On 15 December 2022, the UK published the Russia (Sanctions) (EU Exit) (Amendment) (No. 17) Regulations 2022 (the "Regulations") which amend the UK's principal regulation imposing sanctions on Russia (the Russia (Sanctions) (EU Exit) Regulations 2019 ("Russia Regulations")). This post just focuses on the impact of the amendments on trusts, however our colleagues in the Corporate Crime and Investigations team have produced a detailed post on the Regulations which can be found here, as part of their ongoing 'sanctions tracker' series of blog-posts.
Summary of the Regulations on trusts services
The Regulations introduce a prohibition on providing trust services to or for the benefit of: (i) a designated person, or (ii) a person connected with Russia ("C").
In respect of (ii), there is an exception for services provided pursuant to an ongoing arrangement under which those services were provided to or for the benefit of C immediately before 16 December 2022.
For these purposes, trust services are provided for the benefit of a person ("B") where:
- B is a beneficiary of a trust or similar arrangement;
- B is referred to as a potential beneficiary in a document from the settlor relating to a trust or similar arrangement (such as a letter of wishes); or
- having regard to all the circumstances, B might reasonably be expected to obtain, or be able to obtain, a significant financial benefit from the trust or similar arrangement.
Who is a "designated person" or a "person connected with Russia"?
For the purposes of these restrictions, "designated person" does not mean any target of the UK's asset freeze. Rather, the Regulations give the Secretary of State a new power to designate individuals and entities for the purposes of the trust services restrictions. Any such designations will be recorded in the "sanctions imposed" field of the UK Sanctions List.
"Person connected with Russia" (or "PCWR") has the same meaning as elsewhere in the UK Regulations, namely: (i) an individual (or combination of individuals) ordinarily resident or located in Russia; or (ii) an entity incorporated/constituted under the law of Russia or domiciled in Russia (see Regulation 19A of the Russia Regulations.
What services are covered by the Regulations?
The trusts services covered by this restriction are:
- the creation of a trust or similar arrangement;
- the provision of a registered office, business address, correspondence address, 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 trustee of a trust or similar arrangement.
Are there any exemptions to the prohibitions?
A number of exemptions appear in Regulation 60ZZB of the Russia (Sanctions) (EU Exit) Regulations 2019, including in relation to the following:
- services provided in relation to the discharge of or compliance with UK statutory or regulatory obligations;
- acts done for the purpose of compliance with asset freezing obligations under the Russia Regulations, or in connection with transferable securities or money-market instruments where dealing with such securities or instruments is not prohibited by regulation 16 or 18B of the Russia Regulations;
- trust services provided to various specific types of trusts/arrangements, where the services are not provided primarily to, or for the benefit of a designated person or a PCWR. These include sports clubs, charities, unit trust schemes, and pension schemes (among others); and
- trust services provided to specific individuals where the services are not provided primarily to or for the benefit of a designated person, including persons under the age of 18 and persons who are deemed to lack capacity.
Licences may also be granted by the Office of Financial Sanctions Implementation for the provision of trust services in accordance with Regulation 64 (as amended). Specific licences can only be granted for the purposes specified in Part 3A of Schedule 5 of the Russia Regulations, which include the purposes of enabling anything to be done to deal with an 'extraordinary situation', for cases involving humanitarian assistance activity, medical goods or services, food, diplomatic missions, safety and soundness of a firm supervised by the FCA, PRA or Bank of England, financial regulation, financial stability, or unauthorised unit trusts.
An immediate point worth noting is that the UK trusts sanctions have a different focus to the EU trusts sanctions (which came into effect earlier in 2022). The EU trusts sanctions trigger on nationality, residence, incorporation or ownership or control. The UK trusts sanctions trigger on whether a natural person is located or ordinarily residing in Russia and a legal person is incorporated in or domiciled in Russia. The scope of the services covered by the restrictions, exceptions and licensing grounds are also all different. The differences between these two regimes should be kept in mind given the serious ramifications of falling foul of the relevant legislation.
Another point to consider is when precisely the UK sanctions are triggered for trusts where B is not a beneficiary, and what is meant by "ordinarily resident or located". For example, would the grandson or granddaughter of a beneficiary of a discretionary trust reasonably be expected to obtain, or be able to obtain, a significant financial benefit [i] from the trust if the trust was for the benefit of the beneficiary and remoter issue? If so, would there be a prohibition on providing these services if this individual travelled to Russia (for example on a long holiday or sabbatical) and was temporarily located in Russia? On the wording of the legislation, this scenario could trigger the UK sanctions. What is also concerning is that a trustee of a discretionary trust (with a number of beneficiaries and potential beneficiaries such as remoter issue) might not know where such beneficiaries are located and could be operating a trust in breach of UK sanctions.
Noting the above and the serious ramifications of breaching the sanctions legislation, trustees should approach these issues with a great deal of caution.
1 In the context of the asset freeze restrictions a "financial benefit" is defined to include the discharge (or partial discharge) of a financial obligation for which the designated person is wholly or partly responsible; but it is not clear that this definition (which in any event is non-exhaustive) would have read-across value to other parts of the Russia Regulation.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.