As businesses across all sectors adapt to new ways of working, compliance issues may understandably slip down the priority list. However, compliance obligations that existed before the COVID-19 crisis remain in force, and still need to be addressed
The need to adhere to international sanctions is no exception, and, the recent financial penalty imposed on Standard Chartered Bank (SCB) serves as a reminder of the potentially serious consequences of failing to ensure that compliance obligations are understood and followed.
In this article we briefly analyse the facts that led to the SCB penalty, and some compliance guidance issued by Office of Financial Sanctions Implementation (OFSI).
Why were the sanctions imposed?
On 18 February 2020, the Treasury upheld OFSI’s decision to impose two monetary penalties on SCB for breaches of Article 5(3)of EU Council Regulation 833/2014 and Regulation 3B of The Ukraine (European Union Financial Sanctions) (No.3) Regulations 2014 (the Regulations). Two separate penalties were imposed totalling £20.47 million (this was reduced from £31.5 million following a ministerial review instigated by SCB under s.147 Police and Crime Act 2017). The penalty included a 30% discount from the penalty that would otherwise have been imposed, in light of the voluntary disclosure made by SCB.
The penalties derived from restrictive measures imposed by the EU in July 2014 aimed at safeguarding the sovereignty and independence of Ukraine. In particular, the Regulations were intended to prevent certain Russian banks, companies, and subsidiaries from accessing EU primary and secondary capital markets (including access to loans).
SCB granted 102 loans to Denizbank A.Ş. between April 2015 and January 2018. At the time the loans were made, Denizbank was almost wholly owned by Sberbank of Russia. Sberbank was at the material time subject to relevant restrictive measures. As Sberbank’s majority-held subsidiary, the restrictions also applied to Denizbank.
Article 5(3)(a) of the Regulations provides a relevant exemption, permitting loans or credit, which have the objective of financing the import or export of non-prohibited goods between the EU and any third country to ensure that legitimate EU trade is not harmed. Accordingly, the exemption requires that relevant trades have an EU nexus and concern goods coming in or out of the EU.
OFSI found that while a minority of the 102 loans were permitted under the Regulations, 70 loans (with an estimated value exceeding £266 million) did not have any EU nexus and so did not qualify for the prescribed exemption.
The case was assessed by OFSI as ‘most serious’. Whilst SCB had initially ceased business with Denizbank, it later sought to introduce dispensations enabling business to continue. OFSI, however, concluded that the dispensations were invalid, which led to SCB being in breach of the Regulations.
SCB disclosed the suspected breaches to OFSI, carried out an internal investigation, provided a detailed report of that investigation and cooperated with OFSI’s own investigation. In light of those factors, OFSI reduced the penalty by 30% in line with the process in its published guidance on case assessment.
In addition to announcing the penalty, OFSI took the opportunity to issue some compliance guidance, which included the following points:
- Firms and individuals must ensure that they fully understand prohibitions and exemptions contained within financial sanctions legislation, and put in place appropriate policies and processes to manage risk and ensure compliance. These should address the varying risks across different jurisdictions.
- Whilst OFSI does not mandate a particular standard of financial sanctions compliance, it is good practice for firms to continuously review their own due diligence and compliance processes. This will ensure that breaches are prevented or recognised early and appropriate action taken.
- OFSI values voluntary disclosure. Co-operation is a sign of good faith and makes enforcing the law easier, quicker and more effective. The prompt and complete voluntary disclosure of a sanctions breach in ‘serious’ cases can lead to a 50% reduction in the final penalty amount. If a matter is deemed ‘most serious’ (as with SCB) that reduction is a up to 30%.
- Firms should ensure they carry out appropriate sanctions screening, and act on the results in the correct way.
- Additional guidance is given in the event that sanctions also involve an asset freeze, both as to what may not be done with relevant assets and the positive obligations that may then fall on firms or individuals.