In a first-of-its-kind move, the UK’s Office of Financial Sanctions Implementation (OFSI) has issued a Legal Services General Threat Assessment, shining a light on a sector that is often assumed to be a step removed from the core of sanctions enforcement. But according to the Assessment, legal service providers are actually on the front lines of the UK’s financial sanctions regime. And many are unknowingly, or intentionally, falling short.

What does this mean? And, more importantly, what do legal professionals in the UK need to do now to remain compliant?

Why are legal services under the microscope?

Legal professionals often function as gatekeepers for clients navigating international law and financial frameworks. Since Russia’s invasion of Ukraine in 2022, sanctions have become significantly more complex, with heightened focus on regimes involving not only Russia but also Libya, Belarus, Iran, South Sudan and others. 

Legal services providers’ role in maintaining the integrity of the UK’s sanctions regime has become increasingly significant – along with the risks.

OFSI’s concerns: What legal services are doing wrong

1. Underreporting of suspected breaches

OFSI flagged a major discrepancy in reporting. Only 16% of all suspected sanctions breach reports came from the legal sector compared to a massive 65% from the financial services sector. Even more concerning: 98% of legal sector reports came from law firms and barristers, while Trust and Company Service Providers (TCSPs) contributed just 2%.

This indicates a serious underreporting issue, especially among TCSPs, likely driven by weak sanctions detection policies and a lack of proactive client monitoring.

2. Mishandling frozen assets

Some legal providers have mishandled frozen funds, delaying asset freezes or transferring funds into non-approved accounts. This isn’t just a compliance misstep but a breach of law that could invite steep penalties and reputational damage.

3. Licence breaches

Legal services rendered to sanctioned individuals require an OFSI licence. Providers have breached conditions by:

• Charging more than the licence permits
• Accepting payment after a licence has expired
• Failing to report payments within the mandatory 14-day window

This reveals a widespread lack of understanding or oversight around OFSI’s licensing framework.

4. Inadequate wind-down compliance

While many UK firms exited Russia post-invasion, OFSI warns that some failed to wind down operations in line with proper permissions. The recent penalty against Herbert Smith Freehills (HSF) underscores the real-world consequences of getting this wrong.

Why is this all so complicated?

Legal services are tricky. They are increasingly entangled in:

• complex ownership structures, such as trusts that mask the involvement of Russian DPs.
• asset transfers to non-designated persons like family members or associates to circumvent sanctions. 
• use of intermediary jurisdictions like BVI, Guernsey, Cyprus, UAE and others flagged by OFSI as potential hotspots for illicit financial flows.

OFSI is clear: Legal services providers must not enable, even inadvertently, the movement or dissipation of frozen assets.

Red flags and risk management: What legal providers should do now

This isn’t just about reactive compliance. Legal services providers need to go on the offensive in their compliance strategies. OFSI outlines several essential actions:

✅ Monitor and identify red flags
From suspicious jurisdictions to sudden ownership changes, know the indicators of risk.

✅ Upgrade client due diligence
Basic ID checks are not enough. It’s important to understand beneficial ownership and connected parties.

✅ Screen all transactions
Every matter should be screened against OFSI’s consolidated sanctions list.

✅ Tailor risk assessments
Generic compliance won’t cut it. Incorporate OFSI’s findings into tailored assessments.

✅ Understand licence obligations
Know when and how OFSI licences apply and be sure to report within the required timeframes.

A legal and ethical imperative

OFSI’s assessment comes with a clear directive: The legal sector must do more to identify and report potential sanctions breaches. This isn’t merely about ticking a regulatory box. It’s about ensuring that legal professionals are not exploited as unwitting enablers of financial crime.

With sanctions now central to the UK’s foreign policy and financial integrity, legal services providers are at a crossroads. They can be part of the problem or part of the solution.

Either way, the message from OFSI is loud and clear: Enforcement is ramping up, and ignorance is no defense. Legal services providers must urgently review their internal controls, reassess their exposure and ensure they are fully equipped to navigate an increasingly complex sanctions landscape. For those that rise to the challenge, this is an opportunity to build trust, safeguard clients and lead the sector into a more secure and compliant future.

Vinciworks’ sanctions compliance courses give your staff the tools they need to understand and comply with sanctions requirements in these volatile times.