Transparency, War, and Sanctions: How Audit Can Help Organisations Weather the Storm

Chelsea Football Club is not alone in feeling the chill of sanctions against Russian oligarchs. Its owner (prior to the impending forced sale), Roman Abramovich – a tycoon and politician with a personal fortune estimated at £9.1 billion – is the highest-profile individual caught in the crossfire between Russia and the West, but he is only one among many. 

The UK government’s actions against so-called “oligarchs” and others from Russia and Belarus include a freeze on assets, transport sanctions, and the imposition of monetary penalties. Over 1,400 individuals and businesses and £500 billion of their assets have been sanctioned in the UK to date, including £150 billion from more than 100 oligarchs and family members.

With continuing – and likely increasing – restrictions precipitated by war and an ongoing drive for greater transparency, we will reflect on recent legislative action and consider ways in which internal auditors can help organisations anticipate and respond. 

Overview: The Drive for Greater Transparency and Recent Legislative Action

What is driving the UK’s pursuit of corporate transparency? It began long before the war, but recent events have prompted renewed urgency for greater clarity regarding ownership and control. 

The UK’s financial and political ties are such that its capital has been dubbed “Londongrad”. In response, the UK government is working to discourage the use of shell companies and other methods to hide identities. The Economic Crime (Transparency and Enforcement) Act was fast-tracked into law in March this year and follows the release of a white paper on Corporate Transparency and Register Reform.

The Economic Crime Act – which is closely aligned with the Financial Action Task Force on Money Laundering (FATF) recommendations – seeks to strengthen:

• Transparency for foreign ownership and control of UK assets. 
• The implementation of unidentified wealth orders.
• The application of sanctions.

Specifically, it requires a register of beneficial ownership (i.e., legal persons with ownership or control of at least 25 percent) to be held by Companies House.  

This mirrors actions being taken elsewhere, including the 2021 US Corporate Transparency Act and ongoing EU reform. Globally the FATF, of which the UK is a member, recently released new recommendations designed to “prevent the misuse of legal persons for money laundering or terrorist financing and to ensure that there is adequate, accurate and up-to-date information on the beneficial ownership and control of legal persons.” 

Six Ways Internal Audit Can Help Organizations Navigate the Impacts

Organisations were granted several weeks to wind down their relationships with sanctioned individuals and businesses. Nevertheless, the Act imposes new and significant requirements. According to Dun and Bradstreet, establishing beneficial ownership is “one of the biggest challenges facing financial institutions today.” It is hard to get access to reliable and timely information, maintain accurate records, and share data as required with authorities, especially when operating in multiple jurisdictions with varying requirements. 

Through their insight and advice, internal auditors can help senior leaders as they grapple with the impacts of sanctions and regulations. Practical advice should include: 

1. Don’t underestimate the impacts. Remain current with the latest developments and be aware that the reach may be severe.
2. Be prepared for additional sanctions. It is likely there will be further measures in the coming months.
3. Assess the risks and determine proportionate responses, especially concerning compliance, solvency, reputational damage, economic pressures (such as rising costs and inflation), and supply chain and other operating disruptions.
4. Look for automated solutions for increased scrutiny of beneficial ownership. Consider the use of technology solutions for data visualisation.
5. Focus on internal and external transparency. Within the requirements for data privacy, ensure compliance with increased disclosure requirements.
6. Keep records up-to-date. Implement appropriate steps to maintain accurate information.

The ongoing conflicts and the simultaneous push for greater corporate transparency promise continued stresses on operations. But with sufficient anticipation and preparation, organisations can minimise some of the disruptions. Internal audit can play a highly valuable role in offering timely insight, foresight, and advice.