Russian sanctions risk continues for sector

Russia’s invasion of Ukraine has led to the UK imposing economic sanctions on persons designated on its sanctions list. Simon Hartley highlights significant recent developments for property professionals. As of 16 December 2022, 1,463 individuals and 162 entities were sanctioned under the Russia (Sanctions) (EU Exit) Regulations 2019. Many of these designated persons (DPs) have investments in UK commercial or residential property. These interests may be held in complex structures, using offshore companies and trusts. Payments to and from entities beneficially owned or controlled by DPs may also be sanctions breaches potentially punishable by fines and/or imprisonment. Licence regime under pressure DPs need a licence from the Office of Financial Sanctions Implementation to pay third parties, such as suppliers of building services, even if they are already holding the funds on trust on behalf of their premises’ tenants or other occupiers. Funds held by managing agents acting for landlords who are, or are owned or controlled by, a DP also fall within the regime. Such landlords may be unable to pay for utilities, security, or other services essential to keep buildings open. Unfortunately, the OFSI was not able to increase its staffing levels to meet the sudden demand for licences to authorise payments that would otherwise be prohibited. Applications regarding items such as service charges have been taking months, as other payments, such as living expenses, have been prioritised. This is the case even if applicants face forfeiture or the closure of their premises due to the termination of essential services. General licence for building insurance One of the ways in which the pressure on the OFSI may be reduced is using general licences, which are public, potentially retrospective, but cannot be applied for. On 22 July 2022, the OFSI granted the General Licence: Permitted Payments to UK Insurance Companies (INT/2022/2009156) (amended 17 August 2022). The licence was granted under various regulations, including the 2019 Regulations. Any act which would otherwise breach the prohibitions is exempt to the extent required to give effect to the permissions in the licence. Under the licence, DPs (other than those sanctioned by the UN) may pay insurance and reinsurance premiums and broker commissions relating to the provision of specific insurance to UK properties. The types of insurance covered are building insurance, terrorism cover, property owners’ liability insurance (covering claims against landlords and other proprietors for personal injury or damages suffered by third parties or otherwise arising from their ownership of land), claims preparation costs insurance (regarding the costs of professional claims handlers), and engineering insurance against risk associated with plant and machinery in commercial properties. Accordingly, UK insurers registered with the Financial Conduct Authority may receive those funds, and UK institutions may process the payments. However, within 14 working days of a licensed transaction, the DP and insurer must report the details with supporting evidence to HM Treasury. General licence for gas and electricity General licence INT/2022/2300292 dated 17 November 2022 allows for payments to utility companies for gas and electricity by DPs who own or rent properties in the UK (and are not UN-sanctioned). Payments can be made to Ofgem-registered firms with permission to provide UK properties’ gas and/or electricity. Energy companies can accept funds and return overpayments. There are reporting and record-keeping requirements for DPs and energy companies. However, the licence currently expires on 16 April 2023. Guidance for specific licence applications Specific licences are still needed for payments not covered by general licences. The strongest applications seem to be made by the DP, with parallel supporting applications by other interested parties, such as tenants of sanctioned landlords, seeking permission for funds to be paid and received by all relevant parties. Applications may be successfully made in relation to both service charges and rent and should be supported by evidence, such as copies of demands, contracts, and leases. The OFSI will only interact with applicants by post or e-mail and may make requisitions, such should be responded to promptly. If successful, a licence will be granted on detailed terms for a limited period. Applications by a DP together with other stakeholders will likely result in a single private licence to the DP, which the OFSI will verify for third parties on request. Hopefully, general licences and increased recruitment at the OFSI will reduce the pressure on the OFSI and speed up the consideration of applications. Solicitors Regulation Authority guidance: Complying with the UK sanctions regime On 28 November 2022, the SRA published guidance on the financial sanctions regime to help legal firms understand their obligations. Unusually, the SRA commented in its introduction that “working within the sanctions regime is complex and challenging, and firms should not seek to provide these services without first gaining the necessary expertise to do so correctly”. The guidance focuses on the restrictions on paid legal work for DPs without a licence by the OFSI. Guidance is provided on screening new clients for DPs and what should be done if a client becomes a DP. The reporting obligation to the OFSI is flagged, which exists in parallel to firms’ anti-money laundering obligations. Unlike that regime, sanctions liability is strict, and a risk-based approach will not necessarily protect firms from unintentional breaches. The guidance references general licence INT/2022/2252300 of 28 October 2022, which allows fees to be paid for legal advice to DPs within certain limits and under certain conditions. The general licence is limited to the Russia and Belarus sanctions regimes and currently expires on 28 April 2023. Simon Hartley is a partner in the property litigation department at Weightmans Photo by Алексей Васильев from Pexels