EU sanctions against Russian interests are an important but mostly “technical” issue for lawyers in the grand duchy, , vice chairman of the Luxembourg Bar Association and partner at Elvinger Hoss Prussen, told Delano during an interview.
Attorneys have regularly carried out similar types of due diligence checks for years, stated Reckinger, who was called to the Luxembourg bar in 1990. “We [lawyers] are used to it, we [the bar association] tell our lawyers what they have to do, we will check how they control it, and we are fairly confident that it’s not an issue for lawyers to do this.”
Lawyers’ due diligence obligations
Reckinger said that attorneys are already familiar with the types of requirements set out by the EU sanctions since they are comparable to long-standing anti-money laundering (AML) regulations. After the new EU sanctions were introduced, the bar association issued a confidential “circular to all its lawyers” outlining their obligations. The circular summarises the financial sanctions and its implications for those in the legal sector. “So mainly, it implies that funds are frozen or that you cannot remit funds to these persons, or that you cannot indirectly participate in anything which circumvents the fact that funds are frozen or the prohibition of remittance.”
“Lawyers are obviously less in the front line here than bankers are, because in general lawyers do not have funds which belong to their clients.” However, there are instances when clients make prepayments into an retainer account or when proceeds from litigation cases are passed through a law firm’s bank account. “It’s not common, but it happens.”
Need to screen entire client base
In practice, lawyers “actually have to screen their entire clientele, vis-à-vis the names which they have on the sanctions list,” stated Reckinger. The screening needs to cover both “clients and beneficiary owners if they are working with companies.”
Larger firms will carry out checks using specialised software, while smaller firms and solo practitioners will search their files manually. Reckinger said the task is not particularly onerous. Lawyers already open and maintain a ‘know your customer’ file for each client, which includes their identities, including beneficial ownership, and a risk assessment. Screening against the sanctions list “should not be difficult” for lawyers because of these KYC files. “They simply have to check whether the name is on their list of clients or not.”
Client on sanctions list
If a lawyer finds they are working with an individual or organisation on the sanctions list, “you’d probably stop working for the sanctioned person” or entity immediately.
There are very few situations where a Luxembourg lawyer would be likely to continue working with sanctioned clients, even for protracted litigation cases, Reckinger told Delano. “The sanctions say you freeze funds. There is a prohibition of remittance of funds, and there is a prohibition to participate voluntarily in activities which the effect of which is to circumvent the measures. Now, let’s suppose you have litigation, where you are acting for a sanctioned person, and you are requesting monies from a contractual counterparty. I think the lawyer has to ask themself the question, ‘if I continue to do that, is that somehow part of a remittance of funds?’”
“What is very important, I believe, is that it’s each lawyer’s liability to apply the sanctions. A lawyer must answer the question, ‘am I now participating through helping my client in the litigation, or in helping my client in setting up a company, am I participating in this?’ In most cases, it’s difficult to imagine that you continue working for sanctioned persons.”
Attorneys who freeze funds or take other measures need to proceed with care. “Lawyers are subject to a very strict confidentiality policy, including who their clients are.” But they “must notify the ministry of finance” and bar association on what action they have taken.
Reckinger would not comment on how many reports have been filed by legal professionals since the sanctions were introduced.
Limited impact on legal business
It is difficult to put a peg on how much Russian interests represent in terms of the total client base and turnover for Luxembourg lawyers. “‘I don’t know’ is the answer,” Reckinger stated. That is partly because legal professionals are obliged to keep client relationships confidential, so there no complete database or comprehensive figures available.
There certainly are Russian clients in the grand duchy, but their importance could be relatively minor, he speculated. “Luxembourg is an open jurisdiction, and therefore we have been open to Russian business for years.” For certain law firms, “it may be important. In general, I would say that it’s probably rather niche.” The share for lawyers is “probably” about the same as for clients in the financial sector, he estimated.
The bar association has not been worried about lawyers and law firms in Luxembourg taking a financial hit because of the sanctions. “We are more worried about the economy in general,” he said. “We have no reason to believe that law firms would have worked only for Russian clients” and therefore be left in dire straits.
Inspections coming
“The Luxembourg bar has a control mechanism in place,” which normally audits attorneys’ compliance with AML requirements, but will soon start checking observance of the sanctions regime.
Reckinger noted that the bar association has Russia’s invasion of Ukraine and free legal advice to Ukrainian refugees.