Key take-aways from the SRA Sanctions Update - 18/03/25

On our interpretation there would seem to be three key topics discussed:

- Regulatory and Compliance

- Sanctions Risk Management

- Firm Practices

It would seem that these three topics are further broken down:

• SRA Activities and Findings
• Challenges face by Firms
• Best Practice
• Understanding Challenges
• OSFI Threat Assessment
• Updates
• Counterparties
• Risk Assessments
• Intermediaries
• Small Firms - Sanctions Checks
• Future Work

• Sanctions are age old concept
• They mention their previous Sanctions guidances
• The Russian invasion in 2022 significantly increased the exposure of many firms to sanctions obligations overnight
• The ownership and control regime adds complexity
• the need to go beyond the person,
• firms dealing with corporate clients to look beyond direct ownership and trace back through multiple layers. 
• "if you're dealing with corporate clients then you may need to think who owns them who controls them and go back several layers to find out who that is."
• While Russian sanctions (Belarus included) are currently prominent, the Sanctions Regime is much broader.
• Sanctions apply to everyone in the UK
• Unlike the risk-based AML Regime, the Sanctions Regime operates on a strict liability basis. 
• Enforcement is carried out by OFSI and OTSI, on a risk-based approach.

The SRA referenced a slide containing salient data, which is available for review on their website. Our interpretation of the data presented is set forth hereunder:

Comparative Data:

• Firms Supervised under the Money Laundering Regulations 2017 (37): 100% compliance with identification and verification protocols, 100% client sanctions screening, 31 firms completing client matter risk assessments (including matters not regulated under MLR 2017).
• Firms Not Supervised under the Money Laundering Regulations 2017 (18): 16 firms completing identification and verification protocols, 14 firms conducting client sanctions screening, 10 firms completing client matter risk assessments

Sanctions regimes impose a strict compliance obligation without prescribing specific implementation methodologies. 

In contrast, money laundering regulations offer a suite of prescribed tools. Although designed for the mitigation of money laundering risks, these tools may be effectively adapted to address sanctions compliance.

• Keeping up to date with regime changes: Sanctions continue to evolve, with interplay between UK, UN, US, and European regimes adding complexity. 
• Notably, 36 out of 55 inspected firms had clients who became subject to sanctions mid-retainer.
• Understanding ownership and control: Checking ownership structure. 29 inspected firms had clients with designated persons in their ownership structure. Firms had to consider if that person exerted control, even when they held a minority share holding or interest. The challenge is, who is your client and who is in the background
• Third-party issues: Banks and insurers may have different risk thresholds than OFSI, potentially causing issues even with an OFSI licence. 
• "simply having a licence from OFSI did not guarantee the bank would accept the payment for instance."

• Firm-wide risk assessment: A written assessment understood by all staff to identify and mitigate sanctions risks.
• Policies, Controls and Procedures: Clear guidelines on what to do when a designated person is encountered, regardless of perceived low risk.
• Screening: Including ultimate beneficial owners and counterparties where appropriate.
• Training: Tailored to staff roles, covering awareness, screening importance, and actions upon encountering a designated person.
• For firms actively providing sanctions advice: 
• Increased central oversight and coordination.
• Specific procedures for meeting licence terms and conditions.

• Volume and complexity of measures: The sheer number of designations and sectoral sanctions, especially following the 2022 invasion, presents a considerable challenge.
• Speed and pace of change: Firms need to react quickly to new measures. The Wise Payments OFSI decision notice highlighted the importance of robust systems and quick responses, even for seemingly minor breaches.
• Ownership and control intricacies: acting in accordance with instructions and share transfers around the time of sanctions add layers of complexity. This also extends to considering the ownership and control of counterparties based on risk assessment.
• Extraterritorial impact of US measures (secondary sanctions): Non-US persons may face consequences for not adhering to US sanctions, causing nervousness among international counterparties and professional indemnity insurers.
• Misconceptions about sanctions: 
• The Consolidated List is exhaustive: Not always the case due to ownership and control complexities (e.g., Roman Abramovich and Chelsea).
• Low risk if not acting for designated persons: Sectoral sanctions and counterparties still pose risks.
• Cannot deal with nationals of sanctioned countries: Depends on the specific regime and the individual's activities and location.
• No need to worry if not involved with sanctioned countries: Circumvention risks exist through intermediaries and other jurisdictions.

