Sanctions Synopsis October 2024 Edition

By Mikhail Vishnyakov and Emily Davies

As the past two and a half years have shown, the UK sanctions regime will remain a topic of considerable importance for UK businesses (and for foreign businesses with a UK nexus). The UK sanctions regime continues to evolve, and this synopsis captures the following recent developments:

A very substantial FCA fine for inadequate sanctions compliance controls.
Further judicial guidance on the “control” test.
The introduction of a UK secondary sanctions mechanism.
Opening of the Office of Trade Sanctions Implementation.

If any of these topics are of interest, please do not hesitate to reach out.

1. FCA fines Starling Bank for “shockingly lax” sanctions controls

The FCA has recently fined Starling Bank Limited for inadequate financial crime controls, specifically criticising its approach to financial sanctions compliance.

Aside from the very substantial quantum – £28,959,426 – the Final Notice is significant because it illustrates the FCA’s focus on sanctions compliance, and its ability to impose fines for inadequate sanctions systems without needing to show that sanctions were in fact breached.

More details available here: https://international-adviser.com/expert-view-fca-fine-of-challenger-bank-for-shockingly-lax-sanctions-screening/

2. What does “control” mean?

The question of whether an entity is “controlled” by a designated person (and is therefore itself sanctioned) has continued to appear in the English Courts. In the latest development, the High Court identified four categories of “control” (Hellard & Ors v OJSC Rossiysky Kredit Bank & Ors [2024] EWHC 1783 (Ch)).

This case concerned an application by the trustees in bankruptcy of Mr Anatoly Motylev, a Russian national residing in London, for directions under s.303(2) Insolvency Act 1986 on whether they should treat certain Russian bank creditors as being caught by sanctions because they are “controlled” by sanctioned persons.

The Court noted that although the question can be simply put, “the answers are not simple at all” and that “it is difficult on the basis of the current law to assess in what circumstances a person should be regarded as being owned or controlled directly or indirectly by a designated person”. Indeed, these difficulties have been highlighted by previous case law.

The Court held that the test is satisfied if the designated person has control of at least one of four types:

de jure control, which exists where there is an absolute right to exercise control, embedded, for example, in the constitution of a company or a body;
actual present de facto control, which exists where the putative controller is manifestly ‘calling the shots’ with no legal right to do so;
potential future de jure control, which would exist where, although the designated person enjoyed no legal right of ownership or control, the designated person had the legal means to obtain ownership or control (such as where the designated person had an option or a forward contract to acquire a majority shareholding in a company); and
potential future de facto control, which would exist where, although there was no evidence that the putative controller was currently exercising de facto control, there is some good reason to believe that the putative controller could, if he or she wished, exercise control in some manner. This type of control is “very rare”. Notably, the Court gave an example that “anyone with a gun (or access to a gun)” would not “control” an entity via coercion.

In addition to providing valuable guidance regarding the “control” test, the Court also considered whether the creditors’ voting rights can be accepted by the trustees, or whether they are funds or economic resources that must be frozen. The Court distinguished between creditors’ voting rights (which, on the facts, could be exercised) and shareholders’ voting rights (which may need to be frozen).

3. The introduction of UK secondary sanctions

New grounds for imposing sanctions have been added to the already broad designation criteria. Notably, one such addition is what appears to be the UK version of “secondary sanctions”, permitting the UK government to impose sanctions on anyone who provides financial services, or makes available funds, economic resources, goods, or technologies to persons or entities who themselves satisfy any of the broad sanctions bases.

For example, making funds available to a business which is of “economic significance” or “strategic significance” to the Government of Russia (both terms are very broad), may be sufficient to justify the imposition of sanctions, even if that business is not itself sanctioned. This development has attracted significant attention.

Whilst the amending legislation does not explicitly state that the scope of authority extends extraterritorially, in its Guidance on the Amendment Regulation, the UK Government has confirmed that the amendments expand “the criteria under the Regulations to designate entities, including foreign financial institutions that facilitate transactions on behalf of, or in support of, specified sectors of strategic significance to the Government of Russia. This in line with G7 commitments to further curtail Russia’s use of the international financial system which Russia is using to facilitate its war in Ukraine.”

Accordingly, it appears that the UK Government will now be able to sanction entities even if they do not trade or transact with sanctioned entities, or otherwise undermine the effectiveness of UK sanctions.

4. OTSI Becomes Operational

On 11 October 2024, the UK Government announced that the Office of Trade Sanctions Implementation (“OTSI”) became operational. OTSI “has been created to strengthen the UK’s implementation and enforcement of trade sanctions – to maximise their impact”.

OTSI will take the lead on civil enforcement in relation to trade sanctions, whilst the Department for Transport will largely lead on enforcement in relation to aircraft and shipping sanctions.

OTSI has the power to investigate and take enforcement action in relation to:

providing or procuring sanctioned services;
moving, making available, or acquiring sanctioned goods or technology outside the UK; and
providing ancillary services to the movement, making available or acquisition of sanctioned goods or technology outside the UK.

OTSI has also been given the power to impose monetary penalties for breaches of trade sanctions, with a permitted maximum of the greater of £1,000,000 and 50% of the estimated value of the breach or failure to comply (Regulation 9 of the Trade, Aircraft and Shipping Sanctions (Civil Enforcement) Regulations 2024).

Notably, these civil monetary penalties are enforceable on a strict liability basis, similar to those powers given to OFSI in relation to financial sanctions enforcement. In essence when determining whether to impose a penalty, OTSI should ignore any defence “that the person did not know and had no reasonable cause to suspect that an offence had been committed.” (Regulation 6 of the Trade, Aircraft and Shipping Sanctions (Civil Enforcement) Regulations 2024).

The establishment of this new sanctions enforcement body, OFSI’s emphasis of its enforcement objectives, and the FCA’s recent fine (outlined above), demonstrates that complying with UK sanctions will continue to require considerable investment and attention.