On March 21, 2023, HM Treasury’s Office of Financial Sanctions Implementation (“OFSI”) designated all individuals and entities that currently are subject to an asset freeze under the Russia (Sanctions) (EU Exit) Regulations 2019 (the “Regulations”) for the additional purpose of the trust services sanctions measures outlined in Regulation 18C(1) of the Regulations. As a result, persons subject to UK sanctions jurisdiction are now prohibited from providing trust services to, or for the benefit of, those UK designated persons absent an available exception or licence. OFSI also has issued a wind down General Licence and updated its Russia Sanctions Guidance (“OFSI Guidance”) to address the interaction between the asset freeze, trust services, and professional and business services prohibitions.
In a blog post announcing the measure, OFSI indicated that the move represents a conscious effort close off perceived loopholes in the existing trust services prohibitions in response to intelligence from enforcement agencies suggesting that UK-based trust service providers have been offering their services to persons for the purpose of reducing the impact of sanctions in the event that they become subject to them.
The Trust Services Ban
Since December 16, 2022, Regulation 18C of the Regulations has prohibited persons subject to UK sanctions jurisdiction from providing trust services to, or for the benefit of, a (1) person “connected with Russia” (i.e., one or more individuals ordinarily resident, or located, in Russia, or entities incorporated/constituted under the law of, or domiciled in, Russia); or (2) UK designated persons. However, until this week’s expanded designations, no individuals or entities were designated under the UK’s Russia sanctions regime for the purpose of the trust services prohibition. Consequently, the provision of trust services to those UK designated persons was only restricted if they also met the definition of persons “connected with Russia” and had not been receiving such services prior to 16 December 2022.
The Regulations define “trust services” as:
- the creation of a trust, or similar arrangement;
- the provision of a registered office or business, correspondence, or administrative address for a trust or similar arrangement;
- the operation or management of a trust or similar arrangement; or
- acting or arranging for another person to act as a trustee of a trust or similar arrangement.
The expansion of the designation of all individuals and entities currently subject to asset freeze sanctions under the Regulations to include trust services means that it is now prohibited for person subject to UK sanctions jurisdiction to provide trust services to, or for the benefit of, these persons, unless permitted by a licence or exception.
The exceptions to the trust services prohibition with respect to UK designated persons are set out in Regulation 60ZZB of the Regulations and include:
- acts in satisfaction of an obligation in respect of the provision of trust services where those services are provided in relation to the discharge of, or compliance with, UK statutory or regulatory obligations;
- acts for the purpose of complying with the asset freeze and making available prohibitions under the Regulations;
- acts in connection with transferable securities or money-market instruments when dealing with such securities or instruments is not prohibited by Regulation 16 or 18B of the Regulations;
- providing trust services to certain specified types of trust identified in Regulation 60ZZB(2) that are not primarily to, or for the benefit of, a designated person; and
- providing trust services for the purpose of making funds or economic resources available to certain specified types of person identified in Regulation 60ZZB(4), which are not primarily to, or for the benefit of, a designated person.
The licensing grounds to the trust services prohibition with respect to UK designated persons are set out in Part 3A, Schedule 5 of the Regulations and include licensing to enable anything to be done:
- to deal with an extraordinary situation;
- in connection with the performance of any humanitarian assistance activity;
- in connection with the provision of medical goods or services for the benefit of the civilian population of a country, or the import, export, or use of medical goods;
- in connection with the production, or distribution, of food for the benefit of the civilian population of a country;
- such that the functions of an international organisation, or a diplomatic mission or consular post in Russia/of Russia in the UK, may be carried out;
- that is necessary or expedient to promote the safety and soundness of a firm that is supervised by the Bank of England, the PRA, or FCA;
- by, or on behalf of, a relevant financial authority for the purposes of the functions of that authority;
- that is necessary or expedient to protect, or enhance, the stability of the financial system of the UK; and
- by the operator or trustee of an unauthorised unit trust scheme in relation to that scheme, provided that the trust services are not provided primarily to, or for the benefit of, a designated person.
OFSI has issued General Licence INT/2023/2589788, which covers the “wind down of trust services provided to designated persons” (“GL”). The GL is intended to support trust service providers as they wind down their services in relation to UK designated persons. The GL authorises a 90 calendar day window during which an individual or entity may undertake any activity that otherwise would be prohibited under Regulation 18C of the regulations that is necessary to terminate an arrangement between themselves and a UK designated person involving the provision of trust services.
The GL is effective from the date of designation of the person to whom the trust services are being provided and will expire on the 90th day. By way of example, for UK designated persons designated on March 21, 2023, the wind down period will expire at 23:59 on June 18, 2023.
The GL applies to arrangements, including: (1) the continued provision of trust services being provided to a UK designated person on the date they were designated; (2) trust services provided to a UK designated person after the date they were designated; and (3) the conduct of activities, including the processing of payments, by relevant UK financial institutions undertaken in accordance with such activities. The GL does not permit activity in breach of the asset freeze or that is exempt under Regulation 60ZZB (1)(b).
Reporting to OFSI
Anyone using the GL must report to OFSI within 30 calendar days of undertaking any activity under the GL. The details and supporting evidence that should be reported to OFSI include information about:
- the UK designated person(s);
- any participants to the trust who are owned or controlled by a UK designated person, or who are not owned or controlled by a UK designated person but are providing trust services to, or for, their benefit;
- the value and type of assets dealt with; and
- any activity undertaken under the GL, including details of the date, amount, reason for, and route of any payment made.
The relevant form for reporting can be found here.
Update to the OFSI Guidance
The OFSI Guidance has been updated to add three new FAQs addressing the trust services sanctions. In particular:
- FAQ 50 clarifies that all sanctions on the provision of professional and business services pursuant to Chapter 6B of the Regulations apply, even when the provision of trust services is permitted, unless the particular professional and business services are permitted by a licence issued by the Department for Business and Trade’s Export Control Joint Unit (“ECJU”) or an applicable exception under Regulation 60DA applies. The FAQ also states that if both professional and business services, and trust services, sanctions apply to a particular activity in relation to a trust, separate licences for each activity will be required (i.e., a licence from the ECJU for the professional and business services and a further licence from OFSI for the trust services); and
- FAQ 51 addresses the interaction of trust services and asset freeze sanctions. In particular, the FAQ clarifies that assets of a designated person caught under Regulation 11 must remain frozen unless there is an applicable exception or OFSI has issued a licence permitting the contemplated activity. The trust service sanctions include an exception authorizing the provision of trust services for the purpose of complying with the asset freeze, which could include the situation where an activity needs to be undertaken in relation to the frozen assets and a designated person, or the trustee, obtains a licence or uses an exception applicable to the asset freeze.