A New Dilemma For Lawyers: Will Sanctions Rules Force You To Report Your Clients?
Posted on 17 October 2017 by
A new set of regulations has been heavily criticised for putting professions in an impossible position - and at risk of a criminal penalty. Here Guy Martin, Carter-Ruck's Head of International Law, follows up on his recent interview in The Times and answers some pressing questions.
"What has changed - and what do I have to do?"
You are now required to inform HM Treasury as soon as practicable if you know or have reasonable cause to suspect that someone is a 'designated person' or has committed an offence for the purposes of any of the various European Council financial sanctions regulations.
Until August 2017 these obligations only applied to certain financial service providers but now they cover other businesses, including auditors, estate agents, external accountants, tax advisers and "independent legal professionals".
This means you have to report the information, anything else you have based your knowledge or suspicion on, any information you hold about the person by which they can be identified, and the nature and amount of any funds or economic resources held for the relevant person.
"This feels like a bolt from the blue. Why didn’t we get more time to prepare for this or moderate the changes?"
A statutory instrument was laid before Parliament on 18 July 2017, only two days before the summer recess. So even MPs had very limited time to comment.
Many lawyers will agree that it would have been preferable to engage in a meaningful consultation exercise before the adoption of the Regulations.
The government said in its Explanatory Note that an Impact Assessment had not been prepared because "no significant impact on the private or voluntary sector is foreseen". Many businesses disagree with that assessment because the sectors covered by the Regulations were not previously subject to a reporting obligation.
As far as lawyers are concerned, the regulations impose a reporting requirement that is without precedent in UK law.
On the positive side there is now an opportunity to get feedback from other affected businesses like auditors, estate agents and tax advisers, and to seek further guidance on their obligations and what they need to do to meet them. Hopefully that can help remove uncertainty and create the simplest and clearest possible processes people can follow.
"In practical terms what will be the real burden on lawyers? Will we have to spend a lot of time on reporting?"
The imposition of reporting standards on "independent legal professionals" does create an exceptionally broad disclosure requirement and it applies to information received from clients.
The threat of criminal sanctions could well lead to a very cautious approach by lawyers and could have a chilling effect on the willingness of clients to seek advice about sanctions legislation.
Given that the Regulations extend the reporting obligations not only to lawyers but also to accountants and tax advisers, there is also a risk of multiple reports being made about the same subject matter.
No-one wants either law firms or the Office of Financial Sanctions Implementation getting burdened with unnecessary data and it would be good if there could be a clearer definition. The way things stand, an accounting firm or an estate agency or many other types of advisory business will be concerned to be uber-compliant and may be taking advice on that.
"What about privilege - surely we don’t have to disclose any and all client information?"
Actually the Government's guidance says any general or blanket assertion of privilege is likely to be challenged by the OFSI. They advise that instead lawyers look carefully at whether privilege applies in each specific case.
This is not terribly helpful, and in the absence of further guidance there are real uncertainties over the extent of the applicable privilege exemption. It's hard to see how this could result in anything but additional difficulties for lawyers.
The Law Society has expressed concerns and pressed for clear guidance that law firms are not required to report privileged information, information which is received in privileged circumstances, or a belief or suspicion based on information which is received in privileged circumstances.
The scope of the UK legal professional privilege is currently the subject of significant legal developments - particularly as it relates to compliance and investigations work undertaken through the support of legal counsel. Given this landscape there is a pressing need for much clearer guidance on all these issues.
"Will this deter clients from coming to UK lawyers?"
International clients use UK lawyers because English law remains the preferred choice for contracts, because English courts are preferred and work so well and are so flexible, and because they like the commercial ethos and internationalist culture of the English profession. So there is little doubt that UK firms will continue to be a popular choice for international clients.
However no-one wants a situation where businesses located here face a disproportionately onerous reporting regime compared to other European jurisdictions, and it would be well for the profession to step up efforts to remind all relevant authorities of that.