Sanctions enforcement in the UK and EU – growing attention | Allen & Overy LLP

Taken together, these announcements represent renewed interest in maximizing the effectiveness of the UK and EU sanctions regimes, in particular the new sanctions measures imposed in response to the invasion of Ukraine by the Russia.

This app update covers:

  • the red alert issued by the UK National Crime Agency and the Office of Financial Sanctions Implementation;
  • the EU Council’s proposal to make breaches of EU sanctions an “EU crime”; and
  • the statement of the European Securities and Markets Authority on the supervision of prospectuses in the context of EU financial sanctions against Russia.

These developments come on top of other measures recently announced by the UK and EU, as well as numerous changes to substantive UK and EU sanctions against Russia. Collectively, these changes are indicative of how seriously UK and EU authorities are taking compliance sanctions at this time.

UK red alert

On July 12, 2022, the UK National Crime Agency and the Office of Financial Sanctions Implementation (OFSI), among others, issued a Red Alert: Financial Sanctions Evasion Typologies: Russian Elites and Enablers (The Red Alert). This defines various sanctions circumvention indicators, some of which are:

  • changes in ownership of a holding company to reduce holdings below the 50% threshold shortly before or after sanctions designations;
  • multiple beneficial ownership changes synchronized with new sanctions designations;
  • movement of assets previously associated with the nominee, by family members or otherwise on their behalf, such as the sale of high-value assets, where funds are then disbursed overseas through secrecy jurisdictions; and
  • the use of fiduciary arrangements or complex corporate structures involving offshore companies, the circumstances of the transfers calling into question whether the original owner retains indirect control or can otherwise derive a benefit from the transferred assets.

The red alert also makes various recommendations to companies doing business in the UK to ensure that they do not, inadvertently or otherwise, breach UK financial sanctions. These include:

  • document arm’s length transactions and seek advice from the OFSI if in doubt, rather than taking a transaction at face value; and
  • undertake appropriate due diligence with respect to the source of funds, including increased due diligence for high risk clients and complex corporate structures.

Indeed, the Red Alert notes that a failure to undertake proper due diligence, for example by being willfully blind to the source of funds or fortune checks, will be considered a red flag for complicity and a violation and/or circumvention violation.

As we have previously indicated, given the UK government‘s new ability to impose civil monetary penalties on the basis of strict civil liability, the red alert further underlines the need for companies to review and improve their sanctions compliance frameworks and efforts.

The red alert comes on top of a recent enforcement action involving Johnson Matthey’s UAE-based subsidiary, Tracerco, which provides measurement products and services to the oil and gas industry. In response to Tracerco making payments totaling approximately GBP 3,000 for tickets on flights operated by Syrian Arab Airlines, a UK asset freeze target, the OFSI imposed a fine of GBP 15,000 on Tracerco. This penalty included a 50% reduction in recognition of Tracerco’s voluntary disclosure of these payments.

This is a timely reminder to non-financial services companies that they also need to be aware of the risks of financial sanctions across their business portfolios.

EU Council proposal to make violation of EU sanctions an “EU crime”

As a reminder, the application of EU sanctions is the responsibility of each Member State. In particular, the Treaty on the Functioning of the European Union (TFEU) does not currently provide for the establishment of minimum rules regarding the interpretation and sanctioning of breaches of EU sanctions, as such breaches are currently not listed not on the list of The “EU crimes” referred to in Article 83(1) TFEU (i.e. terrorism, trafficking in human beings, sexual exploitation of women and minors, trafficking in drugs, arms trafficking, money laundering and corruption, counterfeiting, computer crime and organized crime).

Competent authorities in each Member State may therefore adopt, and often do, different interpretations of certain provisions of the various EU sanctions regimes (e.g. how the phrase “acting on behalf of or at the direction of” should be interpreted ). Penalties for violating EU sanctions are also not uniform across member states. This creates a risk of sanctions being circumvented by recourse to jurisdictions with weak enforcement.

To address this risk, the European Council issued a draft Council Decision 10287/1/2022 on 30 June 2022, which sought to add breaches of EU sanctions to the list of “EU crimes “established in Article 83(1) of the 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, it will then allow the adoption of a directive establishing minimum rules concerning the interpretation and sanctions applicable to breaches of EU sanctions. While the actual enforcement of EU sanctions will remain the responsibility of each Member State, this will set a benchmark for Member States’ legislation in this area.

ESMA Statement on Prospectus Oversight under EU Sanctions on Russia

In addition, on July 7, 2022, the European Securities and Markets Authority (ESMA), the EU securities market regulator, issued a statement alerting stakeholders to the need to ensure compliance with EU sanctions when submitting prospectus for approval.

Specifically, ESMA pointed out that breaches of EU sanctions may provide sufficient legal basis for a submission to be rejected, and that issuers should be prepared to respond to questions and requests for additional documentation regarding areas and parties subject to EU sanctions. These questions and requests for additional information can 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 violation of EU sanctions is taking place.

Comments are closed.