The G7 announced the creation of a new Enforcement Coordination Mechanism “to bolster compliance and enforcement of our measures and deny Russia the benefit of G7 economies” on the one-year anniversary of Russia’s invasion of Ukraine.
As set out in our introduction to the blog series, our sanctions experts in G7 offices will respond to a series of questions relating to sanctions enforcement and the potential impact of the Enforcement Coordination Mechanism. Following our post last week which covered the position from a US perspective (here), this blog post will be considering sanctions enforcement and the Enforcement Coordination Mechanism from the UK perspective.
Our next instalment will look at sanctions enforcement from the perspective of the EU, in light of the fact that three EU Member States form part of the G7 and the EU does not itself carry out sanctions enforcement activities.
What are the recent sanctions enforcement trends in the United Kingdom?
Financial sanctions and trade sanctions are implemented and enforced by separate authorities in the UK. Financial sanctions are implemented by the Office of Financial Sanctions Implementation (“OFSI“) and enforced by OFSI in tandem with the National Crime Agency (“NCA”), which has responsibility for criminal enforcement of financial sanctions. Trade sanctions are implemented by the Department for International Trade (“DIT“), administered by the Export Control Joint Unit (“ECJU“) or Import Licensing Branch (depending on the nature of the trade sanctions) and enforced by His Majesty’s Revenue and Customs (“HMRC“).
Broadly, UK sanctions enforcement is moving towards a US style enforcement model: enhanced inter-authority cooperation and greater focus on intelligence sources, giving rise to more frequent investigations that are resulting in larger fines, facilitated by the strict liability nature of UK sanctions offences (under which the maximum monetary penalty can be £1,000,000 per offence). Taking a closer look at the key trends we are seeing in the UK:
- an increase in the number of investigations into potential sanctions violations. This appears to be arising as a result of a combination of factors:
- post-Brexit, UK authorities have had the freedom to take more expansive interpretations of the restrictions. For example, in OFSI’s enforcement action against Hong Kong International Wine and Spirits Competition Ltd (“HK W&S“) it determined that HK W&S violated UK asset freeze restrictions by making intangible economic resources available to a designated entity by providing it with publicity. OFSI determined that publicity constitutes an intangible economic resource on the basis that the designated entity would likely ‘exchange’ the publicity for funds as its purpose was to increase sales – this illustrates a shift to a broader interpretation of activities which give rise to sanctions breaches.
- significant investment into the intelligence and enforcement teams within the authorities responsible for sanctions enforcement. For example, OFSI received resources to double the size of its investigations and enforcement teams during 2022, providing it with the resourcing to take a more proactive approach towards the identification and progression of investigations. Whilst less publicised, comparable investment has also been made into HMRC.
- proactive engagement from other UK authorities to encourage compliance and whistleblowing, as well as intelligence sharing. Most notably, the UK Financial Conduct Authority (“FCA“) has taken a number of steps to drive sanctions enforcement, including informing all bodies which it regulates that any report to OFSI regarding potential sanctions breaches (see below), must also result in a Principle 11 report to the FCA. This will drive greater intelligence sharing and coordinated enforcement activity between these key authorities. The FCA has also taken steps to encourage whistle-blowers to come forward where they are aware of sanctions breaches or sanctions control weaknesses within regulated bodies;
- as well as developing their own intelligence functions, UK authorities are also taking note of journalist coverage related to sanctions breaches and evasion. We have observed a number of instances of investigative journalism pieces signposting the UK sanctions authorities to particular sectors and/or entities of interest, which have then resulted in active investigations;
- OFSI has also entered into an ‘enhanced partnership’ with the US Office of Foreign Asset Control, under which they will exchange intelligence and best practices (announcement here). This is reflective of the shift within the UK to a US enforcement model.
- the expanded intelligence and investigatory activities of the UK authorities is resulting in more aggressive enforcement by OFSI and the HMRC, including the imposition of greater penalties. From a financial sanctions standpoint this has been facilitated by the introduction of civil penalties, which since June 2022 are able to be imposed on a strict liability basis. While, to date, the published fines are not as great as those imposed under the US regimes, there has been a steady increase in the penalties imposed. Further, HMRC has also been imposing greater fines for violations of UK export control laws, most recently a number of which have been in excess of one million pounds, providing a clear signal as to the general direction that penalties for breaches of trade sanctions will take;
- this more aggressive approach to enforcement is also being seen in the UK adopting a greater extraterritorial focus to sanctions implementation and enforcement. A recent example was the designation of MTS Bank PJSC, following it being licensed to provide banking services in the UAE, a key financial hub for the movement of Russian funds. More broadly, we are observing UK authorities pushing the boundaries of their enforcement jurisdiction beyond that which has historically been accepted.
