The current geopolitical situation is leading to similarly volatile sanctions regime updates.

Recent developments include powers introduced by the Economic Crime (Transparency and Enforcement) Act 2022 being used for the first time, de-listing applications involving Russian billionaires proving unsuccessful, and an upcoming prohibition on third-party processed Russian iron and steel imports.

With changes happening constantly, it is more important than ever to ensure your compliance measures are up to date. Here is a round up of the recent updates, please get in touch if we can help with any compliance questions.

Disclosure powers

The Economic Crime (Transparency and Enforcement) Act 2022 introduced a new disclosure power, exercised for the first time at the end of August 2023 by the Office of Financial Sanctions Implementation (OFSI). This power allows the Treasury to publish information about sanctions breaches where it considers that a person has breached financial sanctions legislation but a fine has not been issued. Wise, the online bank, was reported to have breached an asset freeze in July 2022.

The value of the assets released was low at £250, but OFSI has published a report on failures in Wise’s compliance process that contributed to the breach, deeming this in the public interest. Key points that OFSI noted in Wise’s breach were that its procedures did not immediately freeze customers’ bank accounts when there was a designated person name match, even though it did freeze transfers into and out of such accounts.

Furthermore, as Wise’s sanctions review team was not available at weekends, this unnecessarily delayed the review of the account and was found to be a failure of process. Both measures – ensuring appropriate prohibitions are put in place on flagged accounts and ensuring that staffing is adequate to ensure compliance – are worthwhile considerations for the industry at large.

Now we have seen the power used for the first time, it is likely that OFSI will continue to publish similar reports regarding low-value breaches where there are wider learnings on sanctions compliance. This may have serious reputational consequences for organisations in the future, with even low-value sanctions breaches being widely reported in the national and specialist press. If your organisation prides itself on its ESG credentials, a reported breach could have significant ramifications for how you are viewed by your customers.

De-listing

Several de-listing applications have recently been brought for Russia-affiliated individuals subject to UK and EU sanctions, but these have generally not been successful, with the High Court and the European Commission applying a high threshold for lifting the sanctions.

Of the applications brought to date, the most success has been enjoyed by Oleg Tinkov, a banking entrepreneur. The businessman, who founded digital bank Tinkoff, was sanctioned in 2022 due to the bank’s importance in Russia. Following this sanction, he renounced his Russian citizenship and has spoken out strongly against the war on several occasions. A campaign which included support from Richard Branson led to his sanctions designation being lifted by the Foreign, Commonwealth & Development Office this July. However, his success has not been replicated.

Just a month later, Eugene Shvidler, a businessman known for his position on the board of a steel manufacturing and mining multinational company, had his application for de-listing rejected by the High Court in England.

Shvidler was known for his association with the oligarch Roman Abramovich, which has ultimately factored into the decision to refuse his application. The court found that payments from Abramovich to Shvidler were sufficient evidence that he was associated with Abramovich under the Russia Regulations, and his appointment to the board of Evraz plc was due to Abramovich’s patronage. The listing was upheld even though Schvidler had not visited Russia since 2007 and he does not hold Russian nationality.

Frozen assets may be used to pay for daily living costs and the European commission has broadly considered that sanctions do not constitute an unjustified, arbitrary, or disproportionate limitation of the fundamental rights of those listed. As such, there is a very high threshold for the lifting of sanctions listings and three subsequent challenges post-dating Shvidler have also failed. It is unlikely that there will be many successful challenges to individual listings.

Iron and steel

An import ban on Russian iron and steel products that are processed in a third country or multiple third countries will take effect from 30 September 2023. The measure was introduced in April and as such there will be no transitional period for goods which fall under this restriction.

The full list of relevant materials is set out in Schedule 3B of the Russia Sanctions Regulations and includes rebar, metallic coated sheets, electrical sheets and railway material, amongst others.

This regulation change is designed to respond to circumvention of the sanctions regime where iron or steel products are imported in a third country and altered, before their import into the UK. If your business uses imported iron or steel products, it is important to ensure you have full oversight of the supply chain process and that imported products are not of Russian origin.

Iran

The UK, France and Germany have set out that they will transfer UN Iran sanctions into their domestic regimes to preserve these beyond the October deadline. Sanctions on individuals and entities involved in missile, nuclear and weapons programmes in Iran were due to be lifted on 18 October 2023, but these are being retained under domestic sanctions regimes for the EU and UK.

The UK government set out that Iran’s enriched uranium stockpiles are significantly beyond the permitted limit agreed in the Joint Comprehensive Plan of Action, and Iran has been non-compliant with this deal since January 2020. As a dispute resolution action under the plan, this update might further change the sanctions in place between the EU, UK, and Iran and will be particularly important for scientific knowledge in the nuclear sector.

Guidance

OFSI published further guidance on enforcement and monetary penalties for financial sanctions breaches on the same day. The guidance will apply where the breach took place on or after 00:00 on 15 June 2022. This sets out that low severity cases are likely to be dealt with via private warning letter, without monetary penalty, and moderate via publication without monetary penalty, as in the case of Wise.

Drawing from similar information, the Financial Conduct Authority has recently published Sanctions Systems and Controls, a webpage that sets out areas of good practice for financial services and review of controls in firms.

These have similarities with the noted points above – namely ensuring teams are adequately resourced to respond to sanctions risks and ensuring screening tools are in place and appropriately calibrated. The site provides a range of compliance measures that should be taken by the financial sector to ensure they do not inadvertently breach sanctions and sets out that those who were best placed to respond to sanctions changes were those who had a detailed regime in place before February 2022.

With several updates, sanctions regulation is busier than ever. Now is the time to ensure your policies and processes are up to date and to stress test existing sanctions compliance programmes. If you are reviewing your own processes, taking on a new business, or responding to a potential breach, get in touch with our sanctions team for support.

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