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19 Dec 2022

UK/Russia trust sanctions: a neat trick or creating new potential problems?


Many months after the Government first announced its intention to introduce Russia related trust sanctions, they have finally been published in The Russia (Sanctions) (EU Exit) (Amendment) (No 17) Regulations. We have had a long time to speculate whether they would mirror the EU's trust sanctions first introduced on 9 April 2022 (and which we wrote about here) and then as subsequently amended in the EU's sixth sanctions package on 3 June 2022 (and which we wrote about here). The broad answer is that they look and feel very different and, at first blush, seem to be far less disruptive to the trust industry. Time will tell whether that's a good thing.

What are the main differences?

The UK trust sanctions prohibit UK persons from providing trust services to, and for the benefit of, (a) designated persons; and (b) to persons, who are not otherwise designated persons, connected with Russia unless provided as part of an ongoing relationship pursuant to which such services were provided immediately prior to 16 December 2022. Pausing there, there are two immediate points to note: (1) persons can now become designated persons for the purpose of the trust sanctions only; and (2) save in relation to designated persons, there is no requirement for UK trustees to terminate services to existing trusts; it is a forward looking prohibition. This is in obvious distinction to the EU trust sanctions which generally required EU citizens to terminate fiduciary and management services to, and for the benefit of, Russian nationals and persons resident in Russia within specified wind down periods unless those nationals/persons were also EU/EEA/Swiss citizens or had rights of permanent or temporary residence in those states.

The UK may have taken a different path because it was proving so difficult for the trust industry to terminate or to transfer affected fiduciary arrangements within the (extended) wind down periods. Indeed, this difficulty seems to have led the EU to amend the trust prohibitions to permit trustees to continue to provide fiduciary services (but oddly not management services) to Russian nationals/persons resident in Russia beyond the longstop date of 5 September 2022 with the permission of a relevant NCA.

Some welcome guidance is provided in the UK trust sanctions on the meaning of "for the benefit of" which is defined as services provided to a person who is a beneficiary of a trust or similar arrangement, is referred to as a potential beneficiary in a document from the settlor or similar arrangement or who, having regard to all the circumstances, might reasonably be expected to obtain, or be able to obtain, a significant financial benefit from the trust or similar arrangement. This definition makes clear that potential beneficiaries under new discretionary trusts will be caught if they meet the criteria of being persons connected with Russia.

The UK trust sanctions also do not draw a distinction between fiduciary services and management services as we have seen to be the case with the EU trust sanctions. Trust services are defined in the UK trust sanctions as:

  • creating a trust or similar arrangement;
  • providing a registered address, business address, correspondence address, or administrative address for a trust or similar arrangement;
  • ·operating or managing a trust or similar arrangement;
  • acting or arranging for another person to act as a trustee of a trust or similar arrangement.

New potential problems?

The EU trust sanctions are focused on the Russian nationality/residence of the settlor/beneficiary. The UK trust sanctions are focused (as with trade sanctions) on persons connected with Russia, meaning natural persons residing in, or located in Russia and legal persons incorporated in or constituted under the laws of Russia or domiciled there. Difficult questions may well arise in respect of new seemingly compliant trusts with beneficiaries residing outside Russia who then travel to Russia for whatever reason. Purely by way of example, does a temporary sojourn bring the UK trusts sanctions into play? And if it does, is the prohibition on the provision of trust services permanent or temporary. These are by no means hypothetical questions as the UK trust sanctions are clearly envisaged by OFSI to be financial sanctions in nature and therefore subject to strict liability if breached.

OFSI's classification of the UK trusts sanctions as being financial in nature is somewhat odd on a number of levels: other UK services prohibitions are treated as trade sanctions; the EU has treated its trusts sanctions as trade sanctions; and, as noted in our article on the 16th amendment in relation to the maritime services prohibitions and reporting obligations, it raises questions as to whether Parliament has actually given OFSI the authority to take enforcement action for their breach.

If you would like advice on the implications of the UK trust sanctions to your business, please do get in touch with one of the sanctions team or your usual Stephenson Harwood contact.