Against this developing enforcement landscape, we have seen considerable aggression from UK sanctions authorities in relation to the interpretation of the scope of UK restrictions and enforcement investigations in respect of the Russia-related sanctions. Our sense is that this trend will continue on its current trajectory and we will see an uptick in enforcement investigations – specifically in relation to the Russia regime – by UK sanctions authorities in the near future.
What are the maximum penalties for violations?
In the UK, sanctions violations can result in liability for organisations, as well as for the individuals involved.
Breaches of financial sanctions are criminal in nature and punishable by up to seven years imprisonment and/or an unlimited fine. OFSI does also have the power to penalise financial sanctions violations on a civil basis, the monetary penalty in these circumstances may be significant (up to 50% of the value of the transactions in question). As mentioned, in June 2022 the UK adopted a strict liability model for civil penalties for sanctions violations, meaning that they will be easier for OFSI to impose.
Similarly, breaches of trade sanctions are criminal in nature, with violations resulting in imprisonment up to ten years and/or an unlimited fine. Violations of trade sanctions may also be settled on a civil strict liability basis.
Criminal prosecutions of a corporate may also be resolved by the corporate entering into a deferred prosecution agreement.
In addition, sanctions violations also carry significant commercial risk for entities involved, for example reputational damage, revocation of banking facilities or insurance, as well as liability for contractual damages resulting from purported breaches of sanctions or compliance with law provisions.
Is there a mechanism by which countries can submit a voluntary self-disclosure of possible violations to mitigate penalties?
The UK does have a voluntary disclosure regime under which persons (both legal and individual) who suspect that sanctions violations have occurred may self-report. Both OFSI and HMRC take into consideration any voluntary self-disclosure when considering what penalty, if any, to impose. Generally, a voluntary self-disclosure will be considered to be a ‘mitigating factor’ and will result in a penalty reduction (in the case of OFSI, the maximum reduction is between 30-50% depending on the nature of the offence).
The UK also imposes mandatory reporting obligations on certain regulated entities, such as financial institutions. This means that where these regulated entities become aware of actual or potential sanctions violations, they are required to make a report to OFSI. As noted above, where regulated financial institutions make such reports to OFSI they are also mandated to make a Principle 11 report to the FCA. Consideration may also need to be given to the need to file a ‘SAR’ (suspicious activity report) under anti-money laundering laws.
What do you think the G7 Enforcement Coordination Mechanism means for sanctions enforcement in the United Kingdom?
Per the G7 Leaders’ Statement (UK issuance here) the purpose of the Enforcement Coordination Mechanism is to prevent and respond to evasion and circumvention of Russia-related sanctions measures, as well as to bolster compliance with such measures, specifically in third countries.
In our experience, UK authorities have been taking an aggressive approach in respect of enforcing the UK’s Russia sanctions regime, including by pushing the boundaries of its jurisdiction beyond that which has historically been accepted. We see the G7 Enforcement Coordination Mechanism as a way in which UK authorities might legitimise this more expansive jurisdictional approach – similar in some respects to the extra-territoriality of US secondary sanctions. This is an approach which we have already seen emerging under the OFSI-OFAC enhanced partnership, as highlighted above.
In addition, the Enforcement Coordination Mechanism opens the door for greater collaboration between the UK and G7 countries, particularly in respect of enforcement investigations. A more collaborative approach in the enforcement space could give rise to greater liability for entities as they could be subject to investigations and penalties in more than one jurisdiction.
What is one thing that you would recommend companies do now to get ready for increased enforcement in the United Kingdom and increased coordination with the other G7 members?
The G7 Leaders’ Statement implies that G7 jurisdictions will be looking at trade occurring via third countries and the risk that this may give rise to circumvention of sanctions restrictions. It is therefore important for organisations to assess their global operations and identify areas of risk where business may be carried out concerning Russia that is contrary to UK or other sanctions restrictions. Organisations should also assess their internal controls to ensure they have mechanisms in place which can detect any potentially problematic transactions and prevent those activities from continuing without further review from a sanctions compliance expert. This includes raising overall awareness within the organization.
