On February 2, 2022, HM Treasury’s Office of Financial Sanctions Implementation (OFSI) announced a GBP 36,393.45 monetary penalty against Clear Junction Limited (Clear Junction) for multiple breaches of The Ukraine (European Union Financial Sanctions) (No. 2) Regulations 2014 (the UK Regulations).

According to OFSI’s penalty report, Clear Junction, a fintech company, transferred funds to accounts held by non-designated persons with the Russian National Commercial Bank (RNCB), an entity subject to an asset freeze.  This resulted, according to OFSI, in 15 transactions made between March 20, 2018, and June 18, 2018, in which Clear Junction made funds available to a person designated under Council Regulation (EU) No 269/2014 (the EU Regulation) (i.e., RNCB).

The transactions were initiated by TransferGo Limited (TransferGo), a client of Clear Junction and the subject of a previous OFSI monetary penalty on August 5, 2021, in relation to the same series of transactions.  For more information on the TransferGo enforcement action, see our previous blog post here.

The Clear Junction case represents the sixth use of OFSI’s civil monetary penalty powers since they were introduced under Part 8 of the Policing and Crime Act 2017 (PACA).  Several useful hints as to OFSI’s enforcement priorities can be discerned from the Clear Junction case.

OFSI’s focus remains broader than traditional financial institutions

The Clear Junction enforcement action underscores that OFSI has its sights set on fintech and other companies as well as traditional financial institutions.  Three of OFSI’s six enforcement actions to date have involved fintech or telecommunication companies, suggesting that OFSI’s investigations may continue to cover a broad range of sectors.

The potential benefits of materially complete voluntary disclosures

Under the PACA, OFSI has the discretion to determine the amount of a penalty up to the greater of GBP 1,000,000 or 50 percent of the value of the funds or resources involved in a sanctions breach.  The version of OFSI’s Monetary Penalties for Breaches of Financial Sanctions Guidance applicable to the Clear Junction case states that, OFSI “regard voluntary disclosure of a breach of financial sanctions by a person who has committed a breach as a mitigating factor when we assess the case.  It will also have real effect on any subsequent decision to apply a penalty.”

Clear Junction’s penalty of GBP 36,393.45 related to transactions with a combined value of GBP 7,703.68.  The maximum possible penalty was therefore GBP 1,000,000.  Clear Junction voluntarily disclosed an initial eight transactions to OFSI and received a voluntary disclosure discount of 26.7% on its penalty in relation to those transactions.

During the course of OFSI’s investigation, a further eight transactions were identified that pre- and post-dated Clear Junction’s voluntary disclosure.  Clear Junction provided representations in relation to one of the transactions, which showed the transaction was the result of a technical issues with Clear Junction’s compliance system that had since been remedied.  Although OFSI considered the payment to be a breach of financial sanctions restrictions, it removed the payment from its penalty assessment due to the specific mitigating factors.

However, OFSI considered the remaining seven transactions to be breaches for which it was reasonable and proportionate to impose a monetary penalty.  As those transactions had not been self-disclosed, no voluntary disclosure discount was applied by OFSI.

OFSI indicated in its penalty report that, “[h]ad all of the breaches been voluntarily disclosed to OFSI Clear Junction could have received a 50% discount to the baseline penalty amount” instead of the 26.7% discount it received.

The importance of due diligence

The Clear Junction enforcement action underscores OFSI’s position that a person transferring funds to accounts held by non-designated persons with designated banks breaches the prohibition in the UK Regulations on making funds available to a designated person if the person knew, or had reasonable cause to suspect, they were doing so.

OFSI’s penalty report makes clear its expectation that companies and individuals must ensure that they carry out due diligence on both the parties to transactions, the banks and financial institutions involved in those transactions, as well as any other parties in such transactions to ensure that financial sanctions are not breached.

The Clear Junction enforcement action also communicates OFSI’s position that Clear Junction was not able to rely on TransferGo – another Authorised Payment Institution regulated by the Financial Conduct Authority and supervised by HM Revenue and Customs – ensuring that its instructions were compliant with financial sanctions restrictions.  Rather, companies must undertake their own due diligence and systems and controls checks to ensure that they comply with financial sanctions restrictions.

There is not always benefit to be derived from appealing OFSI’s initial penalty

As in the previous TransferGo enforcement action, having reviewed the case materials, the Minister upheld OFSI’s decision both to impose a penalty on Clear Junction and on the amount of the penalty, concluding that the initial penalty was “within the range of reasonable and proportionate options open to OFSI.”  While Clear junction initially appealed the Minister’s decision, those proceedings have now been withdrawn.

The Minister also rejected Clear Junction’s request for anonymity in the event that its penalty was upheld following the ministerial review process.  As in the TransferGo case, the Minister considered anonymizing the penalty to be contrary to the objectives of OFSI’s sanctions enforcement regime and not in the public interest.

OFSI will continue to investigate and impose penalties for financial sanctions breaches occurring under EU sanctions regulations

The sanctions breaches in the Clear Junction case occurred prior to the end of the Brexit transition period in 2018 and were therefore breaches of the relevant EU Regulation.  The case reiterates OFSI’s commitment to continue investigating and, where appropriate, imposing monetary penalties for breaches occurring under EU sanctions regulations prior to the end of the Brexit transition period on December 31, 2020.

Key takeaways

  1. Sanctions compliance for fintech and non-financial institutions continues to be important, as OFSI has again demonstrated its appetite for bringing enforcement actions for financial sanctions breaches in a range of sectors.
  2. It is crucially important for companies to conduct robust due diligence checks to ensure that they understand with whom they are doing business.
  3. The investigation and disclosure to OFSI of potential breaches of financial sanctions should be undertaken carefully and with appropriate cooperation, to maximize the likelihood of a swift and satisfactory outcome.

For assistance in assessing how these developments could impact your organization, contact the author of this post, Alexandra Melia, in Steptoe’s Economic Sanctions team in London.