OFSI’s latest enforcement actions emphasise the importance of effective due diligence

In its latest enforcement actions for breaches of Russian financial sanctions, the UK’s Office of Financial Sanctions Implementation (OFSI) has imposed penalties on a bank and its customer in respect of the same transactions. In doing so, OFSI demonstrated it will take a holistic approach to enforcement, scrutinising and, where appropriate, penalising all parties involved in a transactions chain rather than focusing solely on the entity initiating the payment.

Both cases were resolved under OFSI’s new settlement procedure introduced in February this year and the outcomes give an indication as to what organisations suspecting or being involved in a sanctions breach can expect from OFSI going forward. The agency also gave informal guidance in its two penalty notices, noting in particular that the responsibility to ensure that sanctions compliance measures are effective lies with entities themselves, notwithstanding that they have engaged third-party agencies to conduct screening for them.

Key lessons for firms

UK financial sanctions apply to any conduct in the UK and to all UK persons (including legal entities established under UK law) anywhere in the world. That includes non-UK firms such as ADI, which was based in Ireland, that use UK financial institutions to conduct payments, even if they are managing the account from outside the UK. Firms must ensure they comply with those UK financial sanctions that are in force.
Firms remain ultimately responsible for screening payments and ensuring compliance with financial sanctions. While use of third-party sanctions screening and ownership diligence providers is often invaluable, there are inherent risks. Firms need to account for the limitations of any third-party screening tools they use.
Firms should ensure they maintain suitably robust customer due diligence frameworks to enable them to identify and understand ownership and control, both at the outset of a relationship and on an ongoing basis. They should be able to demonstrate strong onboarding procedures and regular, risk-based customer reviews, especially for higher risk jurisdictions such as Russia. Ongoing monitoring should take account of changes in ownership and control that may give rise to heightened sanctions risk.
Firms concerned about potential sanctions breaches should carefully examine OFSI’s new enforcement procedures. Making a complete, detailed and prompt voluntary disclosure of potential breaches to OFSI and cooperating fully with any subsequent investigation can result in a discount of up to 50% of any financial penalty when combined with use of the Early Account Scheme. The two penalties under consideration were both resolved under the new settlement procedure, which can give a further discount of 20%. But it remains the case that prevention is better than cure. Ensuring the implementation and effective operation of appropriate sanctions due diligence and screening procedures, particularly if these have previously been found wanting, remains key.

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Key lessons for firms

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Key lessons for firms