Wed, 08 Mar 2023
With the financial sanctions imposed against Russia has been widening and deepening over the past year, more and more businesses and investors have paid attention to the regulatory obligations for compliance.
The Sanctions and Anti-Money Laundering Act 2018 (the “Act”) provides statutory power and legal foundation for imposing sanctions in the UK. The UK government also implement sanctions imposed by the United Nations (UN). The enforcer and implementer in the UK is the Office of International Sanctions Implementation (“OFSI”) which is part of HM Treasury.
Other legislations relating to sanctions include The Terrorist Asset Freezing Ect. Act 2010, Immigration Act 1971 and Export Control Order 2008.
Financial sanctions apply to all sectors and concern all forms of financial services through freezing or preventing funds, financial services, financial products and economic resources which would otherwise be made available for the benefit of the designated persons, persons connected with a prescribed description or a prescribed description of persons connected within a prescribed country.
For instance, on 27 September 2022, OFSI imposed monetary penalty of £30,000 on Hong Kong International Wine and Spirits Competition Ltd (a UK registered company) for its breach between 2017 and 2020 of regulations 3 (1) and 6 (1) of the Ukraine (European Union Financial Sanctions (No.2) Regulations 2014 and Articles 2 (1) and (2) of the Council Regulation (EU) No 269/2014. In this case, HKIWSC received funds and wine bottles (tangible economic resource) from a designated entity, the State Unitary Enterprise of the “Republic of Crimea” Production-Agrarian Union (“Massandra”) which entered into the competitions in the years and used the platform and publicity (intangible economic resource) to increase sales of wine and exchange for funds. HKIWSC failed to make voluntary disclosure to the UK authorities, so a reduction discount would not be applicable. Further, OFSI was satisfied on balance of probability that HKIWSC breached the prohibitions imposed by financial sanctions legislation and that HKIWSC knew or had reasonable cause to suspect that it was in breach of these prohibitions. HKIWSC then applied for a ministerial review under available provisions of Policing and Crime Act 2017 (“PACA”), the Economic Secretary to the Treasury conducted the review and conclusively upheld OFSI’s decision on the penalty and amount of the penalty.
Section 9 (5) of the Act provides that “person” includes any organisation, association or combination of persons, in addition to an individual, a body of persons corporate or unincorporate.
Financial sanctions may target the entire government / regime of a prescribed country or target specific recipients such as individual residents and assets.
There are currently 34 regimes in total as target of the UK’s financial sanctions.
The UK financial sanctions apply to all legal entities including branches established pursuant to the UK laws and other entities operating in the UK. Businesses and investors should increase awareness and develop good practice to ensure compliance, in particular if there is operation abroad and serves overseas customers. Any breaches committed after 15 June 2022 would incur a strict civil liability, which means that the sanctions requirements must be complied with, failure of which would have consequence of written warnings, publication of the breach, civil monetary penalties, and may even incur criminal sanctions imposed by National Crime Agency (NCA). In addition, OFSI carries out enforcement on a case-by-case basis.
To maintain compliant, entities ought to consider the international scope of their business, ensure sufficient measures in place, manage potential risks of breach and, where necessary, apply to OFSI for (general or specific) licence that allows activities which would otherwise be prohibited by the financial sanctions. Licence application is a complex legal and commercial process which is based on the relevant grounds and cannot be made retrospectively. Timing of the licence application would also likely be extended when UN will need to approve or be made aware of, as a result of which the entity should take into account of any deadlines which may affect the urgency and process of licence application.
International institutions might also fall within the remit of the UK sanctions where a UK nexus could be established, albeit a variety of circumstances could be found to establish the required UK nexus.
Understandably, matters could be far fetching, involving numerous parties across jurisdictions and regimes. For instance, the UK provides major financial services and Fintech sector in the global market; it also has the largest insurance sector in the world’s maritime industry. UK reinsurers may provide cover for overseas underwriters who have insured risks for the beneficiary based in a third country against which the UK sanctions have been imposed. Dispute may easily arise due to varied expectations and goals of diverse parties who are based in different countries.
A most recent development is that on 5 December 2022 the UK and EU imposed a general prohibition from importing Russian-origin seaborne crude oil, subsequent to the United States’s ban on all imports of Russian crude oil, petroleum, natural gas, coal and oil earlier in the year. A new Unit within OFSI has been set up to institute a licencing and enforcement system for Price Cap, to engage with industries, monitor the Price Cap level and impact and work with other government agencies and with international counterparts for implementation. This will undoubtedly impact on transportation, insurance, financing, freight and other operations of oil shipment.
It is therefore crucial for businesses and investors to carry out rigorous due diligence timely even before entering into a transaction, regularly assess the situation of sanctions and monitor related development to remain up-to-date, identify companies and individuals against the consolidated sanctions list, checking ownership and control of persons against the sanctions list, communicate with other parties in the transaction, mitigate risks when dealing with designated persons, report to OFSI on which you have knowledge or suspicion, and seek independent legal advice for support in order to make informed decisions and achieve compliance.
This article is written for knowledge sharing. It does not form legal advice. Readers are reminded to seek independent legal advice for their specific queries and needs.
Russia, United Kingdom, Banking, Financial Services, Insurance, Reinsurance, Trade & Customs, Energy & Natural Resources, No5 Chambers, Regulations / Regulatory Compliance
Sanctions, Supply chain, Anti-money laundering, Anti-bribery and corruption, International law
Office of Financial Sanctions Implementation (UK)
Cecilia Xu Lindsey practises in a spectrum of Commercial practice in both dispute resolution and advice. Her practice has a focus on Commercial Law (contract, e-commerce, sports and construction), Company Law, Fraud and Economic Crimes, Banking and Financial Services, Insurance/Reinsurance, and International Law (international trade, arbitration, FDI and investment treaty, international sanctions). She also acts as Counsel in arbitrations, and accepts appointments as Arbitrator. She is fluent at native level in written and oral Chinese Mandarin.