This week, one of the UK’s leading law firms – Herbert Smith Freehills – was fined almost half a million pounds for breaching sanctions against Russian banks.
The reason for the fine was ‘making funds available for the benefit of a designated person without a licence’ – the designated persons in this case being three banks: Alfa-Bank JSC, PJSC Sovcombank, and PJSC Sberbank.
The payments arose as a consequence of Herbert Smith Freehill’s (HSF) decision to wind-up its Moscow office following Russia’s illegal invasion of Ukraine. Five of the six payments were for relatively trifling amounts – ranging from (at the top end) just-over £13,000 down to £40. The sixth payment, however, was for almost £4 million. After a consideration of the aggravating and mitigating factors, the Office of Financial Sanctions Implementation imposed a penalty of £930,000 – reduced to £465,000 because HSF provided prompt and detailed disclosure.
While the current legal basis for the fine is the Russia (Sanctions) (EU Exit) Regulations 2019, made under the Sanctions and Anti-Money Laundering Act 2018, the initial basis for these sanctions stems from the UK’s membership of the European Union.
The initial measures were adopted under the EU’s Common Foreign and Security Policy (CFSP) – the process for adopting such measures being highly prescriptive. Chapter 2 of Title V of the Treaty on European Union makes specific provision for the conduct of the CFSP. It is on the basis of this chapter that the Council of the European Union (often known as the ‘Council of Ministers’) adopted Council Decision 2014/145/CFSP of 17 March 2014 concerning restrictive measures in respect of actions undermining or threatening the territorial integrity, sovereignty and independence of Ukraine, following Russia’s initial illegal act of aggression: the annexation of Crimea.
Expanding on Title V TEU, Article 215 TFEU provides the legal basis for the adoption economic and financial sanctions:
“Where a decision, adopted in accordance with Chapter 2 of Title V of the Treaty on European Union, provides for the interruption or reduction, in part or completely, of economic and financial relations with one or more third countries, the Council, acting by a qualified majority on a joint proposal from the High Representative of the Union for Foreign Affairs and Security Policy and the Commission, shall adopt the necessary measures. It shall inform the European Parliament thereof.”
It is on this basis that the Council adopted Council Regulation (EU) No 269/2014 of 17 March 2014 concerning restrictive measures in respect of actions undermining or threatening the territorial integrity, sovereignty and independence of Ukraine (note the dates – the decision and the regulation both happened on the same day).
The regulation has been updated 65 times since it was adopted. This accelerated considerably following Russia’s illegal invasion of Ukraine in 2022. Indeed, the restrictions against Alfabank, Sovcombank, and Sberbank were all imposed in 2022 – after the UK left the EU. Despite this, the UK also imposed the same sanctions on the same banks under Regulation 5 of the 2019 Regulations.
What we can see here is the ‘long shadow’ of the UK’s former membership of the EU – even in areas like foreign policy. The broad legal frameworks for adopting these sanctions were first agreed in 2014 within the EU’s Common Foreign and Security Policy. The relevant legislative acts were given continuing effect by 2019 Regulations, and decisions of UK ministers after Brexit largely mirrored those of the EU.
When leading law firms like Herbert Smith Freehills can be fined a half-a-million pounds under these frameworks, it really illustrates the enduring influence of EU law in the UK’s legal system. The decision also highlights the importance of all businesses, especially leading international law firms, undertaking due diligence in their dealings with Russian financial institutions – whether for £40, or £4,000,000.
Leave a Reply