At the end of June 2023, the UK introduced new restrictions to prohibit lawyers from advising Russian companies on certain business transactions that would be prohibited under sanctions if they happened in the UK. The stated purpose of the new restrictions is to thwart Russia “from benefitting economically from the UK’s world-leading legal expertise”.
The swift and scathing response from the Law Society was that the measures will have “severe unintended consequences” that “run counter to the government’s objectives” and “will harm non-Russian businesses more than Russian businesses”.
But do the measures actually add up and how do they compare with what our allies are doing?
While specific oversights in the drafting of the new regulations need to be – and are being – addressed promptly, the more fundamental problem is that these new restrictions don’t actually hit their intended policy target of ensuring Russian businesses are not serviced by the UK legal sector.
Unintended consequences: excluding legal advice on sanctions compliance
A major concern raised by the Law Society is that the new measures prohibit UK lawyers from providing advice to clients on compliance with international sanctions regimes. An exception in the regulations to allow legal advice about compliance with UK sanctions on Russia does not extend to advice relating to non-UK regimes such as US and EU sanctions.
Given that close co-ordination with our allies is essential for the effective implementation and enforcement of sanctions, this failure seems to have been an inadvertent consequence of some hasty legislative drafting. The government has now confirmed that this “unintended consequence” will be addressed through a general licence, described by the Law Society as “a short-term sticking plaster while a longer-term solution is agreed”.
While the government has had to move at speed in ramping up sanctions against Russia, it’s clear the government should:
- strengthen its legal capacity to ensure new measures are effective in realising the government’s policy intent;
- conduct better and more transparent multi-stakeholder consultation to address the concerns of – without kowtowing to the views of – lawyers and others who may stand to lose business; and
- ensure new measures are subject to proper parliamentary scrutiny – as pointed out in parliamentary debate, introducing these reforms through primary legislation would have helped the government “get it right first time”.
Out of step with key allies: the limited scope of the new restrictions
Putting aside the discrete oversights in the new regulations, however, it’s important to be clear about what the new restrictions do and do not do. In particular, they are by no means a blanket ban on legal advisory services to Russian businesses or persons.
On the contrary, the new measures are narrowly drawn, applying only to legal advice on certain kinds of international business transactions, rather than all commercial transactions.
They prohibit lawyers from advising on international commercial activities that would be in breach of UK sanctions if they were carried out by a British person or in the UK. The new restrictions therefore stop well short of the general professional services ban which targets other major sectors like accountancy, management consulting and public relations services.
The UK measures are also less ambitious than the position taken by the EU, contrary to the Law Society’s claim that the EU’s prohibitions are “narrower in scope”. The EU ban, which is subject to legal challenge, is actually far broader than the UK equivalent because it covers all advisory work, irrespective of whether the underlying transaction would be prohibited under sanctions.
In the US, there is no outright ban on legal advisory services under Russia-related sanctions, but the payment of legal fees is far more tightly regulated. The general rule in the US is that frozen funds may not be used to pay for legal services to designated persons, and even payment using non-frozen funds are subject to strict fee caps. By contrast, the UK general licence for legal fees sets a very different point of departure by giving advance, “no questions asked” authorisation for up to £1 million from frozen funds to be used to pay for permissible legal services.
The need for a step change: revisiting the policy objective
In practice, the narrow prohibition appears to be aimed at ensuring UK lawyers don’t enable the circumvention of sanctions abroad. While this closes an important gap arising from the territorial application of UK sanctions, it is a far cry from cutting off Russian businesses from accessing top-class UK legal advice on mainstream commercial activities.
The government’s own assessment reveals that Russian business is “highly dependent” on UK legal services to operate internationally. Given London’s role as an international legal centre, the UK has accounted for 59% of all legal services imported to Russia from G7 countries. In monetary terms, this means that the UK has previously exported £56 million in legal services to Russian businesses a year.
Although the latest data suggests that legal services exports to Russia during 2022 were roughly half what they were in previous years, this £31 million in legal services traded with Russia last year is significant compared to the hit that some other sectors have taken – with manufacturing ceasing entirely and financial services dropping by as much as 65%.
As the government revisits the regulations to address the unintended consequences of the new restrictions, it should also reflect on the more fundamental question of whether the measures achieve their intended policy objectives.
As things stand, the limited scope of the prohibition simply does not live up to its label of being “a tough new law to stop Russia accessing UK legal expertise”. If the UK government is serious about ensuring Russia can no longer benefit from the UK’s world-class legal expertise, it needs to go much further: pulling the plug on the supply of all commercial advisory services to Russian businesses, and setting much stricter fee caps on permissible legal services offered to sanctioned entities.