OFSI imposes fourth monetary penalty in respect of financial sanctions

On 31 March 2020, HM Treasury’s Office of Financial Sanctions Implementation (“OFSI”) announced the imposition of a monetary penalty on Standard Chartered Bank (“SCB”). This represents OFSI’s fourth use of its power to impose a monetary penalty in respect of suspected breaches of UK financial sanctions restrictions.

OFSI’s power to impose monetary penalties

As set out in more detail in our previous update, since April 2017, OFSI has had the power to impose a monetary penalty where it is satisfied on the balance of probabilities that an individual or entity has: (a) breached a prohibition, or failed to comply with an obligation, imposed under financial sanctions legislation; and (b) knew or had reasonable cause to suspect that this was the case. OFSI has discretion to determine the amount of the penalty up to a maximum of the higher of £1,000,000 or 50% of the estimated value of the funds or resources that were subject to the breach.

OFSI has issued guidance on the circumstances in which it may consider it appropriate to issue a penalty and how it will determine the value of such penalties (the “Guidance”).

Monetary penalty imposed on SCB

In its 31 March announcement (the “Announcement”), OFSI confirmed that it was imposing two penalties on SCB, totalling approximately £20.4m, on the basis that it was satisfied, on the balance of probabilities, that SCB had breached certain restrictions relating to the UK’s financial sanctions against Russia and that SCB had reasonable cause to suspect that this was the case.

The Announcement states that the penalties were imposed in respect of certain loans made by SCB to Denizbank A.S., a majority-owned subsidiary of Sberbank at the relevant time. As readers are likely aware, Sberbank is one of the targets of the so-called “capital markets restrictions” or “sectoral sanctions” imposed on various Russian entities by the EU and US in response to the situation in Ukraine. Those sanctions restrict, among other things, the making of certain loans to those entities, and their majority-owned subsidiaries. The EU restrictions applicable to SCB at the relevant time included a prohibition on the making of any loan or credit to Sberbank and its subsidiaries with a maturity of over 30 days, subject to an exception which permitted loans with the “specific and documented objective of financing the import or export of non-prohibited goods between the EU and any third country”. Further background on these restrictions and the EU guidance on their interpretation can be found in our previous briefings here and here.

OFSI’s assessment was that 70 loans made to Denizbank (the “Loans”) did not have the required EU nexus and were therefore prohibited. The monetary penalty was imposed in respect of 21 of the Loans which were made after 1 April 2017 when OFSI’s monetary penalty powers came into force.

It appears that, like many other financial institutions, SCB initially ceased all trade finance business with entities such as Denizbank that were subject to the above restrictions and later sought to introduce dispensations for permitted business. OFSI assessed that those dispensations were not appropriately put in place, leading to the making of the Loans. OFSI noted that a number of loans made to Denizbank were however permitted under the EU trade exemption; it was not the case that all of SCB’s loans to Denizbank were prohibited.

The monetary penalty comprised a 30% reduction as a result of SCB’s self-report in respect of the Loans and its cooperation with OFSI’s investigation.

Cooperation and other takeaways

The Announcement emphasises SCB’s cooperation throughout the investigation and penalty process by:

• self-reporting its suspected breaches in respect of the Loans;
• carrying out an internal investigation;
• providing a detailed report of that investigation to OFSI, along with interim updates; and
• cooperating with OFSI’s investigation.

The 30% reduction in penalty in this case is the greatest reduction that can be made in cases (such as this) which OFSI categorises as “most serious” under the Guidance.

In this case, SCB exercised its right to a ministerial review of the penalty imposed by OFSI which resulted in a reduction of the penalty. The penalty was reduced by around £11m from the level originally imposed by OFSI. In this case, the Minister determined that SCB did not wilfully 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. The Minister took the view that, while these factors had been considered in OFSI’s assessment, they should have been given more weight in the penalty recommendation, leading to the reduction in the final penalty imposed.

The involvement of Denizbank in this case is also noteworthy. As mentioned above, Denizbank was, at the time of the Loans, majority owned by Sberbank and therefore subject to the EU capital markets restrictions. As readers are no doubt aware, the US also imposed similar capital markets restrictions on a similar (but not identical) list of Russian entities in 2014, also including Sberbank (and its majority-owned subsidiaries). However, in the case of the US sanctions, the Office of Foreign Assets Control issued a general licence permitting all transactions with Denizbank which would otherwise have been permitted as a result of its ownership by Sberbank. The fact that no equivalent licence or exemption was issued in respect of the EU sanctions gave rise to the relatively unusual situation where the EU took a more restrictive approach to equivalent sanctions than the US. Although not mentioned in the Announcement and not necessarily of relevance to SCB’s particular situation, (and now of only historical relevance in any event since Sberbank has since disposed of its interest in Denizbank), this underlines the importance for those companies that are subject to more than one sanctions regime of ensuring that they are aware of any gaps/differences between applicable regimes and adjust their internal systems and controls accordingly. The UK’s exit from the EU (and therefore the separation of its sanctions regime and greater ability to make unilateral licensing decisions) offers further potential for such divergences in the future and remains an area to which companies should pay close attention.

OFSI also took the opportunity to provide further compliance advice in the Announcement. Although this will not add a great deal to entities’ existing understanding of their sanctions compliance obligations, it nonetheless provides some insight into OFSI’s priorities and focus.

• The Announcement flags the differing scope of different sanctions regimes, noting the specific features of the EU sectoral sanctions and emphasising that “firms and individuals must ensure that they fully understand both the prohibitions and exemptions contained within financial sanctions legislation, and that they put in place appropriate [risk based] policies and processes to manage sanctions risk”.
• OFSI does not mandate a particular standard of financial sanctions compliance but notes that it is good practice for firms to continuously review their own processes.
• OFSI values voluntary disclosure and penalty reductions are available in the case of “prompt and complete” voluntary disclosure.
• The Announcement also contains a reminder of the importance of screening against relevant asset freeze lists and the action that should be taken where an asset freeze applies.