As we continue with our 2022 Financial Crime Developments series, join us as we take a journey into the turbulent sanctions landscape over the previous year. The global condemnation of Russia and the swift reactions by governments to impose sanctions showed just how pervasive such measures are - we all saw how even Chelsea Football Club was dragged into the mix when owner Roman Abramovich’s assets were frozen by the UK government.
Russia’s invasion of Ukraine has jumped forward several sanctions’ updates, from new regulations to reporting requirements to the Financial Conduct Authority (“FCA”), as well as new guidance and information on sanction evasion typologies. Here, we will review key sanctions updates in the past year, with specific focus on the updates to the UK's sanctions regime the global sanctions response against Russia for invading Ukraine and regulatory guidance on Sanctions from the FCA, National Crime Agency (“NCA”) and the Office of Financial Sanctions Implementation (“OFSI”).
Strengthening the UK Sanctions Regime
The Economic Crime (Transparency and Enforcement) Act 2022 (“the Act”) received Royal Assent on the 15 March 2022 as part of the Government’s urgent response to Russia’s invasion of Ukraine. The Act amends the Sanctions and Anti-Money Laundering Act 2018 (“SAMLA”) and has three key elements:
- The establishment of a Register of Overseas Entities,
- The strengthening of the Unexplained Wealth Order (“UWO”) regime, and
- To amend existing legislation on UK sanctions (clauses 54 to 66), which will be further examined below.
Parts one and two were previously covered in our first article of this series.
Part three of the Act created some key changes within the UK Sanctions regime that impacts all firms. Spilt into further two sections, part three of the Act makes amendments to the provisions of financial penalties under the Policing and Crime Act 2017 and the second part within the actual sanction’s framework itself (“SAMLA”).
First and foremost, the Act has created a strict liability offence in relation to sanctions breaches, it is no longer a requirement for an individual or firm to previous had to know, suspect or believe that a sanctions breach had occurred, if there has been a failure to comply with an obligation. Further to this, whilst the OFSI has always published fines for sanctions breaches, the Act now allows the OFSI to publish information where a fine has not been implemented but on the balance of probabilities, a breach or failure to comply with an obligation has occurred.
The second section of part 3 of the Act focuses on the UK Sanctions framework. It creates a simplified process for updated and creating further sanctions regulations, allowing for a less onerous process. The Act allows the government for urgent designation of individuals or firms for 56 days if they have already been designated by another country (such as the US, Canada) with a recognised sanctions list (even if there is no reasonable ground of suspicion) and for designation by description (i.e., groups of individuals).
The Act also now takes away the ability of a court to award damages for claims relating to sanctions where the Government may have acted negligently. Therefore, where an individual or company has felt l that the UK government has acted wrongly in applying sanctions, they will not be able to go to court for damages.
In summary, the changes permits the Government to impose sanctions on a wider range of persons and more swiftly and allows OFSI to publish cases where they think there has been a breach without imposing a financial penalty. It also expanded the information-sharing powers relating to sanctions which allowed for the publication of the NCA and OFSI’s red alert discussed below.
Sanctions against Russia
The Russian invasion of Ukraine received widespread international condemnation from the global community back in early 2022 and more than 30 countries around the world united to impose comprehensive sanctions measures designed to punish Russia and its ability to finance their war.
Whilst different governments have their own sanctions against Russia, key actions covered both financial and economic measures, and there have been a number of collaborated global responses, for example Russia’s access to global banking was revoked, and key Russian banks (such as VTB were removed from the international financial messaging system – the Society for Worldwide Interbank Financial Telecommunication (SWIFT). It was estimated that when this was first implemented, the Russian stock market’s value had fallen by $250 billion dollars, which restricted Russia’s ability to trade across the globe.
In addition to the sanctioning of Russia’s banks, key individuals and companies are also captured under a number of global sanctions regimes. The UK alone had sanctioned around 775 Russian individuals at the start of the Ukraine war and included high profile individuals such as Russia’s President, Vladimir Putin, Russia’s Minister for Foreign Affairs, Sergey Lavrov, oligarchs linked to the Kremlin, such as the previous Chelsea Football Club owner Roman Abramovich. However different countries have applied different sanctions for example whilst Oleg Deripaska (Russian billionaire who made his fortune in aluminium) is sanctioned by the US, UK and Canada, the EU have not added Oleg to their sanction’s lists. The UK sanctioned more Russian billionaires than any other country.
