The impact of economic sanctions on the rule of law and the effective administration of justice

Stavros Pavlou; Stella Strati; Eleni Dionysiou
Patrikios Pavlou & Associates, Limassol, Cyprus

Access to justice is a fundamental right protected by both the EU Charter of Fundamental Rights (the Charter) and the European Convention of Human Rights (the ECHR). It encompasses a number of human rights, such as the right to a fair trial under Article 6 of the ECHR and Article 47 of the Charter and the right to an effective remedy under Article 13 of the ECHR and Article 47 of the Charter.[1]

A degree of tension exists between these fundamental rights and the unprecedented restrictive measures introduced by the European Union against Russia as a result of its actions undermining or threatening the territorial integrity, sovereignty and independence of Ukraine. By December 2022, the EU imposed its ninth package of sanctions against Russia, while the tenth package was recently announced at the end of February 2023. Although such sanctions are part of a continuous effort to impose severe economic, political and other consequences on Russia for its war against Ukraine, they may also pose a threat to the effective administration of justice and the rule of law. 

The two major sanctions regulations are: 

(a)    Regulation (EU) No 269/2014 concerning restrictive measures in respect of the actions undermining or threatening the territorial integrity, sovereignty and independence of Ukraine, as amended (‘Regulation 269’); and 
(b)    Regulation (EU) No 833/2014 concerning restrictive measures in view of Russia’s actions destabilising the situation in Ukraine (‘Regulation 833’). 

For the purposes of this article, we focus on the below prohibitions: 

Regulation 269 in article 2 provides, inter alia, a general asset freeze of any persons or entities, listed in Annex I thereto (hereinafter ‘Listed Persons’). It also prohibits any person from participating, knowingly and intentionally, in activities the object of which is to circumvent the measures referred to in article 2. Also, it allows the competent authorities of a Member State to authorise the release of certain funds including, inter alia, for the payment of legal fees.

Regulation 833 prohibits, in article 5n, the provision of ‘legal advisory services’, directly or indirectly, to the Russian Government, or legal persons, entities or bodies established in Russia. An exception exists for services that are strictly necessary for the exercise of the right of defence in judicial proceedings and the right to an effective legal remedy, as well as to those strictly necessary to ensure access to judicial, administrative or arbitral proceedings in a Member State and for the recognition or enforcement of a judgment or an arbitration award rendered in a Member State. Furthermore, the preamble clarifies that the term ‘‘Legal advisory services’ does not include any representation, advice, preparation of documents or verification of documents in the context of legal representation services, namely in matters or proceedings before administrative agencies, courts or other duly constituted official tribunals, or in arbitral or mediation proceedings’.

The prohibition on the provision of ‘legal advisory services’ was introduced in late 2022. Previously, the provision of legal services was allowed, provided that it was not aimed at circumventing the applicable restrictive measures. Even then, however, the provision of legal services to Listed Persons carried a number of concerns, all of which risk undermining to some extent the fundamental rights of access to justice and legal representation. Such concerns included reputational risks for the lawyers involved, potential liability for sanctions circumvention and the potential inability to obtain payment of legal fees.

Namely for lawyers, when advising a client, concerns may exist whether any action or transaction (including their engagement by a sanctioned client) would amount to a breach or circumvention of sanctions.  

In the event that a proposed transaction falls within the prohibitions of the Regulations, it must be checked whether derogations are allowed, in order to obtain a clearance from the competent authority. Clearly, compliance with the provisions of the EU Regulations is a difficult and complicated exercise, especially due to the fact that limited or no guidance is available at the EU or local level, and often the easy way to ensure compliance, is simply to avoid being engaged by Listed Persons. The constant struggle for legal practitioners to safeguard compliance with sanctions has burdened them with considerable additional work.

