06 Apr 2020

OFSI sharpens its teeth


As we explained in a previous briefing, in April 2017, the Office of Financial Sanctions Implementation (“OFSI”) was given powers to impose monetary penalties for breaches of financial sanctions pursuant to Part 8 of the Policing and Crime Act 2017 (the “Act”).

Previous enforcement action announced by OFSI has been relatively low level and low value. In January and March 2019, OFSI announced penalties against Raphael & Sons and Travelex in the amounts of £5,000 and £10,000 respectively in connection with breaches of the EU Egypt sanctions. The breaches arose out of the same circumstance. The fines were different in amount because Raphael & Sons self-reported to OFSI whereas Travelex did not. Then, in September 2019, OFSI announced that it had fined Telia Carrier UK Limited (“Telia”) £146,341 for breach of the EU Syria sanctions. The penalty originally imposed against Telia was higher but it was reduced following Ministerial review.

Following the Telia enforcement action, there were rumours in the market that OFSI was considering a much more significant penalty against an unnamed financial institution, possibly running into the low millions. In the event, the OFSI enforcement action announced against Standard Chartered on 31 March 2020 has certainly exceeded those market rumours.

In July 2014, the EU imposed restrictive measures against those responsible for actions which undermined or threatened to undermine the territorial integrity, sovereignty and independence of Ukraine. Those measures were intended to prevent certain Russian state-owned banks, companies and their non-EU subsidiaries from accessing the capital and loan markets within the EU.

Article 5(3) of the relevant regulations (which came into force following amendment in September 2014) prohibits any EU person from making loans or credit available to sanctioned entities, where those loans have a maturity exceeding 30 days. Article 5 (3) (a) of the relevant regulations creates an exemption from the prohibition to permit loans or credit which have the specific and documented objective of financing permissible trade between the EU and any third country (the “EU trade finance exemption”); the intention being to protect legitimate EU trade. The EU trade finance exemption requires that the financed trade concerns goods coming in or out of the EU.

Standard Chartered made a series of 102 loans to Denizbank, which was at that time a Turkish subsidiary of Sberbank of Russia. Sberbank was itself a sanctioned entity and so the prohibitions also applied to Denizbank. OFSI assessed that while some of the loans were permitted under the EU trade finance exemption, 70 loans with an estimated transaction value of over £266 million did not have an EU nexus and did not therefore qualify for the EU trade finance exemption. 21 of these loans with an estimated transaction value of £97.4 million were issued between April 2017 and January 2018 and fell within OFSI’s enforcement powers.

For the purposes of its guidelines, OFSI considered that these breaches were to be categorised as “most serious”. OFSI assessed that Standard Chartered was aware of the sanctions regime and the need to take compliance steps and had initially ceased all trade finance business with Denizbank. However, Standard Chartered had then sought to introduced dispensations enabling such financing to continue where they considered the EU trade finance exemption was applicable. OFSI assessed that these dispensations were not appropriately put in place or monitored resulting in loans being made which were not within the EU trade finance exemption and which were therefore in breach of sanctions. The failings persisted over an extended period of time, leading to the repeated provision of new loans to Denizbank.

However, Standard Chartered had self-reported to OFSI, carried out an internal investigation of the breaches, provided a detailed report and co-operated with OFSI’s investigation. As a result of this, OFSI reduced each penalty by 30% in accordance with its published guidance.

Standard Chartered exercised its right under the Act to a Ministerial review. Under section 147 of the Act, the Minister may:

a) uphold the decision to impose the penalty and the amount;

b) uphold the decision to impose the penalty but substitute a different amount; and

c) cancel the decision to impose the penalty.

The Minister upheld OFSI’s decision to impose the penalty. The Minister agreed that Standard Chartered had made the 21 loans in breach of the sanctions. He agreed that this was a “most serious” breach. However, he gave further consideration to the bank’s investigative report and found that they did not wilfully breach the sanctions, they had acted in good faith, had intended to comply with the restrictive measures, had fully co-operated with OFSI and had taken remedial steps following the breach. In the circumstances, he held that OFSI should have given these factors more weight in its penalty recommendations.

The Minister therefore reduced the overall penalty payable by Standard Chartered to £20.47 million.

Practical implications

As a result of the Standard Chartered enforcement action, it is now clear, if it wasn’t before, that OFSI is developing a bite to match its bark. Many sanctions professionals were sceptical that OFSI would be sufficiently well funded by Government fully to exercise its civil enforcement powers. Whilst OFSI’s recent enforcement action in no way matches the eye-watering penalties imposed by its transatlantic cousin, OFAC, it does increasingly establish OFSI as a serious player in sanctions enforcement.

Many sanctions professionals were equally sceptical about the utility of the Ministerial review process provided for in the Act. However, this recent enforcement action and that against Telia have served to demonstrate the independence of that process. The Minister has adopted a different view than those of his department and the respective penalties have been reduced accordingly.