Overview
On September 27, 2024, HM Treasury’s Office of Financial Sanctions Implementation (“OFSI”), announced that a civil monetary penalty of £15,000 was imposed on August 29, 2024, against Integral Concierge Services Limited (“ICSL”) for breaches of The Russia (Sanctions) (EU Exit) Regulations 2019 (the “Russia Regulations”).
According to OFSI’s penalty report, ICSL made or received 26 payments in 2022 and 2023 relating to property management services provided in respect of a UK residential property owned by a UK designated person following the person’s UK designation. The total cumulative value of the payments involved in the breach was £15,487.30. Additionally, ICSL failed to fulfill its reporting requirements under two OFSI general licences in relation to six payments to water and utility companies.
The ICSL case represents the tenth use of OFSI’s civil monetary penalty powers since they were introduced under Part 8 of the Policing and Crime Act 2017 (“PACA”), and the second penalty to be imposed by OFSI in relation to Russia’s February 2022 invasion of Ukraine. Several useful hints as to OFSI’s enforcement approach and interpretation of the scope of asset freeze sanctions can be discerned from the ICSL case.
OFSI’s enforcement focus cuts across many sectors
The ICSL case underscores that OFSI has its sights set on companies across a range of industries and not just financial institutions. ICSL is a small UK registered property management and concierge firm that primarily has served Russian and Ukrainian clients since 2015. ICSL had provided services to the UK designated person since 2015, including the collection of rent from tenants, as well as organizing and paying for routine property maintenance, repairs and insurance.
OFSI’s previous enforcement actions have involved banking, financial services, fintech, oil and gas services, and telecommunications. The addition of a property management and concierge company to this list suggests that OFSI’s investigations are covering, and may continue to cover, a broad range of sectors.
Self-disclosure is not OFSI’s only means of identifying potential breaches of UK financial sanctions
OFSI became aware of the transactions forming the basis of this enforcement action as a result of “proactive means” and, having identified the property to which the transactions related, OFSI initiated an investigation into ICSL. As ICSL did not submit a voluntary disclose of the violations forming the basis of this enforcement action, OFSI initiated contact with ICSL to obtain information regarding the conduct forming the basis of the monetary penalty.
The importance of sanctions risk identification and mitigation
OFSI’s penalty report makes clear its position that companies need to understand their sanctions risk exposure and take appropriate action to address it. ICSL served a client base primarily comprised of Russian and Ukrainian individuals. Given the high profile of Russia sanctions following Russia’s invasion of Ukraine, ICSL should have sought to more fully understand its responsibilities under UK sanctions. Businesses serving a high risk client base should fully educate themselves with the sanctions risks associated with that business, including by engaging with guidance published by OFSI and seeking legal advice on their sanctions compliance obligations, when necessary.
Ignorance of the requirements of UK sanctions is no defence
ICSL was unaware of its sanctions compliance obligations beyond not making direct payments to a UK designated person or facilitating rental payments to the designated person’s client account. ICSL made no attempt to educate itself about its obligations under the UK’s Russia sanctions regime and continued to operate its business with respect to the client and their property as normal following the client’s UK designation. In particular, ICSL continued to provide services in relation to the designated person’s property such as rent collection from tenants, as well as collecting its own management fees from the designated person’s ICSL client account. ICSL also facilitated payments on behalf of the designated person, for example, paying for the upkeep and maintenance of the property.
During OFSI’s investigation, ICSL admitted that it did not believe it was necessary to seek guidance about the UK sanctions regime, despite its knowledge of sanctions being, by its own admission, “extremely limited.”
Reminder as to the scope of UK financial sanctions
The ICSL case highlights some important points about how UK sanctions apply to properties and other assets owned by UK designated persons. ICSL repeatedly breached Regulation 13(1) of the Russia Regulations by making payments to third parties on behalf of the designated person for routine holding and maintenance of the property that were not authorized by an exception or OFSI licence.
Insight into OFSI’s case assessment process
In assessing ICSL’s breaches of UK financial sanctions, OFSI applied the case factors set out in its Enforcement and Monetary Penalties Guidance.
OFSI identified a number of aggravating and mitigating factors as part of its investigation and applied them, as follows:
- Value of breach – Despite the low value of the individual payments involved in ICSL’s breach, their cumulative total was classed as serious by OFSI;
- Conduct – ICSL’s actions “blunted the intended effects” of the asset freeze imposed on the designated person by reducing the disruption the designated person ought to have experienced, harming the objectives of the UK’s Russia sanctions regime. OFSI balanced this aggravating factor against the fact that OFSI may have granted ICSL a licence had it applied for one, as OFSI already had issued general licences to allow some payments in respect of properties owned by designated persons;
- Intent, knowledge, or reasonable cause to suspect – ICSL’s knowledge or reasonable cause to suspect that it was in breach of sanctions with respect to activities it performed after the introduction of strict civil liability for breaches of UK financial sanctions on June 15, 2022 was an aggravating factor that OFSI took into account in deciding how to dispose of the case;
- Knowledge of sanctions and compliance systems – ICSL’s lack of awareness of sanctions risks was treated as an aggravating factor;
- Repeated, persistent or extended breaches – The repeated nature of ICSL’s breaches was considered to be serious by OFSI;
- Cooperation – ICSL cooperated with OFSI’s investigation by providing information on breaches it had committed of which OFSI was not yet aware, which OFSI treated as a mitigating factor, despite ICSL not making a voluntary disclosure, because it made enforcing the law simpler, easier, quicker, and more effective; and
- Other relevant factors – ICSL’s failure to meet the reporting requirements of applicable general licences, as well the fact that ICSL failed to disclose that the designated person was its client during a client due diligence review by its banking provider were treated as aggravating factors.
Key Takeaways
- A clear understanding of the obligations imposed by UK sanctions is important for companies operating in a wide range of sectors, particularly given the significant expansion of sanctions targeting Russia since February 2022, as OFSI has demonstrated its appetite for bringing enforcement actions for financial sanctions breaches across a wide range of sectors.
- Companies should seek legal advice regarding the impact of UK sanctions on their business activities, when necessary.
- It is vital that companies consider the potential sanctions risk exposure of their activities and design, implement, and maintain proportionate controls to mitigate those risks and ensure compliance with UK sanctions.
- The investigation and disclosure to OFSI of potential breaches of financial sanctions should be undertaken carefully and with appropriate cooperation to maximize the likelihood of a swift and satisfactory outcome.
For more information on these developments and their implications for companies, contact the authors of this post, Alexandra Melia or Elliot Letts, in Steptoe’s Economic Sanctions team in London.
