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Author: ICAEW Insights
Published: 15 Dec 2022
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.
Links to the regulations mentioned in this article.
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.
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:
Regulation 21(2) provides that ‘A person connected with Russia’ means:
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.
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.
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—
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—
(4) The purposes are—
(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”)—
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.
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:
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.
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:
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.
Resources, news and features on the impact of the Ukraine crisis on accountancy, business and the wider economy.
ICAEW Members can contact our free confidential helpline for advice and support on technical, ethical, anti-money laundering and fraud issues.
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.
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.
The Institute of Chartered Accountants in England and Wales, incorporated by Royal Charter RC000246 with registered office at Chartered Accountants’ Hall, Moorgate Place, London EC2R 6EA
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