Global | Publication | October 2019
The UK Office of Financial Sanctions Implementation (OFSI) continues to take steps toward fulfilling the statement in its previous Annual Review that it was likely to impose civil monetary penalties during 2019.
Earlier this year, we wrote an update following OFSI’s first monetary penalty against R. Raphael Bank & Sons plc (trading as Raphaels Bank), for dealing with £200 belonging to an unidentified designated person in violation of EU sanctions against Egypt.
That was followed by OFSI issuing its second civil monetary penalty of £10,000 against Travelex (UK) Ltd for dealing with the same funds as Raphaels Bank. In reaching the decision, OFSI emphasised that Travelex’s actions allowed a designated individual to utilise funds that should have been frozen and stated, “No matter the value of the transaction, the breach directly contravened the policy intention of the asset freeze.”
In what appears to be a more significant penalty in terms of value, recent media reports state that OFSI has indicated to a major multinational financial institution that it is “planning” to impose a £10m penalty on the bank for failing to prevent sanctions breaches. While the basis for the penalty remains to be seen, these reports follow the same financial institution being fined over US$1.1 billion by US regulators in April 2019 for violating Iran sanctions and a £102 million penalty in February 2019 from the UK’s Financial Conduct Authority for financial crime (including sanctions) control failures.
This month OFSI published its 2018-2019 annual report which provided an overview of trends and developments with the UK enforcement agency.
The report highlighted OFSI’s continued preparations for Brexit following new legislation such as the Sanctions and Anti-Money Laundering Act 2018 and work with other government departments together with the Foreign & Commonwealth Office. In addition, OFSI has used its increased funding to develop litigation and international engagement branches alongside an advisory governance board.
In December 2018, the Financial Action Task Force (FATF) produced a Mutual Evaluation Report and awarded the UK with the highest possible rating for its regime relating to terrorist financing (including sanctions) and on counter-proliferation sanctions. FATF also evaluated the UK’s enforcement framework under the Policing and Crime Act 2017, which provides OFSI powers to impose monetary penalties for suspected breaches. FATF found that the introduction of such penalties has had a “substantial deterrent effect.”
This past year, the overall number and value of sanctions breaches self-reported has significantly decreased from the previous year, however OFSI note that it “has not observed any obvious trends that might indicate a suppression in reporting compared to previous years.” OFSI considers the importance of taking “proportionate action in every instance of a breach” under UK sanctions regulations. Following OFSI’s first and second monetary penalties handed out this year (see details at 1 above), the report makes note that there are a number of live monetary cases that are currently under consideration.
The recent UK High Court decision Lamesa Investments Limited v Cynergy Bank Limited [2019] EWHC 1877 (Comm) has highlighted a European court’s efforts to honour the context of an agreement entered into by two commercial parties, particularly in relation to compliance with laws as defined within an agreement.
Lamesa (a Cypriot company) lent £30 million to Cynergy Bank (a UK retail bank) pursuant to a facility agreement (the Agreement). Lamesa is ultimately owned by a Russian businessman, Viktor Vekselberg. In 2018, Vekselberg was listed as a US Specially Designated National and Lamesa became a blocked person by reason of Vekselberg’s indirect ownership.
The Agreement provided that “[Cynergy] shall not be in default if…such sums were not paid in order to comply with any mandatory provision of law, regulation or order of any court of competent jurisdiction.” As US secondary sanctions provide that the US Executive will impose sanctions on non-US persons that “facilitate a significant transaction” with a blocked entity, Cynergy argued that those US secondary sanctions constituted a “mandatory provision of law.” Cynergy used this reasoning to stop making repayments to Lamesa. Lamesa brought a claim against Cynergy as to the interpretation of this clause.
The court held that Cynergy’s interpretation was correct and the parties should be inferred to have had intended to include US secondary sanctions as mandatory provisions within the meaning of the Agreement. The judgment was concerned specifically about the interpretation of the contractual wording between the parties and gives much weight to the context that the Agreement was entered into. This decision highlights the importance of drafting such agreements between commercial parties, particularly when alluding to compliance of laws of several jurisdictions.
On 5 August, 2019, the Trump administration issued an Executive Order prohibiting US persons from engaging in any transactions involving the Government of Venezuela (including its political subdivisions, agencies or instrumentalities), or Venezuelan government-owned or controlled entities, and blocking their property and interests in property in the United States or in the possession or control of US persons (the Order). The sanctions, therefore, are much broader than prior sanctions that had only targeted specific Venezuelan government entities such as Petróleos de Venezuela, S.A. (PdVSA) and the Central Bank of Venezuela or transactions involving debt of the Government of Venezuela.
