Daniel Powell discusses the unclear effects of legal access for sanctioned entities on investors

November 14 2022

Daniel's article was originally published in Investment Monitor and can be found here.

Legal access for sanctioned entities and the unclear effects on investors

While the Ukraine-Russia conflict continues, the prospect remains of the UK and EU strengthening sanctions on Russian entities, likely in co-operation 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 a commercial transaction and investment. The broad reach of these sanctions can lead to difficulties for investors and business executives who have invested monies into a company which is now impacted by sanctions, and which may moreover be subject to asset freezes. Governments who have invested public money into a venture which has links to Russia are also at risk of financial reputation and political harm. There is little indication that current sanctions will be removed any time soon. It is therefore essential that businesses have legal access to advice and, where appropriate, access to the courts.

The UK Office of Financial Sanctions Implementation (“OFSI”) have now issued a general license enabling designated persons to make payments for legal services. Provided the terms of the general license are complied with, law firms are no longer required to conduct the time-consuming and burdensome process of applying for a specific license for each matter. This general license 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 license, 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 license. Hourly rates of lawyers are capped, lawyer and counsel fees combined cannot exceed £500,000.00 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 who 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 emphasized that the effect of the general license 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 license 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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