The decision to stop the provision of UK accountancy services to Russian firms was announced on 4 May as part of a wider ban on exporting professional services, including management consultancy and public relations (PR). The government said the latest measures would further increase economic pressure on the Russian economy in the wake of the invasion of Ukraine.
“Our professional services exports are extraordinarily valuable to many countries, which is exactly why we’re locking Russia out,” said Business Secretary, Kwasi Kwarteng. “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.”
Many ICAEW firms have already disengaged with Russian individuals and entities in compliance with existing sanctions or to reduce their risk exposure. But the latest announcement has broader implications for the sector. There are also outstanding questions about the scope of the ban, and around the definitions of accountancy services and what constitutes a Russian firm.
Calls for clarity
“When the government made the announcement, the wording was quite loose,” says Giddings, “which meant a lot needed to be unpacked about how it would work in practice, including what services would be included in, and excluded from, the ban, and what falls within the different definitions.”
To help clarify some of these issues, ICAEW provided input on the policy proposals to the Department for Business, Energy and Industrial Strategy (BEIS). This made it clear that while ICAEW, and the accountancy sector in general, is keen to support the proposals, there needs to be greater clarity about the scope of the prohibitions.
Points raised by ICAEW included:
- the need for a definition of accountancy services that clearly sets out what is included and excluded, and how use of common definitions across the UK, EU and US would facilitate effective implementation of sanctions by global firms;
- clarity on whether the ban will apply only to services provided to entities ‘located in’ Russia, or whether it will also apply to services provided to UK entities with Russian ownership;
- a call for the government to consider excluding from the ban (for example, by way of an express exception) services provided to entities or persons which are required to meet certain statutory requirements – in particular, audit services, tax compliance and insolvency services – or an acceptance that those statutory requirements may not be met; and
- a suggestion that the government allow the completion of pre-contracted services to Russian entities until a specific date, rather than providing for each firm to apply for individual special licences.
In or out of scope?
“In our BEIS response, we were raising some of the key issues and highlighting some of the loopholes that the government needed to address in implementing the requirements,” says Giddings.
One of the key issues is whether audit services required to meet statutory requirements are included in the ban. “Here in the UK, there's a debate about whether audit will be in or out of scope,” she explains.
“Both the EU and US have taken quite a wide definition of accountancy services and management consulting,” she says. “The US has indicated that audit services are included in its definition by requiring a general licence for firms to provide audit services for a period of time while they extract themselves.”
There is also ongoing uncertainty about exactly what constitutes a Russian business. “If we look to the current EU and US definitions – because it makes sense to align with these to ensure sanctions regimes are effective – it appears as though it would be entities incorporated in Russia,” says Giddings.
“If this was the case in the UK, there would be limited risk attached to that for most of our firms because a lot of firms disengaged from any clients with connections from Russia in response to the original financial sanctions earlier this year, as well as from a moral viewpoint and based on the associated reputational risk,” she says. “So there is already limited risk of our firms providing direct services to those Russian entities, although firms do need to stay very aware of, and very conscious of, that risk.”
The most likely scenario for firms, according to Giddings, is that they are not directly providing services to Russian entities but that they’re providing services where the Russian entities are part of a wider group.
She believes the main challenge probably lies with some of the bigger audit firms working for a UK plc which has a Russian subsidiary. “The new sanctions might mean they can't now sign off an opinion on that consolidated group,” she explains. “But of course that relies firstly on audit being in scope and the definition of Russia being the same as that used in the EU and US.”
Although ICAEW member firms have already been reviewing and disengaging with businesses related to Russia, the proposed ban will introduce new requirements. Firms now need to consider the extent to which they need to further review their client-base and whether they might need to apply for a licence to be able to continue some types of work.
“Many firms have already taken a really long, hard look at their client base and thought very carefully about where they have connections to Russia,” says Giddings. “For them, this latest requirement is probably more of a roll forward, but it also depends on the types of checks they will have done, because before it was all about individuals and now this set of rules will be about the corporate entity.”
“The thought process they'll have gone through with the financial sanctions will, however, stand them in good stead for thinking about the types of client they need to look at this time.”
Something else firms should be bearing in mind more generally is the move to strict civil liability for failures to adhere to financial sanctions. For breaches committed after 15 June 2022, the Office of Financial Sanctions Implementation (OFSI) will be able to impose civil monetary penalties based on strict civil liability.
OFSI's director Giles Thomson, writing in the official OFSI blog, explained: “This means the previous requirement for OFSI to prove that a person had knowledge or reasonable cause to suspect that they were in breach of financial sanctions will be removed, but we will still bear the burden of proof to establish that there was a breach of financial sanctions prohibitions.” The change brings the UK more in line with the model used for US financial sanctions.
ICAEW does not have any statutory or legal supervisory obligation over sanctions compliance. “However, we have been asked by all of our oversight regulators what we're doing to make sure firms are complying,” says Giddings.
“First and foremost, we are educating our firms and teaching them what it is that they should be doing,” she explains. “We're engaging with our oversight regulators and ensuring our regulated firms are maintaining best practice.”
“And if we found a firm to be in breach of sanctions, we would be able to take disciplinary action against them under broader conduct rules,” she adds.
“We’re already supporting firms in complying with the existing financial sanctions and, once the government provides more details of the services ban, we will be providing further advice and guidance on the definitions and scope.”