Compliance with Russia sanctions’ complex limits on firms demands internal review

Russia’s Feb. 24 invasion of the sovereign nation of Ukraine generated an extraordinarily broad international response in opposition to its aggression. However, unlike past conflicts, this response, led by the United States and its allies, has focused on crippling the Russian economy through tough sanctions as opposed to direct military confrontation.

While there is certainly a proxy war underway in Ukraine with the US military’s provision of arms to Ukrainian forces, the economic regime aimed at Russian President Vladimir Putin’s regime has been in its scope and breadth. It is a form of economic warfare clearly aimed at fully isolating Russia from the international economy. Effective June 7, 2022, that isolation of Russia entities includes prohibiting US accounting — even US firms operating from offices overseas — from providing a variety of services to Russian individuals and firms.

On May 8, the Treasury Department’s Office of Foreign Assets Control (OFAC) — the branch of government tasked with administering Russia sanctions — issued a press release announcing the most sweeping yet effort to “…cut off access to services that are used by the Russian Federation and Russian elites to evade sanctions[.]In the release, the Treasury remarked that OFAC was identifying “accounting, trust and corporate formation, and management consulting as categories of services that are subject to a prohibition on the export, reexport, sale, or supply, directly or indirectly, from the United States, or by a US person, wherever located, to any person located in the Russian Federation.” Secretary Janet Yellin remarked in the press release that the latest sanctions were aimed at “preventing Russia from accessing the United States’ valuable professional services” and she opined that the measure “increases the pressure on the Kremlin and cuts off its ability to evade sanctions” imposed by the United States and our partners.”

The OFAC sanctions action outlined in the Treasury’s press release constitutes an administrative move by OFAC pursuant to the authority granted to the Treasury Secretary, in consultation with the Secretary of State, pursuant to Section 1(a)(i) of President Biden’s sweeping April 19 , 2021 Executive Order 14024, titled, “Blocking Property With Respect to Harmful Foreign Activities of the Government of the Russian Federation.” As a result, effective June 7, 2022, a US-based accounting firm, or any US actor operating anywhere in the world, may not provide accounting, trust and corporate formation, and management consulting services to any individual or entity linked to Russia.

Many of the largest accounting firms in the world, as well as accountancy organizations including the American Institute of CPAs, have already responded to the Russian military atrocities in Ukraine by implementing or supporting moratoriums on the provision of such professional services to Russia and Belarus. However, federal law now requires firms to cease work with Russian actors, with only very limited exceptions.

The consequences to a firm of an OFAC sanctions are catastrophic. The legal framework around OFAC sanctions treats noncompliance as a national security-level threat. Maximum fines can reach as high as $20 million and potential prison sentences for non-compliance can reach multiple decades, in line with those for other crimes that violate the national security interests of the US

Navigating the sanctions regime prohibiting the provision of various forms of professional services to Russian actors is difficult largely because the narrow exceptions to the general prohibition require a factually intensive analysis of the ownership structure of the client entities involved, and a thorough appreciation for the precise nature of the work that a firm is doing for its clients. Frequently, this will require a significant internal review that must be conducted under the protections of attorney-client privilege. Failure to conduct a privileged and confidential internal investigation of a firm’s sanctions compliance can subject the findings of that internal review to external enforcement scrutiny. Despite the national security implications of US accounting firms dealing with Russian actors, US firms retain an absolute right to consult with legal counsel about their overall policies compliance and case-specific examples of Russian clients that may trigger OFAC sanctions compliance issues. All of this is protected by the confidentiality that flows from the attorney-client relationship.

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