Written by Qi Jiang, Christopher Hill and Nigel Brook
On 18 February 2020, the Economic Secretary to the Treasury (Minister) upheld the decision by the Office of Financial Sanctions Implementation’s (OFSI) to issue monetary penalties totalling £20.47 million against Standard Chartered Bank (SCB) for breaches of financial sanctions.
The penalties were imposed for breaches of restrictive measures imposed by the European Union (including the UK) intended to prevent certain Russian banks, companies, and their subsidiaries from accessing EU primary and secondary capital markets (including access to loans).
As part of those measures, an EU person is prohibited from making loans or credit or being part of an arrangement to make loans or credit, available to sanctioned entities, where those loans or credit have a maturity of over 30 days. 1 However, loans and credit which have the specific and documented objective of financing the import/export of non-prohibited goods coming in or out of the EU are exempt, so as not to harm legitimate EU trade (the EU Exemption). Non-compliance with this prohibition is a contravention of UK law. 2
SCB made 102 loans to Denizbank A.Ş. between 8 April 2015 and 26 January 2018. At the time the loans were made, Denizbank A.Ş. was majority owned by Sberbank, which was at the relevant time subject to these restrictive measures. As Sberbank’s majority-held subsidiary, the restrictions also applied to Denizbank A.Ş.. Whilst a number of the loans fell within the EU Exemption, 70 loans with an estimated transaction value of over £266 million did not.
OFSI was granted powers as of 1 April 2017 to impose civil monetary penalties where it is satisfied that a person has contravened financial sanctions legislation, and that person knew, or had reasonable cause to suspect, that the person had contravened or was in non-compliance with financial sanctions legislation. 3 Thus, the monetary penalties imposed on SCB were only in relation to the 21 loans (with a transaction value of £97.4 million) issued between 7 April 2017 and 26 January 2018.
SCB initially ceased all trade finance business with Denizbank A.Ş. once it became a sanctioned entity. However SCB then sought to introduce 'dispensations' enabling such loans to be made where they considered an exemption (such as the EU Exemption) was applicable.
OFSI was of the view that such 'dispensations' were not appropriately implemented, and their operation over an extended period of time enabled loans to be repeatedly made to Denizbank A.Ş. which were not within any available exemption.
Whilst the penalty notice does not contain any details about the nature of the 'dispensations' and their effectiveness, this aspect of the case goes to show that the effectiveness of sanctions compliance measures (especially where they are calibrated to rely on available exemptions) should be monitored, reviewed, and tested on an ongoing basis.
These are the first substantial penalties imposed by OFSI since it was granted powers to impose civil monetary penalties in 2017. They dwarf previously imposed fines (which ranged from £5,000 to £146,000). 4
This is the first case that OFSI has considered to be a 'most serious' case.
OFSI takes the view that every case that meets its criteria for a monetary penalty is by definition serious. It acknowledges that some cases "are clearly much more serious that the majority". OFSI uses the terms ‘serious’ and ‘most serious’ to draw this distinction. OFSI guidance explains that ‘most serious’ type cases may involve a very high value, blatant flouting of the law, or severe or lasting damage to the purposes of the sanctions regime.
However, the penalty notice does not explain the basis for this finding.
What we do know is that both OFSI and the Minister agreed that SCB's contraventions were 'most serious', even though they both agreed that:
"[SCB] did not willfully breach the sanctions regime, had acted in good faith, had intended to comply with the relevant restrictions, had fully co-operated with OFSI and had taken remedial steps following the breach.”
Therefore, financial institutions and companies should be mindful that good faith efforts to comply with sanctions may be insufficient to prevent a breach from being assessed as 'most serious'.
Voluntary disclosure of breaches to, and cooperation with, OFSI could result in a significant reduction in penalties in line with the process set out in OFSI guidance on the penalty process. 5 Since SCB made a voluntary disclosure in this case, the penalties for SCB included a 30% reduction, which is the maximum reduction possible for a 'most serious' case.
This reduction makes clear the "premium" that OFSI places on voluntary disclosure and confirms that there could be a benefit to voluntary disclosure even in the most serious cases.
This is the second instance in which the ministerial review process has been availed of. In both cases, the initial penalty imposed by OFSI was revised downwards. In this case, the Minister was of the view that OFSI should have given more weight to SCB's good faith actions and co-operation with OFSI in its penalty recommendation. The Minister reduced the overall monetary penalty by around £10.4 million, a reduction of around 33 percent.
Any application for Ministerial review should be carefully weighed because the Minister also has the power to increase the penalty amount imposed by the OFSI.
It remains to be seen how the review process could affect OFSI’s approach to case assessment and imposition of penalties in the future.
1 EU Council Regulation 833/2014, Article 5(3).
2 The Ukraine (European Union Financial Sanctions) (No.3) Regulations 2014, Regulation 3B.
3 Policing and Crime Act 2017, section 146.
4 See https://www.gov.uk/government/collections/enforcement-of-financial-sanctions.
5 OFSI, 'Monetary Penalties for Breaches of Financial Sanctions' (May 2018). See https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/708991/Monetary_Penalties_Guidance_web.pdf.