Since our last newsletter, sanctions have continued to evolve. We summarise some of the notable developments below.
- UK Government announces new Office of Trade Sanctions Implementation (“OSTI”).
- OFSI publishes its 2022-2023 Annual Review.
- The High Court considers “ownership and control” after the Court of Appeal judgment in NBT.
- Sanctions challenge rejected.
- New UK Sanctions under the Russia (Sanctions) (EU Exit) (Amendment) (No. 4) Regulations 2023.
- OFSI publishes updates to its Guidance in relation to Financial Sanctions.
I. Announcement of new Office of Trade Sanctions Implementation body
The UK Government announced the creation of the new Office of Trade Sanctions Implementation (“OSTI”) which will sit within the Department of Business and Trade. This body will be responsible for:
- the civil enforcement of trade sanctions, including the power to issue civil monetary penalties…
- trade sanctions business engagement and guidance.
- monitoring of compliance with trade sanctions to detect breaches, including investigating suspected breaches.
Notably, the Government has also announced that its remit will include preventing activity by entities seeking to evade sanctions by sending products through other countries to, for example, Russia.
This serves as a timely reminder that one of the Government’s key objectives into the new year remains to tighten trade sanctions, particularly in relation to dual-use goods.
Similarly, in December 2023 the National Crime Agency published a Red Alert, highlighting the risks and red flags associated with the export of “high-risk goods” which may be used by Russia on the battlefield in Ukraine.
Companies directly involved in the trade and export of “high-risk” or dual use goods, as well as the financial sector involved in the procurement cycle, should bear in mind the emphasis upon which the UK Government is placing at all levels on the importance of trade sanctions enforcement and implementation.
II. OFSI Annual Review 2023
In December 2023, OFSI released their 2022-2023 Annual Review noting that this year “saw the UK impose broad and severe sanctions against Russia… the UK has heavily restricted Russia’s access to the UK financial system, sanctioning all of its major banks and prohibiting new investment.”
Over the course of the year OFSI reported that 800 designated persons were added to the consolidated list, resulting in a total of 3,883 designated persons subject to asset freeze over 35 regimes by 31 March 2024. Of these, 653 persons were designated under the Russia sanctions regime (comprised of 574 individuals and 79 entities), with a total of £22.7 billion worth of Russian assets reported as frozen.
OFSI noted the positive impact of its new enforcement powers under the strict civil liability regime, indicating that this change had strengthened OFSI’s ability to take appropriate enforcement action against persons and companies who fail to adhere to their obligations. In noting this, OFSI recorded 473 suspected breaches of financial sanctions in 2022-2023, noting that 7 warning letters and 2 monetary penalties were issued (with a combined value of £45,000), with 51 cases closed requiring no further action.
Looking forward to 2024, OFSI intends to:
- Work to move towards a more proactive compliance and enforcement model underpinned by greater intelligence and information sharing.
- Establish information sharing principles, with a particular focus on financial intelligence and enforcement data; outreach/engagement with the private sector; and coordinated third-country engagement to deliver strong, consistent messages on sanctions implementation.
- Further clarify its civil monetary penalty powers under The Economic Crime and Corporate Transparency Bill.
III. Sanctions, control and contractual disputes: The Litasco case
CYK Partners Mikhail Vishnyakov and Jon Felce, and Associate Florence Sandberg have recently written for the Solicitors Journal to explore the recent High Court’s decision on Litasco SA’s payment dispute, which serves as yet another reminder to practitioners of the sanctions issues and disputes that the UK Courts are grappling with.
Please see their article here: https://www.solicitorsjournal.com/sjarticle/sanctions-control-and-contractual-disputes-the-litasco-case
IV. Graham William Phillips v The Secretary of State for Foreign, Commonwealth and Development Affairs  EWHC 32 (Admin)
The closely-watched Shvidler challenge is working its way through the Court of Appeal.
In the meantime, the Administrative Court has recently handed down a judgment regarding the designation of Mr Phillips, a UK national who has been designated under the UK Sanctions. Mr Phillips is a self-described journalist, who produces propaganda in favour of Russia and its invasion of Ukraine. Mr Phillips was designated in July 2022 and has been subject to an asset freeze since that time. Mr Phillips applied to the Court to review the Secretary of State’s decision to sanction him.
In determining the decision to maintain Mr Phillips’ designation, the Court noted that it had to decide whether the interference with the claimants’ Convention rights was prescribed by law and if it is a proportionate means of achieving a legitimate aim.
The Court held that “It is, in particular, foreseeable that a person who positively supports Russia’s propaganda war against Ukraine (for example, by parroting Russia’s propaganda narrative), rather than simply expressing an independent view which happens to align with Russia’s interests, might be subject to designation.”
The challenge was dismissed.
V. New UK Sanctions under the Russia (Sanctions) (EU Exit) (Amendment) (No. 4) Regulations 2023
With effect from 15 December 2023, the UK introduced amendments to its sanctions regime under the Russia (Sanctions) (EU Exit) (Amendment) (No.4) Regulations 2023. Whilst this legislation added a substantial tranche of new measures, of particular note are the following:
(1) Updates to Correspondent Banking Relations (Regulation 17(A)).
