of P are for one or both of the purposes mentioned in paragraph (4);
2. where C is not a credit institution, or is a credit institution that does not meet the condition in sub-paragraph (a)—
1. P is appointed as auditor of C before 16th December 2022,
2. the act is carried out before the end of 31st May 2023, and
3. P notifies the Secretary of State of the provision of the services, before or after the act is carried out, by the end of 15th March 2023.

(4) The purposes are—

1. C, in its capacity as a parent undertaking, deciding whether accounts of a subsidiary undertaking of C which is a person connected with Russia (“S”) should be included in consolidated group accounts of C, and
2. the inclusion in consolidated group accounts of C of the accounts of S.

(5) The prohibitions in regulation 54C, in so far as they relate to auditing services, are not contravened by any act done by a person (“P”)—

1. in satisfaction of an obligation arising from the appointment of P as the auditor of a subsidiary undertaking (“S”) in respect of the provision of those services to S in relation to the discharge of or compliance with UK statutory or regulatory obligations, and
2. which results in the provision of those services indirectly to a person connected with Russia in that person’s capacity as a parent undertaking of S.

There is also a general exemption relating to diplomatic/consular purposes and international organisations:

(7) The prohibitions in regulation 54C are not contravened by any act done by a person that is necessary for the official purposes of a diplomatic mission or consular post in Russia, or of an international organisation enjoying immunities in accordance with international law.

What does this mean for members?

You will need to consider how the new prohibitions apply to your client base, potential new clients, and given the exemptions outlined above, clients you may have accepted prior to 16 December, but not yet completed audit work for.

ICAEW’s article, Russia sanctions: how to check your client base, may be helpful in assessing current and potential clients. It recommends the following:

• Savvy use of open source information already in the public domain can allow members to gain a more complete picture of who they will potentially be dealing with.
• A simple internet search of the client’s name as part of wider background checks that could potentially raise concerns about the client’s activities.
• More complex searches using strings of words, especially search terms that indicate relations to ‘Russia’ or ‘Russian companies’, perhaps even words that indicate undesirable relationships.
• Newspapers, online news and subscription news services, as well as news aggregation services which may reduce time spent scouring multiple outlets. 
• ICAEW members, use our own client screening service for three name checks per week.

You should apply professional scepticism and review, document the information obtained and check for consistency with anything provided to you by the client.

If alarm bells ring when you are conducting research on clients, raise any concerns directly with them. Information that is in the public domain can be discussed openly – after all, your reputation could be at stake.

Being aware of and maintaining scepticism about changes in ownership will be important. Ignorance will not be a suitable defence for a lapse in compliance with the sanctions, therefore think carefully about the further due diligence you judge to be necessary.

Statutory Guidance

Under s.43 of the Sanctions and Anti-Money Laundering Act 2018, the Government has a statutory duty to publish guidance in relation to the prohibitions and requirements of the 2019 Regulations. The guidance has now been updated to reflect the prohibition on provision of auditing services:

• Russia sanctions: guidance - GOV.UK

Paragraph 2.2 of the Statutory Guidance states that:

“For accounting, advertising, architectural, auditing, business and management consulting, engineering, IT consultancy and design, and public relations services, if you discover that you have breached any of the trade prohibitions or licensing provisions, you should voluntarily disclose the irregularity by reporting it to BEIS."

You may wish to obtain legal advice before contacting BEIS.

ICAEW is seeking clarity from the Government on its guidance and will look to provide more practical guidance on the sanctions.