Is the UK sanctions watchdog up for the fight?
Russia’s invasion of Ukraine sparked a tidal wave of sanctions as Western nations sought to pressure the Kremlin to end its invasion.
While there are multiple agencies that have a role in the UK’s sanctions regime, the rounds of Russia-related sanctions have thrust the UK’s Office for Financial Sanctions Implementation, or OFSI, into the limelight.
OFSI, which was established in 2016, sits within the Treasury and has more than doubled its headcount since Russia’s invasion, and it plans to have 135 full-time staff by the end of the financial year.
But OFSI’s enforcement track record has been called into question.
Since 2019, OFSI has only handed out eight fines and one warning.
Of those actions, six were self-reported by the offending company.
The only action OFSI has taken regarding the wave of sanctions following Russia’s invasion was in September against payments firm Wise, which was found, following a self-report, to have allowed a £250 withdrawal from a business customer the day after the day after sanctions were imposed against them. Wise was not fined.
A Treasury spokesperson said fines “are just one element of OFSI’s toolkit as it pursues non-compliance vigilantly, using all available means including referring for criminal prosecution.”
Richard Burger, a partner at Wilmerhale, told City A.M., that it might still be too soon to judge the sanctions body, which he said is “still finding its way”.
Francis Bond, a senior associate at Macfarlanes, also pointed out that the unit was still relatively young when compared with the Office of Foreign Assets Control (OFAC) in the US, which was set up back in 1950.
“It is important to remember that the UK sanctions regime is still in its infancy, and OFSI has come a long way in a relatively short space of time,” Bond told City A.M. “However, while OFSI has made significant strides on licensing and guidance, the wheels of enforcement continue to grind very slowly.”
Tom Keatinge, the director of the Centre for Financial Crime and Security Studies at think tank RUSI, told City A.M. that OFSI has done a “good job” in getting to where it has today, but “the jury’s out as to whether the UK is a kind of serious player in the sanctions world”.
I suppose this is my overall concern with the UK is… would you be concerned about the UK coming after you from an enforcement perspective?
Tom Keatinge, the director of the Centre for Financial Crime and Security Studies at think tank RUSI
“I suppose this is my overall concern with the UK is… would you be concerned about the UK coming after you from an enforcement perspective?” Keatinge said.
Others are more critical of OFSI’s enforcement record. “It’s unsatisfactory,” Maia Cohen-Lask, a partner at Corker Binning, told City A.M.
Not only does the lack of enforcement actions mean that sanctions breaches might be going unpunished, but “the outcome is a state of uncertainty” for businesses that are trying to comply with sanctions rules, she said.
She explained that more enforcement decisions would help provide guidance to those seeking to comply, but without such implied guidance “businesses are frightened into a state of over-compliance”.
Bond also warned that the agency’s current enforcement model, which, so far, has heavily relied on self-reports, creates bad incentives.
“Businesses that do the right thing on compliance and reporting are put in a more precarious position than those who sit tight and hope to avoid getting caught,” he said.
OFSI has hinted at a change in its approach to enforcement, however.
“We are transitioning to a proactive enforcement model, powered by ever greater intelligence-sharing with key partners and allies,” Giles Thomson, OFSI’s director, said in the unit’s annual review last month.
It says that it has boosted resources in its enforcement team by 175 per cent. The Treasury didn’t disclose the unit’s budget.
Since June 2022, it has also had the power to impose penalties for breaches on a ‘strict liability basis’, meaning it can issue fines irrespective of whether the firm had any knowledge or suspicion of the breach.
As of April 2023 – the latest available data – OFSI’s Enforcement Unit was investigating 172 cases, some of which could result in monetary penalties.
Burger, from Wilmerhale, noted that OFSI “requires resource, funding and specialist staff” if it wants to bolster enforcement.
“Sanctions investigations take a long time,” Bond said. “We are coming up to the sweet spot of 16-20 months since many of the post-war offences may have occurred, so expect an uptick of concluded investigations in mid-late 2024.”
We are coming up to the sweet spot of 16-20 months since many of the post-war offences may have occurred, so expect an uptick of concluded investigations in mid-late 2024.
Francis Bond, a senior associate at Macfarlanes
Cohen-Lask, however, was less optimistic.
“It’s not clear how a ‘proactive enforcement model’ differs from what is already in place,” she said. “It seems unlikely that there will be more than a marginal increase in enforcement cases, unless OFSI comes under serious public pressure to take enforcement action.”
While ahead of many EU nations on enforcement, the UK remains well behind the US.
By comparison, OFAC levied £1.54bn in fines for sanctions breaches last year alone. Even if you strip out the eye-watering Binance fine of $968m, the value of penalties still comes in significantly higher than the UK, which has issued £20.8m in fines since 2019.
“It is essential that the agency’s strong words begin to translate into robust action in order to provide a strong deterrent for sanctions evasion,” campaign group Spotlight on Corruption said in a recent note.
Keatinge warned that this year will be a critical one for the agency.
“2024 has to be the year of enforcement, because if it’s not, then I think the credibility of UK sanctions starts to be brought into question.”
To contact the author of this story, email Ben Lucas at ben.lucas@cityam.com