UK Expands Guidance on the Supply of Professional and Business Services to Persons Connected with Russia

On February 7, 2023, the UK Department for International Trade (“DIT”) published an expanded version of its guidance on supplying professional and business services to a person connected with Russia (“DIT Guidance”), following a broadening of the types of services covered by the ban in December 2022.  The DIT Guidance sets out additional details regarding the services falling within the scope of these sanctions, enforcement, applicable exceptions, and the licence application process.  For more information on the ban on the supply of professional and business services, see our previous blog post (here).

The Professional and Business Services Ban

Since July 21, 2022, pursuant to The Russia (Sanctions) (EU Exit) (Amendment) (No. 14) Regulations 2022), any persons subject to UK sanctions jurisdiction, including UK parent companies with Russian subsidiaries, have been prohibited from directly or indirectly providing accounting, public relations, business and management consulting services to a person connected with Russia, absent an available exception or licence.

On September 30, 2022, the UK announced the expansion of the scope of the services ban to  advertising, architectural, auditing, engineering, IT consultancy and design, and transactional legal advisory services.  With the exception of the ban on transactional legal advisory services, which is expected to be legislated for in the coming months, the expansion of the services ban to these services came into force on December 16, 2022, pursuant to The Russia (Sanctions) (EU Exit) (Amendment) (No. 17) Regulations 2022.

For the purpose of the services ban, a “person connected with Russia” includes:

• companies incorporated, or constituted, under Russian law (including subsidiaries of UK companies in Russia);
• companies domiciled in Russia; and
• individuals, or groups of individuals, who are located, or ordinarily resident, in Russia.

The DIT Guidance

The DIT Guidance provides additional information regarding the intended scope of the services ban with respect to advertising, architectural, auditing, engineering, and IT consultancy and design services, which are largely defined in Schedule 3J of The Russia (Sanctions) (EU Exit) Regulations 2019, as amended (“Russia Regulations”), by reference to certain codes from the 1991, 2002, and 2015 versions of the Central Product Classification (“CPC”), a classification system for goods and services promulgated by the United Nations Statistical Commission.

Advertising Services

The DIT Guidance explains that the CPC code for the direct sale of advertising time and space (except on commission) such as in newspapers,  was a valuable product at the time the CPC was drafted and needed to be placed in a separate CPC category to services provided by advertising agencies and that distinction has been maintained in the UK’s definition of advertising services to ensure consistency with the CPC codes and align the UK with its international partners’ implementation of comparable restrictions.

Architectural and Engineering Services

These are individually prohibited services that are often intertwined in practice (e.g., large engineering firms often have in-house architectural services and vice-versa).  The DIT Guidance states that, as a result, there is a strong rationale for banning the provision of both services at the same time.  However, the DIT Guidance also states that these services should be treated as two individual restrictions for the purpose of the Russia Regulations. 

The exceptions applicable to the two types of services also differ under the Russia Regulations.  For example, there is an exception for providing engineering services in relation to the discharge of statutory obligations.  A comparable exception does not exist for architectural services.  This is because certain statutory obligations exist that require engineering services to be carried out before they can be fulfilled (e.g., Ministry of Transport tests (“MOTs”), building regulations, and environmental legislation).

Auditing Services

The prohibition on auditing services is separate, but complementary, to the pre-existing prohibition on the provision of accounting services.  The DIT Guidance states that the UK has distinguished between these types of services because of the differences in their regulatory practices and legal obligations in the UK.  Differing licensing grounds also apply to each of these services under the Russia Regulations.

When a part of a multinational group is a person connected with Russia, and another part is a UK company, the provision of auditing services from the UK to Russia generally is prohibited both directly and indirectly.  The DIT Guidance explains that the effect of this prohibition on group audits is subject to two exceptions:

• UK companies that are owned by a Russian parent company (as is defined in Section 1162 of the Companies Act 2006).  In this scenario, UK companies are still permitted to be audited by a UK auditor in fulfilment of its legal obligations, irrespective of any indirect benefit to the Russian parent undertaking.
• UK parent companies with a subsidiary company that is a person connected with Russia.  In this scenario, when the UK parent company is a credit institution (i.e., it is in the business of taking deposits or other repayable funds from the public and granting credits for its own account), a UK auditor is permitted to provide services to the UK credit institution, for the purposes of the audit of the consolidated group account.  When the UK parent company is not a credit institution, auditing services cannot be provided, which may impact the UK audit and need to be reflected in the final audit report.

The DIT Guidance also provides clarity regarding some common scenarios pertaining to the application of the auditing services ban, as follows:

• when a UK auditor provides standardised material for the purpose of the audit of UK group accounts, and the group includes a Russian subsidiary, those services would generally not be considered to be within scope of the auditing services ban.  However, if bespoke material is provided for the audit of the specific Russian subsidiary, this may qualify as the provision of auditing services to a person connected with Russia; and
• when a UK company that is consolidating group accounts receives an audit report for a Russian subsidiary from a local Russian auditor, this is generally considered the receipt and not the delivery of a service and typically would not be considered within scope of the auditing services ban.  However, if the firm wishes to undertake any activities beyond the receipt of the report (e.g., discussing the contents of the report with the Russian subsidiary or local auditor in Russia), it would be necessary to consider whether a person connected with Russia is a direct or indirect beneficiary of such an interaction.

IT Consultancy and Design Services

As a threshold matter, the IT consultancy and design services ban does not prohibit or target:

• internet access, or the delivery of internet services, to Russian or other citizens (e.g., database services, content delivery networks, or Domain Name Services provision and support); or
• services that support physical infrastructure of the internet (e.g., maintenance of office machinery, computers, software and related equipment).

