On September 27, 2022, HM Treasury's Office of Financial Sanctions Implementation ("OFSI") announced that a monetary penalty of £30,000 was imposed on April 26, 2022 against Hong Kong International Wine and Spirits Competition Ltd. ("HKIWSC") for breaches of the Ukraine (European Union Financial Sanctions) (No. 2) Regulations 2014 (the "UK Regulations") and Council Regulation (EU) No. 269/2014 (Ukraine Misappropriation and Human Rights) (the "EU Regulations"). HKIWSC is a UK registered company.
According to OFSI's penalty report, HKIWSC received three payments and 78 wine bottles from State Unitary Enterprise of the 'Republic of Crimea' Production-Agrarian Union ("Massandra"), a designated entity since July 25, 2014, for entry into competitions between September 2017 and August 2020. The total cumulative value of the payments and wine bottles received by HKIWSC was estimated at £3,919.62. Additionally, HKIWSC made publicity – considered an intangible economic resource – available to a UK designated person.
The HKIWSC case represents the eighth use of OFSI's civil monetary penalty powers since they were introduced under Part 8 of the Policing and Crime Act 2017 ("PACA"). Several useful hints as to OFSI's enforcement priorities and interpretation of the scope of asset freeze sanctions can be discerned from the HKIWSC case.
OFSI's enforcement focus cuts across many sectors
The HKIWSC case underscores that OFSI has its sights set on companies across a range of industries and not just traditional financial institutions. HKIWSC is active in the hospitality sector as an organizer of wine contests. OFSI's previous enforcement actions have involved banking, financial services, fintech, oil and gas services and telecommunications. The addition of a hospitality company to this list suggests that OFSI's investigations are covering, and may continue to cover, a broad range of sectors.
Self-disclosure is not OFSI's only means of identifying potential breaches
OFSI became aware of the transactions forming the basis of this enforcement action as a result of the submission of a suspected breach report detailing a payment received by HKIWSC from Massandra, most likely by a financial institution involved in the payment flow. As HKIWSC did not self-disclose the violations forming the basis of this enforcement action, OFSI made use of its investigation powers to obtain information from HKIWSC regarding the conduct forming the basis of the monetary penalty.
OFSI's discretion as to what is "reasonable and proportionate" is at least as important when calculating penalties as the value of the funds/resources at issue
Under the PACA, OFSI has the discretion to determine the amount of a penalty up to the greater of GBP 1,000,000 or 50 percent of the value of the funds or resources involved in a sanctions breach. The version of OFSI's Monetary Penalties for Breaches of Financial Sanctions Guidance (the "Guidance") applicable to the HKIWSC case states that, in calculating a penalty, OFSI has regard to what is "reasonable and proportionate."
HKIWSC's penalty of £30,000 related to three transactions with a total cumulative value estimated at £3,919.62 and the provision of intangible economic resources (i.e., publicity). While it was not possible to ascribe a financial value to the publicity, that was not necessary because PACA explicitly provides for the possibility of imposing a monetary penalty in such circumstances. The maximum possible penalty was therefore £1,000,000 per breach. HKIWSC did not make a voluntary disclosure and, therefore, did not receive any voluntary disclosure discount on its penalty.
The £30,000 penalty imposed on HKIWSC was therefore based on what OFSI considered to be a reasonable and proportionate penalty, taking into consideration a range of factors, including that HKIWSC:
- received tangible funds and/or economic resources (e.g., wine bottles) from Massandra for entry into HKIWSC's 2017 – 2020 competitions;
- made an intangible economic resource (e.g., publicity) directly available to Massandra between September 2017 and August 2020; and
- made materially complete disclosures in response to information requests and otherwise fully cooperated with OFSI throughout its investigation.
Reminder as to the scope of UK financial sanctions
OFSI's penalty report makes clear its position that companies need to consider their potential sanctions risk exposure broadly, to include the potential provision of intangible economic resources such as publicity and certain types of intellectual property, and not just financial transactions and tangible economic resources.
In the HKIWSC enforcement action, OFSI determined that publicity made available to Massandra following entry into HKIWSC's competitions was an intangible economic resource because it would be exchanged or used by Massandra in exchange for funds based on the reasonable inference that the purpose of the publicity was to increase Massandra's wine sales.
The importance of due diligence
The HKIWSC enforcement action communicates OFSI's position that financial sanctions apply to all sectors, not just the financial sector, and "it is not sufficient for any company to rely on the banking sector to conduct due diligence on [your] behalf," especially if a company has global customers and/or operates internationally.
OFSI's penalty report makes clear its expectation that companies should consider the international scope of their activities, assess their own exposure and put in place appropriate due diligence measures to identify and manage potential financial sanctions risks. While OFSI does not mandate the specific measures that companies should take, it suggests that companies:
- make themselves aware of applicable financial sanctions;
- assess all aspects of their business to identify if any companies or individuals with which they do, or are considering doing, business are designated or owned/controlled by designated persons; and
- consider their exposure – particularly when operating in high-risk regions – and take steps to mitigate against dealing with designated persons/entities.
There is not always benefit to be derived from appealing OFSI's initial penalty
The HKIWSC enforcement action reinforces a recent trend toward companies receiving no reduction in OFSI's initial penalty on appeal. In each of the HKIWSC, Clear Junction and TransferGo enforcement actions, having reviewed the case materials, the Minister upheld OFSI's decision both to impose the penalty and the initial amount of the penalty, concluding that the initial penalty was "within the range of reasonable and proportionate options open to OFSI."
OFSI will continue to investigate and impose penalties for financial sanctions breaches occurring prior to the end of the Brexit transition period
The sanctions breaches in the HKIWSC case occurred prior to the end of the Brexit transition period between 2017 and 2020 and were therefore breaches of the relevant EU Regulations and UK Regulations. The case underlines OFSI's commitment to continue investigating and, where appropriate, imposing monetary penalties for breaches occurring under EU Regulations and UK Regulations prior to the end of the Brexit transition period on December 31, 2020. It is worth noting that OFSI is not able to impose monetary penalties in relation to conduct that occurred prior to its acquiring this power in April 2017. However, the UK does not impose a statute of limitation with respect to the criminal prosecution of financial sanctions violations.
- Sanctions compliance for companies operating in a wide range of sectors is of growing importance, as OFSI has demonstrated its appetite for bringing enforcement actions for financial sanctions breaches across a wide range of sectors.
- It is vital that companies consider their potential sanctions risk exposure broadly when assessing and designing controls to mitigate the financial sanctions risks associated with their business activities.
- It is crucially important for companies to conduct robust due diligence checks to ensure that they understand with whom they are doing business. Implementing such steps will enable companies to mitigate their potential risk through, among other things, the early identification of designated persons involved in potential transactions.
- The investigation and disclosure to OFSI of potential breaches of financial sanctions should be undertaken carefully and with appropriate cooperation, to maximize the likelihood of a swift and satisfactory outcome.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.