Key Lessons Learned as OFSI Begins to Flex its Muscles

On February 18, 2020, the United Kingdom’s Office of Financial Sanctions Implementation (OFSI) announced a £20.47 million penalty against Standard Chartered Bank (SCB) for alleged violations of the U.K.’s Ukraine- and Russia-related sanctions. The penalty is more than 140 times larger than any of OFSI’s previous penalties. It provides a number of important lessons for companies subject to U.K. jurisdiction, and suggests how the U.K. programme may evolve post-Brexit. The penalty also reflects important differences in approach from how the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) has approached enforcement.

OFSI imposed its penalty on SCB in relation to 102 loans that SCB made between April 8, 2015 and January 26, 2018 to Denizbank A.Ş. (Denizbank), an entity almost entirely owned by Sberbank of Russia (Sberbank). During the period, Sberbank was subject to a U.K.  restriction on the receipt of long-term loans, which applied to Denizbank as a majority-owned subsidiary. While the U.K.’s sanctions made an exception for loans related to financing non-prohibited import to, or export from, the EU and any non-EU country (EU Trade Exception), OFSI concluded that 70 of the loans (with a value of £266 million GBP) “did not have an EU nexus” and therefore did not meet the scope of the EU Trade Exception and were prohibited accordingly.

Of those, 21 loans with a value of £97.4 million GBP occurred after OFSI acquired its penalty authorities on April 7, 2017.  OFSI concluded that these 21 loans constituted a “most serious” violation, but that the violations were voluntarily disclosed to OFSI, and that SCB had conducted an internal investigation, provided a detailed report, and cooperated with OFSI. As a result, OFSI recommended an aggregate penalty of £31.5 million GBP, an amount that represented an automatic 30 percent mitigation reduction for disclosure credit, along with additional mitigation at OFSI’s discretion for other cooperation. OFSI further reduced the penalty to an aggregate total of £20.47 million GBP following a review and recommendation by a Minister of the Crown.

In addition to representing the largest fine imposed by OFSI to date, there are a number of key takeaways from OFSI’s action of relevance to companies seeking to understand how OFSI will implement its relatively new power to impose civil penalties. Below, we highlight a few of these themes, drawing out comparisons between OFSI’s approach and the approach taken by the United States and OFAC:

