Regulatory ramp-up: UK's OFSI imposes landmark £20m fine

The UK's Office of Financial Sanctions Implementation (OFSI) has for the first time imposed (PDF) a multi-million-pound fine for a breach of financial sanctions regulations.

Following an OFSI investigation, the regulator imposed two monetary penalties on Standard Chartered Bank (SCB). These penalties – which amount to £20.4m – are by far the highest fines OFSI has issued to date and are far greater than the previous record fine of £146,341 (PDF) imposed against Telia Carrier UK Limited (Telia) in 2019.

Background 

In July 2014, the EU imposed a suite of sanctions against Russia and Crimea following Russia’s military intervention in Ukraine. 

One of these measures was aimed at restricting certain Russian banks, companies and their subsidiaries access to EU capital markets ('the EU prohibition') (see article 5(3) of the EU Regulation).

Between April 2015 and January 2018, SCB made a series of 102 loans to Denizbank (DZB), a nearly wholly owned subsidiary of the sanctioned Russian bank, Sberbank. OFSI assessed and concluded that around 70 of the loans made to DZB were in breach of the EU prohibition. 

Importantly, 21 of these loans worth circa £97.5m were issued by SCB to DZB after 1 April 2017 – the date OFSI acquired its enforcement powers under the Policing and Crime Act 2017. 

As such, it was only in respect of these 21 loans that OFSI issued its penalties. OFSI concluded that SCB was aware of the EU prohibition and had initially taken steps to cease all trade finance to DZB. 

Over time, SCB relaxed its controls and sought to introduce mechanisms that would enable loans to be made to DZB, incorrectly assessing such loans were exempt from the EU prohibition.

Upon SCB’s realisation of the breach, it self-reported to OFSI and subsequently co-operated with the regulator’s investigation. OFSI grouped the 21 loans into two separate buckets, initially awarding a fine in respect of the first bucket in August 2019 with the second fine following late last year. 

In January 2020, SCB exercised its right to ministerial review of the fines. While the Minister considered that SCB's conduct amounted to a 'most serious breach' of financial sanctions, they nevertheless reduced the amount of the penalties as a result of SCB’s full cooperation with OFSI’s investigation.

SCB did not further challenge the penalty in the Upper Appeals Tribunal and has now paid the fines.

Key takeaways

There are four key takeaways from these landmark OFSI penalties.

1. Size of the fine

The size of the fines are unprecedented for OFSI: to date, OFSI has only issued three previous fines of £5,000, £10,000 and £146,341 respectively. 

This latest fine should act as a reminder of the potential reach of OFSI’s enforcement powers and the consequences of failing to comply with financial sanctions. 

The fact that both the SCB and Telia penalties were reduced following ministerial review suggests that OFSI is taking an aggressive approach to how it calculates penalties and is determined to maximise the deterrent effect.

2. Discount for co-operation

SCB was granted a 30 per cent reduction due to its co-operation with OFSI throughout its investigation. This included self-reporting the potential breach, carrying out an internal investigation, providing a detailed report to OFSI and giving interim updates throughout. 

This is consistent with OFSI’s approach to calculating penalties in each of its enforcement actions to date and underscores the importance of early and constructive engagement for firms seeking a more lenient outcome.

3. Keeping on top of risks

A key part of the compliance agenda for any company should be ensuring that front-line staff understand, identify and proactively escalate red flags. 

For SCB, the financial sanctions breaches persisted over an extended period of time without intervention. 

An important step to mitigate sanctions compliance risks is to appraise and evaluate business decisions regularly and ensure that mistakes which may happen are identified as early as possible. 

This includes ensuring that front line staff involved in the day-to-day running of the business understand the regulatory implications of their decisions.

4. Evolution of OFSI

The SCB penalties are a clear statement of intent by OFSI and continue a trend that started last year with OFSI’s first three enforcement penalties.

Looking ahead, the question will be whether OFSI will continue with this heightened enforcement activity and seek to establish itself as the foremost financial sanctions regulator this side of the Atlantic. 

This will undoubtedly become an increasingly significant issue once the Brexit transition period comes to an end (at present, 31 December 2020) and the UK has free reign to design its own unilateral sanctions regime independent of the EU.