UK-Based Financial Institution hit by OFSI’s largest fine to date

Summary

On March 31, 2020, the Office of Financial Sanctions Implementation (OFSI) announced the imposition of a £20.47 million fine against Standard Chartered Bank (SCB) for breaches of European Union sanctions against Russia. Between April 2015 and January 2018, SCB had made a series of loans to Turkey-based Denizbank A.S., which was almost wholly owned by Russian Sberbank at the time, constituting a breach of the EU-wide restrictions on making certain new loans or credit available to sanctioned parties such as Sberbank.

This is OFSI’s largest monetary penalty to date and may indicate the U.K. regulator’s willingness to impose stricter and more substantial penalties in the future. In particular, the case stresses the importance of the effective implementation of sanctions compliance processes. OFSI commented in its penalty report that SCB was aware of the restrictions and the need to take compliance steps, but that such measures were not appropriately put in place to prevent sanctions violations from occurring. This penalty serves as a stark warning for EU organizations that take a generalized approach to relying on exemptions to EU sectoral sanctions. Finally, it demonstrates that OFSI will not shy away from strict enforcement actions where compliance processes are not up to scratch, even where parties acted in good faith and intended to comply with sanctions regimes.

Background and Further Detail

As a majority owned subsidiary of Sberbank, Denizbank was subject to the same sectoral sanctions under Article 5(3) of EU Council Regulation 833/2014 as Sberbank itself. Article 5(3) prohibits any EU person from making loans or credit available to sanctioned entities where the loan or credit has a maturity of over 30 days. An exemption under Article 5(3)(a) permits such new loans or credit if they have the specific and documented objective of financing the import or export of nonprohibited goods between the EU and a third country. This exemption is aimed at protecting legitimate EU trade and so requires the underlying trade to have a meaningful nexus to the EU (e.g., EU imports/exports).

Of the 102 loans made by SCB to Denizbank from April 2015 to January 2018, OFSI concluded that 70 loans—worth over £266 million—did not have sufficient EU nexus to be covered by the Article 5(3)(a) exemption and so constituted sanctions breaches. OFSI’s enforcement powers only allow it to penalize violations occurring after April 1, 2017, leading OFSI to calculate this penalty based on 21 of those 70 loans, worth £97.4 million.

The penalty notice reports that SCB had initially ceased trade-finance business with Denizbank when it became a sanctioned entity as a result of Sberbank’s sectoral sanctions designation. However, SCB then “sought to introduce dispensations” to begin issuing loans again when it considered that an exemption was applicable. According to OFSI, these dispensations were not appropriately put in place, meaning their operation enabled non-exempt loans to be made. SCB’s failure to ensure that the implemented sanctions compliance measures were correctly identifying when the exemption could, or could not, be relied upon (whether or not the trades financing was provided for related to im/exports in/from the EU) is likely to have been a key driver in OFSI’s determination that these violations fell within the “most serious” category of sanctions breaches. This is more so because the Commission had published guidance on the Article 5(3)(a) exemption in both 2015 and 2017. Whilst SCB may have considered such guidance, it appears that the implemented compliance measures may not captured the complexities within that guidance.

In its review of OFSI’s decision to sanction the bank, the Economic Secretary to the Treasury found that the bank “did not willfully breach the sanctions regime, had acted in good faith, had intended to comply with the relevant restrictions, had fully co-operated with OFSI and had taken remedial steps following the breach.”  Notwithstanding the Minister’s findings, he upheld OFSI’s decision to impose the penalty, whichserves as a stark warning for EU organizations that seek to rely on exemptions to EU sanctions, and in particular, those that take a generalized approach to this. For trade finance activities that may invoke Article 5(3)(a), it is vital that the underlying trade’s EU nexus is clearly established in each and every case. Where there is any doubt as to whether the exemption applies, further analysis should be conducted before any financing is given. Companies should consider whether their sanctions compliance programs are in fact correctly designed and effectively implemented to identify and escalate these issues, and ultimately, prevent sanctions violations from occurring.