Sanctions tracker: FCA reports on review of firms' sanctions controls

In this post, we provide a round-up of key recent Russia sanctions developments in the UK and EU, including the findings from the Financial Conduct Authority's ("FCA") review of firms' sanctions controls.

UK

FCA review of sanctions systems and controls

On 6 September, the FCA published the results of a recent programme to assess the systems and controls relating to sanctions compliance for over 90 firms across a range of sectors. The review involved proactive assessments of firms' controls, using a new analytics-based tool, as well as the use of specific intelligence and reporting.

As a result of this work, the FCA has identified a number of examples of both good and bad practice which firms should consider carefully against their own systems and controls in this area. The FCA's findings cover five key themes:

• Governance and oversight: perhaps unsurprisingly the FCA identified that firms that had undertaken advanced planning were better placed to implement UK sanctions at speed following the invasion of Ukraine in February 2022. Firms should therefore consider what (if any) further planning they can/should be undertaking in order to be able to respond to future sanctions escalations. The FCA's observations in this area also relate to the management information provided to senior management on sanctions, noting that they expect improvements to be made where firms cannot show that senior management receive sufficient information or in cases where firms are reliant on global sanctions policies which may not be aligned to the UK position.
• Skills and resources: the FCA found that some firms still lack adequate resources to ensure effective sanctions screening and note the risks arising where backlogs arise in this area.
• Screening capabilities: the findings in this area emphasise the importance of firms being able to demonstrate that their sanctions screening tools are properly calibrated, both to the UK sanctions regime and to the risks faced by the firm.
• Customer due diligence ("CDD") and know your client ("KYC") procedures: consistently with some of the themes emerging from recent enforcement action, the FCA note that they have continued to identify instances of low quality CDD and KYC assessments and backlogs which may contribute to a failure to identify sanctioned individuals.
• Reporting breaches to the FCA: the FCA emphasise the importance of timely and accurate reporting, noting that they have observed inconsistencies across firms.

FCA supervised firms should consider the FCA's findings in detail and evaluate their approach to identifying and assessing sanctions risks, taking action where appropriate. The FCA note that they will continue to work closely with partner agencies and industry to share information and coordinate where appropriate. Where the FCA identify issues, they will "seek out the root causes and ensure effective remediation, which could include the use of regulatory tools". Firms should therefore assume that sanctions systems and controls will continue to be an area of supervisory focus for the FCA.

Recent challenge to UK designation

In a recent High Court case, a British citizen sought to challenge the Foreign Secretary's decision to designate him as subject to the UK's asset freeze under the challenge process set out in the Sanctions and Anti-Money Laundering Act 2018. The challenge was dismissed with the court finding that, ultimately, the executive remains best placed to assess the effectiveness and appropriateness of different methods of achieving its objectives, and the court will be reluctant to second guess those decisions.

For more detail, please see our separate blogpost.

New general licences and licensing grounds

On 29 September, the UK's Russia statutory guidance was amended to include a new licensing ground regarding various trade sanctions prohibitions on the provision of particular goods and services to Russia. The Export Control Joint Unit will consider licensing transactions that are necessary for the purposes of divestment from Russia.

On the same day, the Office of Financial Sanctions Implementation ("OFSI") published a new general licence ("GL") permitting the return of payments which:

• have been received by a non-designated credit or financial institution;
• directly from an institution which is also not designated; but
• which has at some point in the chain of payments been processed by a designated bank acting as originating, correspondent or intermediary institution; and
• where the original account holder and intended recipient are also not designated persons.

The GL will apply until 1 December 2023 and is prefaced by a note that it is issued for the purpose of providing certainty and does not reflect a view that transactions of the type outlined above will engage UK sanctions.

OFSI has also recently published a separate GL permitting designated persons to make payments to water companies for water and sewage.

New UK designations

On 29 September, the UK announced the designation of ten individuals and one entity said to have been involved in Russian sham elections in Ukraine. The new designated persons include the Central Election Commission of Russia as well as a number of officials and are listed in this OFSI notice.

Ban on Russian-origin iron and steel

The UK imposed a ban on the import of Russian iron and steel products processed in third countries in April 2023 (see our previous blogpost for details). Those measures came into effect on 30 September.

To accompany the coming into force of the ban, the UK has published guidance on the scope of these restrictions and the supply chain evidence that businesses can provide in order to demonstrate compliance.

EU

New designations

On 8 September, the Council of the EU announced the addition of six individuals to its Global Human Rights asset freeze list on the basis of serious human rights violations in Russia and the occupied regions of Ukraine. The relevant names can be found in Council Implementing Regulation (EU) 2023/1715.

Commission guidance

The European Commission has continued to update and expand its Russia sanctions FAQs. In addition, the Commission has published specific guidance for EU operators in relation to the due diligence that should be undertaken to address the risk of sanctions circumvention.