This amendment “prohibits UK banks from processing payments previously processed by designated banks… or which are intended for a designated bank”. As such, transactions (in any currency) which may have been routed directly or indirectly via a designated correspondent bank may not be processed by a UK bank (regardless of whether or not the account holder themselves are designated).
Whilst the definition of “processing” includes the clearing and settlement of payments, it does not include the act of crediting a payment, for the first time, to a UK credit or financial institution, where that payment is made to an account in the UK institution’s name, which is not held on behalf of, or for the benefit of a customer of that institution.
This amendment particularly is notable in light of the recent expansion to the list of banks designated under the Regulations. Previously Sberbank was the only banking entity to have been designated, this has now been expanded to include 26 further banks, particularly including: Alfa Bank, Bank Rossiya, Gazprombank and VTB Bank (among others).
(2) New Divestment Licensing Ground (Part 1ZA of Schedule 5)
The new licensing ground contained at Part 1ZA of Schedule 5 to the amended regulations enables OFSI to grant a licence to a UK entity to enable it to make a transfer of funds or economic resources which are in Russia, and are owned, held or controlled by the UK entity, to either the Government of Russia or a designated person (“a person concerned”). The aim of the licensing ground being to assist UK entities to divest themselves of those funds or economic resources and exit Russia.
Further, the new licensing ground enables “anything to be done by a UK entity in order to allow that entity to acquire from a person concerned an interest in that entity held by that person”, provided the sole consideration for that acquisition is the transfer of funds from the UK entity to the “person concerned”, and that the funds are transferred either to a frozen account or an account held by a non-UK financial institution outside the UK.
(3) New Reporting Obligations (Regulation 70A(1) and Regulation 18A(1))
With effect from 26 December 2023, persons designated under the Russia Sanctions regime are now required to disclose to OFSI the nature and value of any funds or economic resources that they own, hold or control. Designated persons are obliged to make an initial report either 10 weeks after 26 December 2023, or 10 weeks after the date of their designation if this occurs after 26 December 2023.
Further additional reporting obligations have been placed upon relevant firms (as defined under the Regulations), who are now required to inform OFSI as soon as possible “if it knows, or has reasonable cause to suspect, that it holds funds or economic resources for a person who whom financial services must not be provided to under regulation 18A(1) (a “prohibited person”).” Prohibited persons include the Central Bank of the Russian Federation, the National Wealth Fund of the Russian Federation, the Ministry of Finance of the Russian Federation, a person owned or controlled (directly or indirectly) by these entities, or a person acting on behalf of or at the direction of these entities.
VI. Updated OFSI Guidance
On 21 December 2023 OFSI published updates to its Guidance, notably including the following:
- Update to the ‘General Guidance’ at paragraph 5.1.3 to reflect the additional reporting obligations placed upon relevant firms if it knows or has reasonable cause to suspect it holds funds or economic resources for a “prohibited person” as listed under regulation 18A(1).
- Updates to the ‘General Guidance’ at paragraph 5.11 to reflect the additional reporting obligations placed on designated persons pursuant to regulation 70A(1). The ‘Russia Guidance’ has equally been updated to provide further details on the reporting obligations under both regulation 18A(1) and 70A.
- Updates to the ‘General Guidance’ at paragraph 6.5 to provide further guidance on OFSI’s approach to issuing licences to enable UK entities to divest funds or economic resources located within Russia to a designated person or the Russian Government. Notably the guidance states that OFSI “will not treat activity it considers to be business-as-usual as [full / partial] divestment” indicating that this includes restructuring the relevant assets so that the entity (“A”) still owns or controls it via a different entity which A owns or controls; or where the object of the activity is to fulfil A’s contractual obligations but is not aimed at the full or partial divestment of the relevant asset. Further, where an entity wishes to only partially divest funds or economic resources, it “must provide evidence to demonstrate that this is part of a strategy to ultimately fully divest the Relevant Asset… or a sufficient explanation as to why that is not possible.”
- Updates at paragraph 7.3 to the ‘General Guidance’ reflecting OFSI’s monetary penalty powers (as recently amended in the Policing and Crime Act 2017). In addition, noting that under regulation 88C(1A) OFSI has the power to impose monetary penalties on a strict liability basis for breaches of the reporting obligations placed on designated persons. Under this regulation the maximum value of the penalty is 50% of the value of the funds or economic resources which OFSI has not been informed of, or £1 million whichever is the greater value. The OFSI ‘Monetary Penalty and Enforcement Guidance’ and ‘Russia Guidance’ has similarly been updated to reflect these additional powers, including further details as to how OFSI will assess breaches of regulation 70A.
- Finally, within the ‘Russia Guidance’, OFSI have provided example scenarios of Correspondent Banking Transactions which will likely fall within the prohibitions under regulation 17A.