MPs: UK sanctions watchdog needs ‘surge capacity’

The latest report by the Treasury Committee also recommends the publication of “clear, precise and readily available” guidance for businesses to assist them in complying with their legal responsibilities.

“The implementation of sanctions requires compliance action by the private sector,” the committee said in its report. “We are therefore concerned that guidance for those who have to implement sanctions has, at least in the initial stages, appeared to have lagged behind that available in the United States.”

The UK, EU, US and other jurisdictions have issued, and are continuing to issue, financial, sectoral and trade sanctions targeting Russia-related business over the past month, as a response to the invasion of Ukraine. While there are similarities between each jurisdiction’s response, there are also some differences making the compliance picture for cross-border businesses a complex one.

Economic sanctions expert Stacy Keen of Pinsent Masons backed the committee’s call for business-focussed guidance.

“The sanctions packages are being issued with minimal notice and the consequences of a breach of those prohibitions are criminal,” she said. “Guidance, particularly sector-focussed guidance, should be issued to assist businesses navigating the complexity of the prohibitions and the exceptions where available.”

OFSI, which is part of the UK Treasury, is responsible for the implementation of financial sanctions imposed by the UK, including compliance and enforcement. It can impose monetary penalties, and also pass suspected breaches to the National Crime Agency (NCA) for investigation.

The Treasury Committee said that it had heard evidence during an inquiry into the UK’s response to Russia’s invasion of Ukraine that OFSI lacked sufficient resources given the “unprecedented scale” of demand for its role in recent weeks. The committee noted that OFSI has 37.8 full-time equivalent staff compared to the over 200 people employed by the Office of Foreign Assets Control (OFAC), its US equivalent, as of 2020.

The committee said that “surge capacity”, including more staff with the appropriate expertise, should be considered by the UK government, reflecting the position of economic sanctions as “a critical weapon in resisting Putin’s war”.

This week, OFSI issued updated guidance (39-page / 1.39MB PDF) which, among other matters, deals with when an entity will be considered ‘owned and controlled’ by a designated person. Financial sanctions can be imposed on entities and individuals directly, but also apply to entities that are owned or controlled, either directly or indirectly, by a designated person. These entities, if not designated in their own right, may not appear on the OFSI consolidated list of sanctions targets.

According to the updated guidance, when making its assessment of ownership and control, OFSI “would not simply aggregate different designated persons’ holdings in a company, unless, for example, the shares or rights are subject to a joint arrangement between the designated parties or one party controls the rights of another”. This means that where, for example, two or more unrelated designated persons each hold less than 50% of the share capital and voting rights of a company, OFSI would not consider that company to be directly or indirectly owned by a designated person.

Rebecca Devaney of Pinsent Masons said that OFSI’s approach differed from the approach taken by OFAC in the US, which does aggregate share ownership by ‘blocked persons’. Under OFAC guidance, “any entity owned in aggregate, directly or indirectly, 50% or more by one or more blocked persons is itself considered to be a blocked person”.

A similar approach is taken by the EU, which aggregates ownership of a company by ‘listed persons’.

“The differences between the UK, US and EU positions on aggregation means that UK businesses with possible US and EU nexuses need to be mindful of the differing tests for aggregation of ownership between the different jurisdictions,” she said. “While UK businesses may be able to deal with an entity that is owned or controlled by a number of designated persons whose combined shareholdings amount to more than 50% of the shares and there is no evidence of a joint arrangement or that the shares are held jointly under UK sanctions, they would not be able to do so under the US or EU regimes as the threshold for ownership is met.”

“Based on the OFSI guidance, when engaging with non-designated entities with links to sanctioned entities, it would be prudent for a UK business to raise enquiries as part of its due diligence process concerning whether any shareholders have a right of control over other shareholders’ shares or whether any joint agreement exists between the shareholders of the non-designated entity,” she said.