Previously on this blog, we had reported (1) about the scope of the EU prohibition for the legal industry to engage directly or indirectly in any transaction with a legal person, entity, or body in or outside of Russia owned or controlled by the Russian Government or the Russian Central Bank introduced by the fourth sanction package and (2) the UK licenses to use frozen funds or economic resources to pay fees for legal representation.
1. Developments in the European Union
Due to the rather broad wording “in any transaction” in the fourth sanction package, several arbitral institutions had raised concerns as to whether the prohibition included the administration of arbitral proceedings and preclude sanctioned parties from the access to justice. In the seventh sanction package, the EU clarified the scope of the prohibition and distinctly exempted transactions strictly necessary to ensure access to judicial, administrative, or arbitral proceedings as well as transactions for the recognition or enforcement of a judgment or an arbitral award in a Member State.
One could have expected that with this clarification, the issue of access to justice for sanctioned parties was resolved. However, in the eighth sanction package, issued on October 6, 2022, the EU Commission once again dealt with the issue of access to justice for sanctioned parties. This time, the Commission prohibited certain business-related services to the Russian government, or any legal person established in Russia. Art. 5n (2), added to Council Regulation No 833/2014 by the eighth sanction package, states that “[i]t shall be prohibited to provide legal advisory services directly or indirectly to the Government of Russia or legal persons, entities or bodies established in Russia”.
Legal advisory services are defined by the EU Commission as
- the provision of legal advice to customers in non-contentious matters, including commercial transactions, involving the application or interpretation of law,
- the participation with or on behalf of clients in commercial transactions, negotiations, and other dealings with third parties and
- the preparation, execution, and verification of legal documents.
The distinction between advisory work and contentious matters is unclear. Not surprisingly, the prohibition unleashed allegations of a breach of the principle of legal certainty and of the right to access to justice. The French Association des Avocats Conseils d’Entreprises (“ACE”) therefore has challenged the validity of Art. 5n (2) of Regulation (EU) 833/2014 before the General Court of the Court of Justice of the European Union (“the Court”). The core issues raised by the submission revolve around the question of whether the prohibition in Article 5n is in line with the Rule of Law. ACE has asked the Court to determine whether Article 5n violates Article 47 of the Charter of Fundamental Rights which provides that everyone shall have the possibility of being advised, defended and represented, and Article 6.1 of the European Convention on Human Rights which protects the right to a fair trial.
It remains to be seen whether the Court shares ACE’s view. Article 5n has been designed to preserve the procedural rights of sanctioned parties in court or arbitral proceedings, to preserve the right to a fair trial and the right to defence. Article 5n stresses that restrictive measures on legal advisory services shall not apply to:
- “the provision of services that are strictly necessary for the exercise of the right of defence in judicial proceedings and the right to an effective legal remedy; or
- the provision of services which are strictly necessary to ensure access to judicial, administrative, or arbitral proceedings in a Member State, or for the recognition or enforcement of a judgment or an arbitration award rendered in a Member State.”
In other words, the EU Commission tried to ensure both access to justice and the enforcement of the sanctions regime by permitting legal services in the context of adversarial matters.
It should be noted that restrictive measures do not apply to natural persons in Russia. Companies established in Russia, which are at least partly owned or controlled by a legal person, entity, or body incorporated or constituted under the law of a Member State, or of a member of the European Economic Area, or a partner country, for instance, the UK, the US, Japan or South Korea, are released from the restrictions. Likewise, any company incorporated under the law of a country other than Russia, which is not established in Russia, even if it is a subsidiary of Russian companies or is owned by Russian residents is exempted from the sanctions, if the services are not for the benefit of the parent company established in Russia. The sanctions do apply to the EU branches of Russian companies since such branches do not have legal personality and are considered entities established in Russia. This demonstrates the difficulties one can encounter in applying restrictive measures.
So far, the Court has not yet ruled on ACE’s application. The EU has not addressed the issue in the ninth, tenth, or eleventh sanction packages.
2. Developments in the United Kingdom
As we had reported, designated persons to which the UK sanctions regime applies require a licence from the Office of Financial Sanctions Implementation (“OFSI”) inter alia to use frozen funds for the payment of fees for legal representation. In view of the large number of new designations under the sanctions regime, OFSI had issued General Licence INT/2022/2252300 to permit the payment of legal fees. In addition, General Licence INT/2022/1552576, OFSI allows designated persons to make payments to the London Court of International Arbitration (“LCIA”) to cover their arbitration costs.
On June 29, 2023, the UK imposed restrictive measures on legal advisory services similar to those imposed by the EU. It is now prohibited to provide legal advisory services directly or indirectly to non-UK persons regarding business activities prohibited under the UK’s Russia sanctions regime. “Legal advisory services” are defined as “the provision of legal advice in non-contentious matters”. Thus, any representation, advice, preparation of documents, or verification of documents relating to prohibited business activities now constitutes a violation of the sanctions regime. Like the EU, the UK thereby attempts to reconcile the right to access to justice and the enforcement of the sanctions regime. Legal professionals in the UK can represent Russian entities in litigation, administrative, arbitration, or mediation proceedings, but not in non-contentious prohibited business activities.
 Sanctions against Russia – How to ensure due process of sanctioned parties in court or arbitral proceedings while at the same time enforce the sanctions regime, Global Arbitration News, December 14, 2022