In its review of the performance of OFSI¹ in March 2019², a House of Commons Committee urged that "public examples of enforcement will be necessary if OFSI is to be recognised as an effective deterrent". Last week, OFSI took a significant step to becoming that effective deterrent with its fourth, and by some margin its largest, monetary penalty to date: a fine of £20.4 million to Standard Chartered, a UK-headquartered global bank, relating to the EU's Russia sanctions³. The decision marks a step change in the enforcement risk associated with financial sanctions in the UK, and serves to give some valuable further illustration of how OFSI applies its monetary penalties framework. It does not put OFSI in the same league as the US sanctions enforcement body OFAC, but it does serve as a reminder that UK and EU sanctions have some bite of their own.

OFSI was established in 2016, and was empowered to issue monetary penalties in April 2017. It did not issue any penalties until 2019 and its first three penalties (for £5,000, £10,000 and £146,341 respectively) would likely have had only a limited deterrent effect. The "permitted maximum" penalty that OFSI can impose is the greater of £1 million, or 50% of the estimated value of the funds involved in the breach. With this £20.4 million penalty, OFSI demonstrates the potential breadth of that second percentage-based limb.

Details of the breach

The penalty related to the EU and UK sanctions regarding Russia. EU persons and entities have been prohibited, since 2014, from, among other things, making new debt (including any loan of more than 30 days) available to certain named Russian entities and their non-EU subsidiaries. There are exceptions, including a "trade finance" exemption which applies to loans which finance legitimate trade between the EU and a third country. The application of these provisions remains one of the most complex parts of EU sanctions in practice, with the trade finance exemption being open to a range of issues. These EU restrictions are also reflected in UK Regulations which establish the associated offences and penalties. 
Standard Chartered had identified that Denizbank, a Turkish bank, was owned by Sberbank, one of the Russian banks in relation to which these restrictions apply. It made 102 loans to Denizbank between 2015 and 2018, having assessed that these loans fell within the trade finance exemption and that they were therefore not prohibited by EU/UK sanctions. OFSI agreed with Standard Chartered's assessment with regard to some of the loans, but found that many (70 loans, with a combined transaction value of £266 million) financed trades with no EU nexus, such that the trade finance exemption did not apply to these loans. No further detail is given by OFSI as to how Standard Chartered reached, in OFSI's view, the wrong conclusion as regards these 70 loans, save that Standard Chartered had intended to comply and that the breaches were not wilful. The absence of further detail here is regrettable as there may be valuable lessons as regards the trade finance exemption, the debt/loan restrictions generally, and OFSI's expectations of firms in relation to them.

OFSI approach to calculating the penalty

OFSI noted that only 21 of the offending loans (with a combined value of £97.4 million) were made after 1 April 2017, and that it has no power to issue a monetary penalty in relation to offending loans issued prior to that date (the OFSI notice makes no mention of what action, if any, it will take in respect of loans made prior to April 2017). 

OFSI determined that the case should be classified as "most serious". This refers to the OFSI Monetary Penalties Guidance⁴ under which non-serious breaches do not incur a monetary penalty. Breaches that do warrant a monetary penalty are classified as either "serious" or "most serious", based on a range of factors, including the value of the transactions, and whether the breach was a one-off or "multiple breaches extended over time".

OFSI's Guidance indicates that its general approach is to start by identifying the statutory maximum penalty (in this case 50% of the transaction value), and then apply a reduction of, in the case of a "most serious" breach, up to 30%⁵. OFSI reported its initial proposed penalties (totalling £31.5 million) following this approach, and confirmed that it had applied the full 30% reduction, reflecting a high level of cooperation and transparency from Standard Chartered following its initial voluntary disclosure.

A person subject to an OFSI penalty may seek a ministerial review of OFSI's decision. Standard Chartered requested such a review, and this review resulted in a further reduction in the penalty of £11 million (from £31.5 million to £20.4 million) in addition to the 30% reduction already applied by OFSI. The report explains that this reflected that Standard Chartered had intended to comply and did not wilfully breach, that it had acted in good faith throughout, had cooperated with OFSI's investigation and had taken appropriate remedial steps. The Minister apparently noted that these factors were reflected in OFSI's original penalty, but he felt that they should be given greater weight.

What can businesses learn from this decision?

Although the OFSI report is light on detailed analysis, there are some important points that businesses may wish to note:

• OFSI's breach report does not aim to develop or clarify its approach to or understanding of the underlying restrictions and exemptions, or indicate any aspect of interpretation that might set any kind of precedent as regards the sanctions laws; it gives only minimal detail about the nature of the breaches themselves;

• OFSI is prepared to issue penalties well in excess of £1 million where the 50% threshold allows it to do so;

• a breach may be designated as "most serious" even where the party has acted in good faith, and the breach is unintentional;

• OFSI appears to take the view that the reduction for voluntary disclosure and cooperation is limited to 30% in the case of a "most serious" breach, in a rigid application of its published guidance; and

• Standard Chartered benefited from the Minister's greater flexibility to take its wider conduct into account, and was substantially rewarded for the transparency and cooperation it had displayed.

How Dentons can help

Our international trade and sanctions team in London stands ready to assist businesses of all sorts on UK and EU financial and trade sanction matters, including compliance, transactional advice, licensing and engagement with relevant competent authorities. The team brings both commercial awareness and the experience of former senior UK and EU sanctions officials. If you would like further advice on any issue arising out of this briefing, please reach out to any of the contacts below, or your usual Dentons contact.

1. Office of Financial Sanctions Implementation↩
2. House of Commons Treasury Committee: Economic Crime – Anti-money laundering supervision and sanctions implementation, published on 8 March 2019, at paragraph 213↩
3. OFSI Report published on 31 March 2020↩
4. OFSI Guidance: Monetary Penalties for Breaches of Financial Sanctions↩
5. The Monetary Penalties Guidance sets out a general framework in section 4↩