OFSI’s first multi-million pound sanctions fine - a trend towards increasing sanctions enforcement in the UK

Introduction

The Office of Financial Sanctions Implementation (“OFSI”) was created as a separate unit of HM Treasury in 2016 to ensure that financial sanctions imposed by the EU and the UK government are effectively implemented and enforced in the UK.

Since the introduction of the Policing and Crime Act 2017, HM Treasury and by extension OFSI has the power to impose monetary penalties as part of civil proceedings in respect of sanctions breaches (although criminal prosecution remains an alternative penalty). Such penalties may be imposed where: i) a breach occurred; and ii) the person in breach knew, or had reasonable cause to suspect, that they were in breach of the prohibition.

The final value of the penalty is subject to the Treasury’s discretion but is capped at the greater of £1 million and 50% of the estimated value of the relevant funds or economic resources. To date there have only been a handful of relatively low fines imposed by OFSI; but earlier this week, the authority announced its largest fine to date totalling £20.4 million imposed on Standard Chartered Bank (“SCB”) for breaching restrictions applicable to the Ukrainian sanctions regime.

The Fine

SCB was fined a total of £20.47 million for breaching Ukrainian financial sanctions in place since 2014. The Ukrainian sanctions were introduced by the EU (with direct effect in EU Member States and with continued application to the UK after Brexit under new legislation passed for this purpose) to prevent those responsible for undermining Ukraine’s territorial integrity, sovereignty and independence from accessing EU capital markets. In particular, the restrictive measures prohibit EU persons from making loans or credit, or being part of an arrangement to make loans or credit, available to sanctioned entities (being certain Russian banks and companies), where those loans or credit have a maturity of over 30 days.

Between 2015 and 2018, SCB made a total of 102 loans to Denzibank A.Ş. which is almost wholly owned by the Russian bank, Sberbank. During this time, Sberbank was subject to restrictive measures under the Ukrainian sanctions regime making it unlawful to enter into certain monetary agreements with Sberbank or any of its subsidiaries. Although the sanction regulation includes an exemption to allow for genuine EU trade of non-prohibited goods to third countries, 70 of the 102 loans were found to be in breach as they did not meet the requirements for exemption and 21 of these occurred after April 2017 when OFSI obtained powers to impose financial penalties. OFSI commented that SCB’s breach was classed as ‘most serious’. SCB was aware of the sanctions regimes and compliance requirements but failed to properly assess the application of the exemption to its dealings with Denizbank A.Ş.

SCB appealed OFSI’s initial decision by seeking ministerial review. Any person subject to a penalty can seek review whereby the Minister may:

• uphold the decision including the penalty and amount;
• uphold the decision but amend the amount of the penalty; or
• cancel the decision to impose a penalty.

Although the Minister agreed with OFSI that the breaches by SCB were most serious, he conceded that SCB did not wilfully breach the sanctions and recognised that SCB cooperated fully with OFSI’s investigations and took appropriate remedial steps; including self-reporting the breaches to OFSI thus obtaining an initial 30% reduction in the value of the fines. The Minister ultimately reduced the original penalties further from £31.5 million to £20.47 million. This fine is nevertheless the largest imposed to date in the UK for a breach of financial sanctions restrictions and suggests OFSI’s increasing willingness to punish those in breach in the three years since it obtained fining powers.

Previous Fines

OFSI’s approach to imposing penalties

Since 2017, OFSI had only imposed three fines. This may be explained by: i) the fact that OFSI’s fining powers are still relatively new; and ii) the approach taken in its “Monetary Penalties for Breaches of Financial Sanctions Guidance”. The guidance states that OFSI’s aim is to take a holistic approach to ensuring compliance with the sanctions regimes and it will not necessarily respond to each breach by imposing a penalty. For example, where it becomes aware of a breach, OFSI may respond by:

• issuing correspondence requiring details of how a party proposes to improve their compliance practices;
• referring regulated professionals or bodies to their relevant professional body or regulator in order to improve their compliance with financial sanctions;
• imposing a monetary penalty;
• referring the case to law enforcement agencies for criminal investigation and potential prosecution.

Fines to date

OFSI’s previous fines were against Raphaels Bank (January 2019) and Travelex (March 2019) which were both involved in a transaction of £200 belonging to a designated person under the Egyptian sanctions regime imposed as a result of the Arab Spring. The two companies were fined £5,000 and £10,000 respectively. Raphaels Bank received a 50% discount for voluntarily disclosing the relevant breach to OFSI. Travelex’s fine was higher because it did not voluntarily report the relevant breach and as explained in OFSI’s announcement, Travelex had direct in-person contact with the designated person including access to his passport which should have made his identity clear for the purposes of confirming whether he was a designated person.

More recently, on the 9th of September 2019, OFSI imposed a monetary penalty of £146,341 on Telia Carrier UK Limited (“Telia”) for breaching EU sanctions regulations against Syria. Telia repeatedly made economic resources and funds available for an extended period of time to a designated entity, SyriaTel, by facilitating calls to that operator. SyriaTel is owned by Rami Makhlouf a designated person who is known to have ties with the Syrian government. The fine was originally set at £300,000 in July 2019 but reduced after Telia sought ministerial review of the penalty and introduced additional evidence to support its case.

A trend towards increased penalities?

It is still early to draw clear enforcement patterns from these limited cases, but it appears that OFSI is now prepared to take action where it deems intervention to be necessary. For example, where the company in breach should have been in a position to properly check whether counterparties were listed as designated persons or because the breaches were repeated over an extended period of time. Although the UK and EU Member States governments have historically taken a more low-key approach to enforcing sanctions breaches in comparison to the much more active Office of Foreign Assets Control (“OFAC”) in the USA, this fine clearly shows that OFSI is keen to demonstrate it is a vigilant and tough regulator. Companies should now be in no doubt about the need to take sanctions compliance seriously.

Managing risks

If you are an exporter of goods based in the UK or involved in cross-border financial dealings, consider whether you trade with entities or individuals located in sanctioned countries and whether any financial sanctions regimes may apply to your activities.

It is important to regularly consider your organisation’s compliance with the various sanctions regimes and to check the up-to-date lists of designated persons in the jurisdictions within which you deal. This includes considering the ultimate beneficial owners of any of your counterparties. The consolidated list of designated persons is available on OFSI’s website and is regularly updated.

If you know or have reasonable grounds to suspect that you or your organisation are dealing with a designated person you should:

1. immediately stop any dealings with that person; and
2. seek legal advice in order to mitigate risks and manage any potential reporting requirements to OFSI.