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UK sanctions – prohibitions on new investments and professional and business services

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Townsend Matthew
Matthew Townsend

Partner

London

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Benson Jonathan
Jonathan Benson

Counsel

London

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Image of Danae Wheeler
Danae Wheeler

Associate

London

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27 July 2022

In the past week, the UK has further tightened its sanctions targeting Russia. The new sanctions include the introduction of new trade-related restrictions on a wide variety of goods (including gold, oil, coal and “G7 dependency and further goods list goods”), as well as associated prohibitions on technical assistance, financial services and funds, and brokering services.

Importantly, the UK has also introduced two new prohibitions that we expect will have a significant impact on the ability of UK persons to continue to do business, or enter into new business, in Russia. Namely, these are:

  • a prohibition on new investments in Russia; and
  • a prohibition on the provision of certain professional and business services.

Prohibition on new investments in Russia

On 19 July 2022, the UK introduced a prohibition on new investments in Russia (the UK New Investment Prohibition), similar to the U.S. prohibitions set out in Executive Orders 14066, 14068 and 14071. The UK New Investment Prohibition is set out in Regulation 18B of the Russia (Sanctions) (EU Exit) Regulations 2019/855 (the UK Russia Regulations).

At a high level, the UK New Investment Prohibition captures the following activities:

  • acquiring any ownership interest in land located in Russia;
  • acquiring any ownership interest in, or control over, an entity connected with Russia;
  • acquiring any ownership interest in, or control over, an entity which has a place of business located in Russia but which is not a person connected with Russia[1];
  • establishing any joint venture with a person connected with Russia;
  • opening a representative office or establishing a branch of subsidiary located in Russia; or
  • providing investment services directly related to the above activities.

There are several specific exceptions available to the UK New Investment Prohibition as follows:

  • any act done in satisfaction of an obligation under a contract concluded before 19 July 2022, or an ancillary contract necessary for the satisfaction of such a contract, provided HM Treasury is notified no later than five working days before the day on which the act is carried out;
  • dealing with a transferable security where such dealing is prohibited by Regulation 16 of the UK Russia Regulations; or
  • dealing with a “relevant security” issued by a person connected with Russia, or by an entity which has a place of business located in Russia but which is not a person connected with Russia.

In relation to the third exception, the definition of “relevant security issued by a person connected with Russia” is complex, but the key point is that the security must have been “admitted to trading on a regulated market or multilateral trading facility prior to 19 July 2022”.

OFSI has issued GL INT/2022/2002560, which permits the activities caught by the UK New Investment Prohibition to be carried out, and for transactions relating to these activities to be wound down. This general licence takes effect from 19 July 2022 and expires on 26 July 2022. Specific licences can also be applied for.

Prohibition on the provision of certain professional and business services

On 20 July 2022, the UK introduced a new prohibition on the provision of accounting services, business and management consulting services or public relations services, to a person connected with Russia (the UK Professional Services Prohibition). This is set out in Regulation 54C of the UK Russia Regulations.

“Accounting services” are very widely defined to include:

  • accounting review services, which are services involving the review by a person of annual and interim financial statements and other accounting information, but excluding auditing services;
  • completion of financial statements services, which are services involving the compilation by a person of financial statements from information provided by a client, including preparation services of business tax returns when provided together with the preparation of financial statements for a single fee, but excluding such preparation services of business tax returns when provided as a separate service;
  • other accounting services such as attestations, valuations, preparation services of pro forma statements; and
  • bookkeeping services, which are services consisting of classifying and recording business transactions in terms of money or some unit of measurement in the books of account, but excluding bookkeeping services related to tax returns.

“Business and management consulting services” are similarly broadly defined, to include advisory, guidance and operational assistance services, provided for business policy and strategy and the overall planning, structuring and control of an organisation, which includes (but is not limited to) management auditing, market management, human resources, production management and project management consulting.

Lastly, “public relations services” means services provided a person related to improving the image of their clients and their relationship with the general public and other institutions, but excludes planning and creating services for advertising or public opinion polling services.

There are a number of exceptions to the prohibitions. Where the above services are provided in satisfaction of one of the following obligations, they continue to be permitted:

  • where they are in respect of the provision of professional and business services to a person connected with Russia where those services are provided in relation to the discharge or compliance with UK statutory or regulatory obligations, such obligations not arising under contract; or
  • where they arise under a contract concluded before 20 July 2022, or an ancillary contract necessary for the satisfaction of such a contract, provided that:
    • the act is carried out before the end of the period of one month beginning on 21 July 2022; and
    • the provider of the services has notified the Secretary of State no later than the day 10 working days before the day on which the act is carried out.

There are a number of key differences between the UK Professional Services Prohibition and the analogous EU prohibition set out in Article 5n of Council Regulation (EU) 833/2014. In particular:

  • the EU prohibition targets the Government of Russia and entities established in Russia, albeit an exception is available where services are provided for the exclusive use of entities established in Russia that are owned or controlled by an EU entity. However, the UK prohibition is wider in scope as it targets all persons “connected with Russia”. Importantly, the UK prohibition also does not contain a general exception pertaining to subsidiaries of UK companies; and
  • the EU prohibition includes auditing and statutory auditing services, but auditing services are expressly carved out from the UK prohibition.

The UK Professional Services Prohibition is not violated where the activity is undertaken pursuant to a trade licence. The Department for International Trade has published updated guidance on the specific circumstances in which a licence can be granted to carry out activities that would otherwise be in breach of the UK Professional Services Prohibition. Two of these circumstances of particular relevance to companies with operations in Russia are:

  • for services required by non-Russian business customers in order to divest from Russia, or to wind down other business operations in Russia; and
  • for services to a person connected with Russia by a UK parent company or UK subsidiary of that parent company.

The latter is indicative that the provision of intra-group services is captured by the prohibition, but this will ultimately need to be assessed on a case-by-case basis, and may be subject to further clarification from the UK Government. This prohibition will also need to be carefully considered in relation to any transitional services agreements that have been or are being concluded in the context of companies exiting Russia.

Should you have any questions on the matters discussed in this article, please contact Matthew Townsend, Jonathan Benson, Danae Wheeler or your usual contact at Allen & Overy LLP.

Footnotes

[1]  A “person connected with Russia” is broadly defined to include: 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, which is incorporated or constituted under the law of Russia; or a person, other than an individual, which is domiciled in Russia.

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