UK and EU sanctions enforcement – increasing focus
22 July 2022
In the past weeks, the UK and EU regulatory authorities have made a series of announcements in relation to the enforcement of sanctions.
Taken together, these announcements represent a renewed focus on maximising the effectiveness of the UK and EU sanctions regimes, in particular the new sanctions measures imposed in response to Russia’s invasion of Ukraine.
This enforcement update covers:
- the Red Alert published by the UK’s National Crime Agency and the Office of Financial Sanctions Implementation;
- the EU Council’s proposal to make violations of EU sanctions an “EU crime”; and
- the European Securities and Markets Authority’s statement on prospectus supervision under the EU’s financial sanctions targeting Russia.
These developments come on top of other measures recently announced by the UK and the EU, as well as numerous changes to the UK and EU’s substantive sanctions on Russia. Collectively, these changes are indicative of the seriousness with which the authorities across the UK and EU are taking sanctions compliance at this time.
UK Red Alert
On 12 July 2022, the UK’s National Crime Agency and the Office of Financial Sanctions Implementation (OFSI), amongst others, published a Red Alert: Financial Sanctions Evasion Typologies: Russian Elites and Enablers (the Red Alert). This sets out various indicators for sanctions evasion, some of which are:
- changes to ownership of a corporate holding to reduce ownership stakes to below the 50% threshold, shortly before or after sanctions designations;
- multiple beneficial ownership changes synchronised with new sanctions designations;
- movement of assets previously associated with the designated person, by family members or otherwise on their behalf, such as the sale of high value assets, where funds are then disbursed offshore through secrecy jurisdictions; and
- 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 Red Alert also makes various recommendations for companies doing business in the UK to ensure they do not, inadvertently or otherwise, breach the UK’s financial sanctions. These include:
- documenting arm’s length transactions and seeking guidance from OFSI if there is any doubt, rather than taking a transaction at face value; and
- undertaking appropriate due diligence in relation to source of funds, including enhanced due diligence for high-risk clients and complex corporate structures.
Indeed, the Red Alert notes that a failure to undertake appropriate due diligence, for example by showing wilful blindness in relation to the source of funds or wealth checks, will be considered a red flag for complicity and a breach and/or a circumvention offence.
As we have previously commented, given the UK Government’s new ability to impose civil monetary penalties on a strict civil liability basis, the Red Alert further emphasises the need for companies to review and enhance their sanctions compliance frameworks and efforts.
The Red Alert comes on top of a recent enforcement action in relation to Johnson Matthey’s UAE based subsidiary, Tracerco, which provides measuring products and services to the oil and gas industry. In response to Tracerco making payments totalling approximately GBP3,000 for tickets on flights operated by Syrian Arab Airlines, a UK asset freeze target, OFSI imposed a monetary penalty of GBP15,000 on Tracerco. This penalty included a reduction of 50% in recognition of Tracerco’s voluntary disclosure of these payments.
This serves as a timely reminder for non-financial services companies that they also need to be alive to financial sanctions risks across their business portfolios.
EU Council’s Proposal to make violation of EU sanctions an “EU crime”
By way of background, enforcement of EU sanctions is the responsibility of individual Member States. In particular, the Treaty on the Functioning of the European Union (TFEU) currently does not provide for the establishment of minimum rules concerning the interpretation of, and penalties for, violations of EU sanctions, since such violations presently are not included in the list of “EU crimes” set out in Article 83(1) TFEU (being terrorism, human trafficking, sexual exploitation of women and minors, drug trafficking, arms trafficking, money laundering and corruption, counterfeiting, computer crime and organised crime).
The relevant authorities of each Member State therefore may, and indeed often do, adopt different interpretations of certain provisions in the various EU sanctions regimes (eg how the phrase “acting on behalf or at the direction of” should be interpreted). Nor are the penalties for violations of EU sanctions uniform across the Member States. This gives rise to a risk of sanctions circumvention via the use of low-enforcement jurisdictions.
To address this risk, the European Council published a draft Council Decision 10287/1/2022 on 30 June 2022, which sought to add violations of EU sanctions to the list of “EU crimes” set out in Article 83(1) TFEU. The European Parliament gave its consent to the draft Council Decision on 7 July 2022.
If this Decision is now formally adopted unanimously by the Council, this will then allow the adoption of a Directive that sets out minimum rules concerning the interpretation of, and penalties for, violations of EU sanctions. While the actual enforcement of EU sanctions will remain the responsibility of individual Member States, this will establish a baseline level for the Member States’ law in this area.
ESMA’s statement on prospectus supervision under the EU’s sanctions targeting Russia
Separately, on 7 July 2022, the European Securities and Markets Authority (ESMA), the EU’s securities market regulator, published a statement alerting stakeholders to the need to ensure compliance with EU sanctions when submitting prospectuses for approval.
Specifically, the ESMA highlighted that violations of EU sanctions can constitute a sufficient legal basis for a submission to be rejected, and that issuers should be prepared to address queries and requests for additional documentation concerning areas and parties targeted by EU sanctions. These queries and requests for additional information may be made when the prospectus is first submitted, as well as at any time during the review process. Issuers may also be asked to provide written confirmation that no infringement of EU sanctions is taking place.