The DIT Guidance also clarifies that, given the central importance of IT to the modern economy, the definition of “IT consultancy and design services” is not intended to cover the full breadth of activity relating to information technology.  In particular, the DIT Guidance outlines some illustrative examples of activities that are not considered to fall within the scope of the restrictions, including:

• civilian telecommunication services (i.e., an electronic communication network or electronic communications service that is used for civilian purposes (as defined by Section 32 of the Communications Act 2003));
• services that are incidental to the exchange of communications over the internet, such as: (1) instant messaging; (2) videoconferencing; (3) chat and email; (4) social networking; (5) sharing of photos, movies, and documents; (6) web browsing; (7) blogging; (8) web hosting; and (9) domain name registration services;
• service contracts that bundle advice with the design and development of an IT solution;
• upgrades or updates that are required to ensure or restore civilian telecommunications and/or exchange of communications over the internet;
• services that provide the storage of data, regardless of how this is delivered (e.g., though the cloud or other means); and
• Virtual Private Network services.

The DIT Guidance states that upgrades or updates to hardware and software can only be applied under the IT consultancy and design services ban if they are required to ensure, or restore, civilian telecommunications and/or exchange of communications over the internet.  Updates/upgrades cannot be applied if they improve performance beyond what is required to ensure civilian telecommunications and/or exchange of communications over the internet.

Wind-down Period

For sanctions related to accounting, public relations, and business and management consulting, a wind-down period for contracts concluded prior to the services ban coming into force expired in August 2022.  However, the wind-down period for advertising, architectural, engineering, and IT consultancy and design services permits businesses to provide covered services in satisfaction of an obligation under a contract that was concluded before December 16, 2022, provided that the service is carried out on or before March 15, 2023, and the provision of the service is reported by the end of that day.

With respect to auditing services, the wind-down period permits the provision of covered audit services in satisfaction of an obligation arising from appointment as the auditor of a parent company, provided that:

• for parent companies that are credit institutions, the auditing services are for one, or both, of the following purposes: (1) the parent company deciding whether accounts of a Russian subsidiary should be included in its consolidated group accounts and/or (2) the inclusion in its consolidated group accounts of the Russian subsidiary’s accounts; or
• for other parent companies, the appointment as auditor occurred before December 16, 2022, the service is carried out on or before May 31, 2023, and the provision of the service is reported by the end of that day.

Reports should be made to the Secretary of State for International Trade by email at exportcontrol.help@trade.gov.uk.  While there is no template reporting form, consideration could be given to identifying and providing details of the sanctioned services provided, recipient of the services, period of service provision, and purpose of service provision.  

Exceptions to the Services Ban

Regulations 60DA, 61, and 63 of the Russia Regulations set out a range of exceptions that apply to the various services falling within the scope of the services ban in certain, defined circumstances.  Activities falling within the scope of an exception in relation to a particular service apply automatically, provided that any conditions set out in the relevant exception are complied with.

Notably, unlike the EU and US, the UK has decided not to permit an exception for UK companies to continue providing covered services to their Russian subsidiaries.  To permit the scrutiny and assessment of such activities on a case-by-case basis, the UK has instead decided to manage these activities via the licensing regime for the services ban.

Any entity wishing to continue providing covered services after the end of any applicable wind-down period will require a licence to do so.  Licences do not have retrospective effect and activity that would violate the services bans should not be undertaken while waiting for a licence to be granted.

Licensing

The licensing grounds available under the services ban are set out in the Statutory Guidance to the Russia Regulations and vary as between the different sanctioned services.  Each licence application is assessed on a case-by-case basis and any licence that is granted will set out the terms and conditions that will apply to the continued provision of the particular service.

Applications for Standard Individual Export Licences (“SIELs”) under the available licensing grounds should be made to the Department for International Trade’s Export Control Joint Unit (“ECJU”) via SPIRE, the ECJU’s online export licencing system.  Some questions on the SPIRE form may not be applicable to the provision of services (as opposed to the export of goods) and may be answered “N/A.”  It also is not necessary to submit an end-user undertaking form with an application for a licence under the professional and business services ban.  However, a cover letter should be submitted with the licence application that includes information on:

• the activities the applicant wishes to carry out;
• how the proposed activities fall within scope of the definition of the relevant prohibited service;
• supporting evidence explaining why a licence should be granted, including details of the licencing grounds being relied upon;
• any other relevant documentation; and
• an explanation of how the activities to be carried out would be consistent with the aims of the UK’s Russia sanctions regime, including how the applicant would ensure compliance with other applicable sanctions measures, if relevant.

The licensing grounds in relation to the services ban include (1) divestment and wind-down of business operations in Russia and (2) the provision of services by a UK parent company to a Russian subsidiary.  The DIT Guidance suggests that licence applications relating to these grounds may wish to include additional details regarding the proposed activities, as set out in the “Cover Letter” section of the DIT Guidance.

Importantly, licences that have been issued previously in relation to accounting, public relations, or business and management consulting services do not automatically extend to the provision of other services subject to the services ban.  Such licences only authorise the provision of services specified within the particular licence.  Consequently, a new licence application will need to be made in relation to the provision of each type of prohibited service that is not specified in the existing licence.  The SPIRE reference number for any previous licence application, and any existing licence reference number(s), should be included as part of any such licence application, along with confirmation of whether any information provided in the previous licence applications has changed.  For more information on how these developments could impact your organisation, contact the author of this post, Alexandra Melia, in Steptoe’s Economic Sanctions team in London.