• Highlights "enablers" or "proxies" (intermediaries) who help designated persons evade sanctions.
• Identifies indicators of potential enablers: 
• limited profiles
• misspellings in names
• recently acquired non-Russian citizenships
• changes of name or 
• declared location.
• Points to intermediary countries where circumvention may be more prevalent, including Austria, Switzerland, Cyprus, BVI, UAE, Turkey, and the Cayman Islands, each with specific risks. Notably, the Isle of Man and Guernsey have seen a reported increase in breach of sanctions reports.

• Designation of Blood and Honour: The UK government designated a domestic far-right terrorist organisation under the sanctions regime, marking the first use of this power against a domestic terror group. This highlights the broadening use and domestic applicability of the sanctions regime.
• OTSI is fully operational: The Office of Trade Sanctions Implementation is now fully set up to enforce trade, aviation, and shipping sanctions, with a risk-based enforcement approach similar to OFSI.
• Legal Sector Threat Assessment: Expected on March 27, 2025. It will be specialised to the legal sector but should be read in conjunction with the financial services threat assessment as they cover different but relevant areas.

• Determining the extent of counterparty checks is challenging and should be driven by a firm wide risk assessment, considering:
• client location
• operating countries
• matter types
• sectoral sanctions
• Unusual transactions or counterparties with limited profiles warrant closer scrutiny.
• Evidence of a decision-making process that considers

• sanctions risk and 
• the appropriate level of due diligence is crucial
• This should stem from: 
  
• Sanctions Firm-Wide Risk Assessment and 
• Client and Matter Risk Assessments
• A documented rationale for the steps taken

• Firm Wide Risk Assessments for Sanctions - Crucial for understanding a firm's exposure to sanctions risks and determining appropriate controls.
• Best when led from the top with senior management ownership and involvement from all areas of the business.
• Serve as the foundation for policies, controls and procedures.
• Involve assessing general risk, client matter risk, and having a rationale for the due diligence undertaken.

• Some Intermediaries will let you know that their role is that of an intermediary such as a Family Office but others won't for obvious reasons
• Acknowledgement that the area of intermediaries is challenging, as intermediaries may not disclose their role.
• Key considerations include understanding the client's background, business connections, and involvement in the transaction.
• Reviewing past share transfers around the time of sanctions may be an indicator.
• Internet-based research may be necessary depending on the client matter risk assessment.
• Being aware of high-risk jurisdictions and news related to circumvention is important.

• While the sanctions regime has one primary requirement (not to breach it), recommendations for best practice exist.
• The UK Consolidated List is freely available. 
• Firms should consider what is unusual for their business.
• Even in low-risk areas of work, no firm is entirely risk-free.
• Processes for: 
• assessing risk
• identifying clients, and 
• understanding the source of funds are relevant.
• Using readily available resources like the Consolidated List and "fuzzy logic" searches can be practical steps.
• The level of due diligence should be proportionate to the risk identified in the specific matter.

• In response to a question about SRA's future work
• The Legal Services Board's held a consultation on regulatory objectives for supervisors, which emphasised the prevention and detection of economic crime (including sanctions breaches). Accompanying the consultation was draft guidance. The draft guidance suggested the need to take a proactive position. This thus signifies the ongoing importance of this area for regulators.
• Economic Crime under the Economic Crime and Transparency Act includes breaches of the Sanctions Regime. It was also mentioned as one of 3 key areas (Sanctions, Fraud and Money Laundering)
• Thus SRA will continue to take a proactive stance on sanctions compliance.
• The specific nature of future proactive steps will be assessed after the latest round of inspections (46 firms).  
• They wish to challenge themselves: effectiveness and efficiency, their resources, making sure work is targeted  

Disclaimer: This 'Key Take Away' is presented for informational purposes only and may not accurately reflect the information or guidance provided by the SRA. We offer no warranty as to the completeness or accuracy of this post. Readers are advised to consult the original sources, namely the SRA website and their YouTube channel, for definitive guidance. Please be aware that the SRA may update its information and that website content may be subject to change. This 'Key Take Ways' does not constitute legal or regulatory advice and should not be relied upon as such. For specific legal or regulatory advice, please consult a qualified and specialist law firm or barrister.