The UK, imposed financial, trade, aircraft, shipping and immigration sanctions and key sanctions included financial sanctions through a targeted asset freeze on designated persons and prohibitions on making funds or economic resources available e.g., Chelsea Football Club was also subject to an asset freeze under UK financial sanctions as it was an entity controlled by Roman Abramovich.
Further guidance from the authorities
Further to the implementation of sanctions measures against Russia, the FCA, NCA and OFSI all published guidance last year aimed at reminding firms of how they can do their part to help authorities identify sanctions evasion and providing guidance on some of the key sanctions typologies that firms may face.
From suspicious activity reports to the NCA, through to sanctions-related reports to OFSI, firms are already subject to a number of financial crime reporting requirements. Adding to this, the FCA in May, released a statement explicitly asking both firms and individuals to report any information on sanctions evasions or systems and control weaknesses that may have been self-identified by firms, this is in addition to the requirement to report to OFSI on sanctions breaches. Firms should be aware that this additional reporting requirement can fall within regulated firms' Principle 11 obligations.
Reporting can be in one of three forms:
- Via the FCA’s Whistleblowing Line - If an individual has concerns about their previous or current employer (or wants to speak confidentially to the regulator.
- Via normal reporting channels (Sup 15 FCA Handbook), where an authorised firm reporting issues at its own establishment and anonymity is not required.
- Where it is a firm or professional with information about potential or actual sanctions evasion by another firm or individual, then reporting is completed via the FCA’s wrongdoing or misconduct form.
However, it is critical for firms to remember that sharing this information with the FCA under the guidelines does not fulfil any other statutory duties to report, e.g., under the Proceeds of Crime Act or the Sanctions and Anti-Money Laundering Act.
In July, the NCA and OFSI issued the first of its kind red alert on financial sanctions evasion typologies by Russian elites and enablers. The purpose of the red alert was to provide guidance on some of the common practises Designated Persons and their UK enablers are suspected of using to evade financial sanctions. In total 34 typologies were published. The publication came about as both the public and private sectors were able to collect key intelligence on the techniques that Designated Persons were using to evade the impact of sanctions on their personal and business assets. The guidance is split into detection of frozen asset transfers, detection of enablers and detection of suspicious payments. Key examples include:
- Use of trust arrangements or complex corporate structures involving offshore companies, with circumstances of transfers calling into question whether the original owner retains indirect control or otherwise could retain a benefit from the assets transferred.
- The appointment of a nominee director to manage the assets of a company and beneficial ownership is obscured through the use of nominee shareholders and a deed of trust between the parties, with the Designated Person claiming to have divested the asset.
- Multiple beneficial ownership changes synchronised with new sanctions designations.
- Holding companies based in jurisdictions that are offshore and/or historically linked to assets in the former Soviet Union.
- Payments from venture capital and private equity vehicles, many located in offshore jurisdictions, Middle East, East Asia or other jurisdictions that continue to support the Russian government or expressed neutrality in international forums such as the UN.
The Alert reminds firms (in the regulated sector) that where they identify any activity that falls under these indicators, (and in addition to the general requirement placed upon them to report sanctions breaches to OFSI) they should also be considering whether they need to make a suspicious activity report (“SAR”) to the NCA. Even where activity does not constitute a SAR, firms are encouraged to report any relevant information to the relevant authority.
Finally, the alert sets out six industry recommendations to assist firms in identifying possible financial sanctions evasion. Principally, the recommendations all focus upon the strength and granularity of the due diligence which firms need to conduct. For example, one of the recommendations reminds firms that complex corporate structures needs to be carefully assessed as a component of the enhanced due diligence approach for higher risk clients, with a sufficient level of questioning applied in order to provide understanding and comfort as to the legitimacy and commercial justification for such structures. Firms should also be scrutinising and documenting arms-length transactions and not taking them at face value.
What does this mean for firms
In a recent news conference, the European Commission President stated that the European Union will impose new sanctions on countries that support Russia (such as Belarus) as it keeps up the pressure on Russia to end its war in Ukraine. Whilst we have seen a slew of sanctions updates, it is unlikely that 2022 was a 'black swan event' and changes and updates to the sanction’s regime will likely continue well into 2023. Sanctions are comprehensive and complicated and now with a strict liability offence; firms therefore need to be alive to the speed with which new sanctions measures can be imposed in order to ensure their frameworks remain up to date and adequate in order to be able to continue to detect and respond to sanctions evasion by Designated Persons. Failure to do so can result in not only financial penalties but reputational damage with the publication of cases where OFSI believes there have been breaches.
Please contact Fiona Raistrick if you have any questions or require support regarding your financial crime prevention arrangements.
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