In its 2019-2020 Annual Report (the Report), the UK’s sanctions office (the UK Office of Financial Sanctions Implementation (OFSI)) revealed that, between April 2019 and March 2020, it had received 140 voluntary disclosures of potential sanctions violations related to transactions worth a total of £982 million. This represents a record number of reports, and an increase from the 99 reports concerning payments worth just over £262 million it received in the same period between 2018 and 2019.
According to the Report, the majority of the voluntary disclosures are being made by the banking and financial sectors, although reports are also being made by those in the legal, charity, insurance and travel sectors. It is not clear from the Report whether the disclosures concern potential violations by the reporting company or whether they relate to potential violations by third parties.
OFSI’s Report also reveals that the agency has received more reports relating to potential breaches of sanctions in place against Libya, as compared to any other regime. This is perhaps not surprising. A 2019 parliamentary report revealed that the UK holds over £12 billion in blocked assets tied to former Libyan leader Muammar Gaddafi and his former associates.
Outside of the enforcement arena, the Report also sets out OFSI’s stall as to post- BREXIT arrangements including its engagement with international agencies, and the issuing of licences.
With the imminent end of the Brexit transition period and with the UK Foreign, Commonwealth and Development Office’s Sanctions Unit spreading its own message as to how UK sanctions policy and compliance will operate from 2021, could 2021 be the new dawn for OFSI with the further flexing of its enforcement muscles?
Who are OFSI?
OFSI was established in March 2016 and is part of Her Majesty’s Treasury (HMT). Its role is to assist HMT in ensuring that financial sanctions are properly understood, implemented and enforced in the United Kingdom. In April 2017, the agency gained significant new powers to impose civil monetary penalties under the Policing and Crime Act 2017 (PACA) for financial sanctions violations. Under PACA, OFSI can impose civil monetary penalties for financial sanctions violations, of up to the greater of £1 million or 50% of the funds or assets involved, employing the lower civil standard of proof (namely, on the balance of probabilities) rather than the higher criminal standard (of beyond reasonable doubt).
Despite the new powers under PACA, OFSI has, until 2020, kept a low profile as compared to other regulators. It has imposed only four penalties in its entire history; three of which hardly deserve a footnote in the annals of financial sanction enforcement fines. In January 2019, OFSI imposed its first penalty of £5,000, followed by a penalty of £10,000 in March 2019 and then, in September 2019, a penalty of £146,341. Its fourth penalty, against Standard Chartered Bank, was its first multi-million pound penalty and arguably a sign that those who write off OFSI as a regulator, may live to regret it.
On 31 March 2020, OFSI announced that it had imposed a £20.47 million fine on Standard Chartered Bank (a UK headquartered bank) for breaching sectoral sanctions imposed against Russia by the EU (which, at that time, included the UK). The penalty was imposed following a voluntary report to OFSI by the bank in which it disclosed that it had lent approximately £266 million to the Turkish bank Denizbank A.Ş., at a time when Denizbank was majority owned by the Russian bank Sberbank and therefore subject to the sectoral sanctions. According to OFSI, Standard Chartered Bank’s conduct represented a “most serious” breach of financial sanctions, although credit was given for Standard Chartered Bank’s investigative report as well as the fact that the bank did not willfully breach the sanctions regime, 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.
OFSI is sharpening its teeth
Against the background of the Standard Chartered penalty, the Report is further evidence that OFSI is committed to establishing itself as a financial regulator with teeth.
The Report highlights that:
- Since its establishment less than five years’ ago, OFSI has achieved a number of milestones. Most notably, the number of voluntary disclosures made to it during the past year suggest that it is not just OFSI itself that views itself as integral to the UK government’s strategy to fight financial crime. Participants in the UK also see the importance of OFSI in that fight.
- As detailed in our client alert “The UK’s Post-Transition Period Sanctions Regime – Continuity or Change?”, the end of the Brexit transition period does not signal an end of the UK’s engagement with financial sanctions compliance. The UK government remains committed to its autonomous financial sanctions regimes, and to ensuring that they are properly understood and enforced.
- Arguably the buzzword of almost every UK law enforcement agency too, the Report highlights OFSI’s current – and projected – “cooperation” with international agencies. The Report notes that, in the past year, OFSI has undertaken engagements in 83 countries across 6 continents, which is close to double the number of jurisdictions with which it engaged in the preceding year. The focus of OFSI’s multilateral and international engagements was on “sanctions related to counter-terrorism and counter-proliferation”. Co-operation doubtless brings OFSI increased resources, intelligence and zeal.
- Although outside the enforcement world, OFSI professes to have implemented measures to consolidate the licencing process and ensure that licences can be issued as fast as possible. At the end of the transition period, OFSI will also have the ability to issue “general licences” which, if granted, will permit the holder to undertake specific types of behaviour (typically, after notifying OFSI in advance) without the need for an application process.
Although it remains to be seen how robust OFSI’s sanctions enforcement will be, it is clear that the UK’s financial sanctions landscape continues to evolve and, as a result, OFSI’s importance is growing in stature and influence. It should remain on the top of compliance agendas with a close eye focused on developments.