Moreover, to be paid for services rendered, the legal practitioner has to apply for and obtain the relevant clearance authorising the release of frozen funds. Taking Cyprus as an example, it takes much longer for the Ministry of Finance, which is the local competent authority, to process such applications and grant the relevant permissions than what was foreseen or provided for in the relevant announcement issued by the Unit for the Implementation of Sanctions, which forms part of the Ministry of Finance.[2] The time required can sometimes exceed four months. Even if permission is granted, often the requirements set by corresponding banks to clear payments or transfers are not met and banking institutions do not allow payments to go through. 

As described above, the amendments introduced to Regulation 833 in late 2022 have imposed further prohibitions by including, inter alia, a prohibition on the provision of ‘legal advisory services’. Despite the fact that the definition of ‘legal advisory services’ included in Regulation 833 has been carefully drafted in order to, at least theoretically, not impede the right of access to justice, whether or not this exception protects the fundamental right of access to justice and legal representation from a practical standpoint is a different story. 

Clearly, the prohibition against offering legal advisory services is very broad and the derogations provided for by the Regulation itself do not make it any easier when one has to decide whether to represent a client or not. In fact, the prohibition may very well deter legal practitioners who are EU nationals or operating in the EU from offering legal services to Russian entities at all, in order to ensure compliance with the sanctions. Even when the advice concerns a contentious matter that may lead to court proceedings, a practitioner may worry whether any advice given outside the strict context of a court action contravenes article 5n of Regulation 833.

All of these considerations indicate that economic sanctions may impact fundamental rights and the rule of law. 

To address this concern, the European Commission has confirmed, albeit in the context of the applicability of Article 5aa of Regulation 833 (which prohibits any direct or indirect transactions with publicly owned or controlled Russian legal persons), that ‘this provision does not affect 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 as referred in Article 47 of the EU Charter of Fundamental Rights and Article 6 of the European Convention on Human Rights’.[3]

Furthermore, in relation to article 5n, the Commission has stated that ‘sanctions on ‘legal advisory services’ have been designed so as to preserve access to justice and the right of defence’.[4]

Despite these clarifications and the existence of potential exemptions, legal practitioners may not be willing to risk engaging with sanctioned clients. Similarly, the broad prohibition against the provision of ‘legal advisory services’ may very well deter practitioners from advising clients not only because of fears of breaching sanctions, but also due to the challenges associated with payment of legal fees and, for many, reputational risks. 

JSC VTB Bank v. Taruta a.o.[5] illustrates the challenges counsel may face. In that case, a BVI Court was faced, inter alia, with legal counsel’s application to come off the record as acting for VTB (a Russian bank), primarily due to the fact that VTB was sanctioned by the UK, and therefore, any breach of those sanctions would amount to a criminal offence, but also because the representation of a sanctioned entity carried reputational risks. However, the BVI Court denied the application, explaining in its judgment that VTB’s lawyers had a continuing duty to act for their client: 

‘VTB may be a pariah, as Mr Alexander QC submitted. That does not afford a ground for its legal representatives to withdraw from representing them. Quite the contrary. It is precisely when VTB are stigmatised as a pariah that VTB need the best endeavours of their legal representatives to advise them and to advocate in Court on their behalf. However uncomfortable it may be for Ogier, this is, as Ms Boyce asserted in respect of England and Wales, a vital safeguard for ensuring the rule of law in this Territory. Even pariahs have rights.’

In a more recent UK judgment in PJSC National Bank Trust & another v. Boris Mints & others[6], the Commercial Court examined whether it could enter judgment in favour of a claimant who was sanctioned by the authorities. The Court held that while the sanctions regulations intended to restrict the rights of sanctioned entities, there was no clear restriction of the fundamental right of access to Courts, and it would require clear wording to ‘interfere with core judicial functions in this way’. 

In summary, if legal practitioners who are nationals of EU Member States or operating in the EU are not willing, or are deterred from, engaging with sanctioned clients, this undoubtedly impacts the rights of those persons or entities of access to justice, representation and an effective remedy, which are so carefully protected under European legislation, and it raises many questions as to the impact of economic sanctions on the rule of law which, at present, remain unanswered.