The UK Government's Office of Financial Sanctions Implementation ("OFSI") recently announced it has fined Standard Chartered Bank £20.5 million (about $25 million) for alleged breaches of sanctions.
The sanctions in question (the "Russia/Ukraine Sanctions") were put in place following the dispute over the status of Crimea in 2014 and are provided for in the Ukraine (European Union Financial Sanctions) (No.3) Regulations 2014, which implement EU Regulation 833/2014.1 Among other things, the Russia/Ukraine Sanctions prohibit the provision of loans with a maturity over 30 days to certain entities (including Sberbank) as well as their majority-held subsidiaries established outside of the European Union.
Between 2015 and 2018, Standard Chartered was alleged to have provided over 100 loans to DenizBank A.Ş., a Turkish entity. At the time of the loans, DenizBank was a wholly-owned subsidiary of Sberbank. Under the Russia/Ukraine Sanctions, a sanctioned entity's majority-held subsidiaries established outside of the European Union (for example, in Turkey) are subject to the same restrictions as the parent company. Therefore, as Sberbank was sanctioned at the time of the relevant transactions, DenizBank was also sanctioned as its wholly-owned non-EU subsidiary. From the OFSI announcement, it appears that Standard Chartered did not put in place compliance measures that properly accounted for this provision of the legislation.
The £20 million fine is notable as it is the largest sanctions penalty issued by the United Kingdom since OFSI was established in 2016. The previous record OFSI fine was only £146,000 (about $180,000). It clearly demonstrates that UK authorities are prepared to impose material penalties against those who contravene sanctions. It remains to be seen whether OFSI will make future fines of this size and whether this is the start of a new approach taken by the regulator.
Furthermore, the fine could have been even larger. EU sanctions are implemented at the member state level, meaning enforcement and the imposition of penalties are left to the individual EU members states (and the UK, during the Brexit transition period). Under UK legislation, the maximum penalty for a breach of the Russia/Ukraine Sanctions is the greater of (i) £1 million (about $1.2 million) and (ii) 50% of the estimated value of any funds or resources to which the breach relates. However, while the Russia/Ukraine Sanctions were passed at the EU level in 2014, the UK legislation which allows OFSI to enforce monetary penalties only became effective in April 2017. Therefore, OFSI was only able to levy a penalty on the loans made after the implementation date (being £97 million of the total £266 million reported to have been loaned).
The fine was reduced by 30% due to Standard Chartered's voluntary disclosure of the matter and their cooperation with the OFSI in the course of its investigation, and further reduced following ministerial review, as the minister felt that more weight ought to be ascribed to these mitigating factors. The case highlights that where a breach of sanctions does occur or is suspected despite a person's best efforts, honesty is the best policy. Standard Chartered's early and meaningful cooperation with the authorities helped it minimize the very significant fine it faced.
By way of comparison, OFSI's enforcement strategy is significantly less aggressive than that of the U.S. Office of Foreign Assets Control (OFAC). While OFSI has to date successfully brought actions for breach of sanctions approximately once a year, OFAC typically prosecutes 10-20 cases a year and its record fine stands at $8.9 billion (levied against BNP Paribas in 2015 for breaches of Sudan-, Cuba- and Iran-related sanctions).
Nonetheless, this does not diminish the risks related to EU/UK sanctions non-compliance. Companies operating in the UK and EU should be aware of specifics of relevant sanctions regimes at both the national and EU level, and ensure that their compliance programmes consider in detail whether non-EU subsidiaries of sanctioned entities (particularly Russian banks and energy companies) are caught by such sanctions. Following the Brexit transition period, compliance regimes should also take account of the specifics of UK sanctions. Whilst it has been suggested that the UK may align its sanctions policy to that of the EU following the end of the Brexit withdrawal period, there will remain a risk of discrepancy between the two regimes. For further detail, see our blog post on the topic.
1. Following the end of the Brexit transition period, anticipated for the end of 2020, EU regulations will cease to have direct effect and new UK-specific sanctions legislation will come into force.
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