Syed Rahman considers the latest advice the Office of Financial Sanctions Implementation has issued about sanctions compliance
The Office of Financial Sanctions Implementation (OFSI) has produced advice for businesses in the wake of Herbert Smith Freehills being fined for breaches of financial sanctions on Russia.
Last month, OFSI announced that Herbert Smith Freehills CIS LLP (HSF Moscow) had been fined £465,000. The penalty related to six payments, with a total value of £3,932,392.10, that HSF Moscow made to designated persons subject to an asset freeze. The payments were made over a seven-day period while the firm wound down its Russian offices.
OFSI said the payments demonstrated “a pattern of failings brought about primarily by inadequate due diligence and sanctions screening, and errors caused by the hasty closure of the HSF Moscow office’’. The breaches had been disclosed to OFSI voluntarily by HSF, which meant it received a 50% reduction on the final penalty amount.
OFSI has now stated that the HSF Moscow penalty “carries a number of important compliance messages’’ for businesses. It has highlighted three key lessons that businesses can take from the case.
These are:
- Understand your exposure to sanctions risks
OFSI states that it is essential for firms to understand their exposure to sanctions risks and take appropriate action to address this. Firms operating in higher risk environments should educate themselves fully about the risks, consult OFSI’s published guidance, and seek professional advice on their sanctions obligations where necessary. Parent companies with subsidiaries in areas where there is a heightened sanctions risk should ensure they are providing suitable advice and assurance to those subsidiaries. OFSI refers to the penalty it imposed on Tracerco in May 2022 to emphasise this. In that case, OFSI imposed a £15,000 penalty on the company – which provides measuring goods and services to the oil and gas industry –for breaching sanctions relating to Syria by making two payments to Syrian Arab Airlines for flights for an employee.
- Adhere properly to any sanctions policies and processes in place in your organisation
Firms should follow all relevant sanctions screening and due diligence measures they have in place. This, OFSI says, applies to everyone in an organisation, regardless of seniority. OFSI states that while it will usually consider the existence of appropriate sanctions policies and procedures as a mitigating factor when assessing a sanctions breach, a failure to comply with them is likely to negate the mitigating factor of having them in place. An exception to this would be if there was a good reason for not following such measures, and the decision not to follow them was taken at the appropriate level. The HSF Moscow case, according to OFSI, demonstrates the significant risks that can emerge when payments are made in haste and procedures are not adequately followed by senior figures.
- Fully consider ownership and control
When considering the issue of ownership and control, OFSI says that those in business need to think beyond whether an entity is directly subject to sanctions. It views failure to properly consider and identify clear ownership more poorly than an incorrect assessment of control that was made in good faith. OFSI emphasises that firms should take sufficient time and care to properly assess “the applicability of sanctions to the specific legal entities they are dealing with’’. Ownership and control is considered under case factor F within OFSI’s Enforcement and Monetary Penalties guidance, which gives examples of the areas of enquiry it expects to be undertaken by persons seeking to establish whether an entity is owned or controlled by a designated person.
Reiteration
OFSI’s advice is a helpful and clear reiteration of already-issued guidance. Similar material was published when OFSI announced its only other fine under the Russia Regulations; against Integral Concierge Services Limited (ICSL).
OFSI tends to provide helpful guidance/commentary when reporting on its fines. And as OFSI welcomes voluntary disclosure of sanctions breaches, any penalty announcements are an appropriate moment for it to remind businesses of their obligations – and what could happen if they do not meet them.
In light of this, it is worth re-emphasising that each business must err on the side of caution when considering its exposure to sanctions risks. The Regulations intend to have the effect that many businesses will de-risk when faced with potential sanctions exposure. For example, banks may cut business ties, or freeze the accounts of, companies and individuals which are connected to a sanctioned entity.
Strict adherence to the regulations has to be ensured, with pre-emptive steps taken rather than reactive ones. The importance of this is clearly seen in OFSI’s guidance, which emphasises that ownership and control should be assessed beyond just direct ownership. Pre-emptive action to investigate a potential client or customer’s ownership is vital, as it will show OFSI that the business operated in good faith. This could have a positive effect in terms of reducing the fine.
It is always worth repeating that a business should ensure that, if it is exposed to sanctions-related issues, it voluntarily discloses this information to OFSI. As mentioned earlier, HSF benefited from a 50% penalty reduction as it reported its breaches.