• Limits to Disclosure Benefits: SCB submitted a voluntary self-disclosure (VSD) involving these transactions, but OFSI limited the benefits SCB received from that VSD in ways that would not be true in the United States. First, OFSI differentiates between “Serious” and “Most Serious” violations, noting that a VSD can result in up to a 50 percent penalty reduction for “Serious” cases, but only a 30 percent reduction for “Most Serious” penalties. OFSI found SCB to be in the latter category and, concluded therefore that it could benefit from only a 30 percent reduction. Second, OFSI states that the reduction can be “up to” a 30 or 50 percent reduction, but is not automatically that amount. 
  • U.S. Comparison: In contrast, for purposes of calculating penalties, OFAC applies an automatic 50 percent penalty reduction to any penalty, whether “serious” (OFAC uses the term “egregious”, but it effectively means the same thing) or not. As a result, if the penalty had been pursued by OFAC, SCB would have benefited from an automatic 50 percent penalty reduction, rather than the “up to” 30 percent reduction from which they benefited.
• The Penalty Could Have Been Larger: The 70 prohibited loans had a transaction value of approximately £266 million GBP, while the 21 loans that occurred after April 1, 2017, when OFSI received its penalty authorities, had a value of £97.4 million GBP. Pursuant to OFSI’s guidance, it can impose penalties of up to £1 million GBP or 50 percent of the value of the funds, per violation. The statutory maximum penalty here was therefore £48.7 GBP. Because SCB voluntarily disclosed the issues, it was eligible to receive “up to” 30 percent automatic mitigation for its disclosure, reducing the base penalty to £34.09 million GBP. SCB received additional mitigation as a result of its cooperation, resulting in an OFSI recommendation of £31.5 million GBP (roughly 64 percent of the maximum), which was ultimately reduced under Ministerial Review to £20.47 million GBP (roughly 42 percent of the maximum).
  • U.S. Comparison: Although OFSI modelled its penalty structure after OFAC’s, its small differences from OFAC’s model stand out here. Specifically, for violations it considers to be “egregious,” OFAC’s statutory maximum penalty is $307,922 (a number indexed for inflation) or twice the value of the transaction, whichever is greater. If the violations were disclosed in a VSD, the base penalty is 50 percent of this statutory maximum. Thus, if OFAC guidelines had been applied to this situation, the statutory maximum penalty for the 21 loans would have been £194.8 million GBP (twice their £97.4 million GBP value), which would have been reduced back to £97.4 million GBP as the base penalty. Additionally, OFSI appears to have put more weight on SCB’s substantial cooperation than OFAC often does, given that it is rare for OFAC to grant mitigation in excess of the automatic disclosure benefit.  
• Risks in Utilizing Exceptions or Licences: The penalty also highlights the risks that arise in transacting with sanctioned persons or places pursuant to licence exceptions. This penalty arose because of an allegedly inaccurate use of an EU licence exception. Specifically, OFSI alleged that SCB aimed to introduce “dispensations” that would allow loans to be made to Denizbank when they qualified for the EU Trade Exception. The difficulty was that allegedly these dispensations enabled SCB to approve loans to Denizbank when the underlying trade activity did not have the required nexus to the EU and therefore did not meet the terms of the EU Trade Exception. As a result, the loans represented a violation of the U.K.’s implementation of the EU “sectoral” sanctions applicable to Denizbank as a result of its ownership by Sberbank.
  • U.S. Comparison: OFAC provides a general licence with respect to Denizbank (General Licence No. 3) that authorizes all transactions with Denizbank otherwise prohibited due to its ownership by Sberbank. These loans therefore likely would not have been a violation of U.S. sanctions if conducted under U.S. jurisdiction. That said, OFAC has aggressively pursued enforcement actions against persons who undertake transactions that fail to comply with the conditions on potentially relevant licences, so the compliance concerns associated with use of licences, exemptions, or authorizations to pursue otherwise sanctionable activity are the same on both sides of the Atlantic.
• Internal Appeal Opportunities: Under OFSI’s systems, all persons receiving a penalty have a right to have that penalty reviewed by a Minister, typically the Economic Secretary to the Treasury, who can uphold the penalty and its amount, uphold the penalty and change the amount, or cancel the penalty. Here, SCB exercised this right to its benefit. The Minister agreed with OFSI that SCB had undertaken the 21 loans and that the violations were “most serious,” but he nevertheless concluded that SCB “did not wilfully 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.” As a result, the Minister agreed to reduce the total penalty by an aggregate of £11 million GBP.
  • U.S. Comparison: OFAC also offers a formal internal review process, but it only has an internal review right somewhat analogous to a Ministerial appeal with respect to violations involving the Cuba program. Specifically, if OFAC considers that a sanctions violation has occurred that warrants a civil penalty, it will first issue a “Pre-Penalty Notice” to the company in question, setting forth the alleged violations and the proposed penalty amount. The subject person has the right to submit a written response to the Pre-Penalty Notice, disputing the facts or providing additional detail for OFAC. If OFAC concludes that a civil penalty is still warranted, it will then issue a Penalty Notice, which represents its final agency action with respect to the violations for which the penalty is issued. If the penalty involves an alleged Cuba violation, then the subject person has a right to further internal review by requesting a hearing before an Administrative Law Judge (ALJ). In such proceedings, either party then can seek review of the ALJ’s decision before the Secretary of the Treasury’s “designee.” For all other potential violations, there are no similar internal appeal options; after receiving a penalty, a subject person’s only appeal avenue would be to seek judicial review of the penalty in federal court, which often is an uphill battle, given the deference generally given to OFAC and its foreign policy decision-making.

Practical Considerations

The restrictions set out in financial sanctions regimes vary between jurisdictions. As such, it is important for firms and individuals to ensure that they maintain a global lens on their sanctions programme. This includes:

• ensuring that they fully understand both the prohibitions and exemptions contained within financial sanctions legislation;
• evaluating licensability from both the U.S. and U.K./EU (i.e., here the loans were permitted by the U.S. as there was a licence, but not permitted by the U.K./EU unless certain conditions were met);
• ensuring that when issues are identified, companies consider all the relevant regulators that may be concerned about the behaviour, including not just OFAC, but also OFSI and its EU Member State counterparts; and
• considering what steps must be taken and when in order to benefit from any discount from the regulator for VSD, including both the automatic benefits in both the U.K. and U.S. from any voluntary disclosure, but also the potential additional benefits available for substantial cooperation.

OFSI’s report on the SCB penalty enables companies managing compliance with both U.S. and U.K. sanctions to make a useful comparison of the way in which OFAC and OFSI approach enforcement. While there are certain similarities, there are also important distinctions to be made and firms would do well to keep these in mind when reviewing their due diligence and compliance processes. Traditionally, there has perhaps been more focus on enforcement by OFAC but OFSI’s approach to enforcement is likely to become increasingly relevant as it continues to work through its backlog of enforcement cases and begins to assert itself more proactively in the post-Brexit U.K. marketplace.