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OFSI imposes first multi million pound penalty for UK sanctions breach

The UK sanctions authority, the Office of Financial Sanctions Implementation (OFSI), has announced its first multi million pound fine since its establishment in 2016.  The fine confirms OFSI’s increasing enforcement activity and the potential consequences for businesses of failing to comply with UK sanctions.

 

OFSI’s first major fine

On 31 March 2020, OFSI announced that it was imposing a penalty of £20.47 million on the UK bank Standard Chartered for breaching sectoral sanctions imposed against Russia by the EU, and as a consequence the UK, since 2014.  These sanctions are intended to prevent certain Russian banks and corporates, as well as certain affiliated entities, from accessing EU capital markets (including access to loans) following Russia’s military intervention in Ukraine.

Standard Chartered voluntarily disclosed to OFSI that it had lent approximately £266 million to the Turkish bank Denizbank A.Ş. between April 2015 and January 2018, when Denizbank was majority owned by the Russian bank Sberbank and therefore subject to the sectoral sanctions, including restrictions on the provision of certain new loans. Standard Chartered had considered in good faith that these loans were covered by the exemption for EU trade finance.  OFSI considered that the exemption was not applicable.

 

Key takeaways

First, the size of the penalty confirms that OFSI is stepping up its enforcement activities.  Historically, UK and EU sanctions authorities have taken a less aggressive approach to enforcement than the US Office of Foreign Assets Control (OFAC), which has leveraged the global reach of US sanctions to impose substantial financial penalties, totalling more than $1.2 billion in 2019.  While OFSI is some way off that figure, this latest monetary penalty represents a significant step up from its three previous penalties and is the largest to date – in the EU or US – for breaches of Ukraine related sanctions against Russian entities.  Companies should be aware that UK sanctions enforcement may lead to material financial penalties.

Second, while the penalty is OFSI’s largest to date, it is smaller than it might have been.  Although the loans in question were issued from April 2015, the penalty relates only to loans issued after 1 April 2017, the date from which FSI gained new powers to impose monetary penalties under section 146 of the Policing and Crime Act 2017 (PACA).  OFSI also reduced the penalty by 30 per cent. in recognition of Standard Chartered voluntarily reporting its conduct, conducting an internal investigation (providing OFSI with regular updates and a detailed final report), and cooperating with OFSI’s investigation.  The penalty was further reduced  by approximately £11 million – following a review by the Economic Secretary to the Treasury, under section  147 of PACA (which enables those facing civil penalties for sanctions breaches to seek a ministerial review of the penalty amount).  He considered that more weight should be given to the fact that the breach was unintentional, that Standard Chartered had acted in good faith, had intended to comply with the relevant restrictions, had fully co operated with OFSI and had taken remedial steps following the breach.

The prospect of meaningful reductions in penalties is encouraging for businesses that find themselves in breach of sanctions despite good faith intentions to comply.  However, even with these reductions, the final penalty is still substantial.  The only way to avoid penalties altogether is making sure compliance procedures are effective, and by staying on top of sanctions developments to avoid being caught out.

Third, the UK sanctions landscape is evolving.  This is also a consequence of Brexit.  The prospect of UK / EU divergence on sanctions post Brexit has been clear for some time, and while the precise nature of any divergence remains unclear, the UK is expected to hew closer to the US approach in some areas, such as the use of so called ‘Magnitsky clauses’ to target those involved in human rights abuses or other serious crimes.  As a recent example, last month saw a letter from 45 MPs and peers to the Foreign Secretary, Dominic Raab, urging ministers to follow the US and Canada by introducing ‘Magnitsky legislation’ to enable Britain’s post Brexit sanctions regime to target individuals involved in corruption and kleptocracy.

As this recent penalty by OFSI confirms, businesses must carefully monitor the UK’s sanctions regime as it evolves post Brexit.

 

See also: International Sanctions

 

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