The Order also authorises the blocking of any property (or interests in property) of any person (including foreign entities) who is determined to have “materially” assisted, including by providing goods and services or financial, material or technological support to or in support of, the Government of Venezuela, where the individual or entity receiving support is identified on the SDN List. As discovered under previous sanctions, the Government of Venezuela has heavily invested into multiple segments of the Venezuelan economy, including indirect interests in many seemingly privately owned entities. Developing a reliable way to identify those companies will, therefore, be a difficult but crucial challenge for many companies contemplating continuing operations in the country.
Obtaining financing, insurance or other crucial third-party services is also likely to become more difficult, even for transactions that are limited to the private sector, as those entities become increasingly fearful of inadvertently dealing with property owned or controlled by the Venezuelan government or providing material support to such transactions.
In September, OFAC designated the Central Bank of Iran and the National Development Fund of Iran as Specially Designated Nationals (SDNs). The designation was made on the grounds that both bodies have been used to funnel Iran’s foreign currency reserves to Iran’s “terrorist network,” including the Islamic Revolutionary Guards Corp (IRGC), IRGC’s Qod Force and its proxy, Hezbollah.
The designation comes following an attack on two of Saudi Arabia’s major oil facilities, which the US asserts was an “unacceptable” and “brazen” attack by Iran on its key regional ally. All property and interests in property of the Central Bank of Iran and National Development Fund of Iran will be blocked and must be reported to OFAC. In addition, the designations generally prohibit all dealings by US persons or those within (or transiting) the US that involve any property or interests in property of the SDNs. The US Treasury Department also notes that any person who engages in certain transactions with any SDN may be designated themselves, including foreign financial institutions.
In September, OFAC issued a final rule amending the Cuban Assets Control Regulations to revoke the so-called Cuban “U-Turn” authorisation that had previously allowed US banking institutions to process US-dollar transactions relating to Cuba, so long as (i) the transactions originated and terminated outside the US; and (ii) neither the originator nor the beneficiary were subject to US jurisdiction.
Financial institutions subject to US jurisdiction are no longer authorised to process Cuba-related payments that originate and terminate outside the US. All such transfers will be blocked. Any companies or financial institutions that intend to continue engaging in any transactions involving Cuba should, therefore, ensure that such transactions are not processed in US dollars, as such transfers will effectively be prohibited, regardless of whether there is any other US nexus.
For the past several months, there has been an increased focus on the shipping industry by US enforcement agencies, such as OFAC. US agencies appear to be increasingly proactive in targeting entities involved in international shipping.
Venezuela: OFAC appears to be actively targeting companies which it deems to be operating in Venezuela’s oil sector, including designations of PB Tankers SpA, an Italian ship-owning company, and several of its vessels which were allegedly carrying Venezuelan oil to Cuba.
Syria: OFAC issued an “Advisory to the Maritime Petroleum Shipping Community” in March which warned of the ‘significant US sanctions risks for parties involved in petroleum shipments to the Government of Syria…including shipping companies, vessel owners, managers, operators, insurers, and financial institutions.’ The Advisory follows several designations of Iranian and Russian entities involving in procuring Iranian oil for Syria in November 2018.
Iran: Last month, OFAC issued a further advisory to the maritime petroleum shipping community in relation to the sanctions risk involved in shipping petroleum and related products from Iran. OFAC has also updated its existing FAQs and published new FAQs regarding bunkering of non-Iranian and Iranian vessels carrying goods to or from Iran. On 25 September, the US designated several entities and individuals, including COSCO subsidiaries which is expected to have a significant impact on COSCO’s business and the tanker market more generally.
North Korea: In August this year, OFAC designated a number of individuals and entities from Taiwan and Hong Kong which had participated in illicit ship-to-ship transfers with North Korea flagged vessels in order to circumvent UN sanctions restricting the import of petroleum products into North Korea.
Our full client briefing on this increased focus on the shipping sector can be found here.
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The US Supreme Court has ruled that a “pure omission” under Item 303 of Securities and Exchange Commission Regulation S–K cannot give rise to a private action for securities fraud under Section 10(b) and Rule 10b-5(b) of the Securities Exchange Act of 1934.
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