Compliance DIY: OFSI’s latest enforcement action and taking responsibility for your own sanctions risk

On 27 September 2022, HM Treasury’s Office of Financial Sanctions Implementation (OFSI) announced the imposition of a £30,000 civil monetary penalty against Hong Kong International Wine and Spirits Competition Ltd (the Company), a UK company, for breaches of sanctions relating to Ukraine.¹ This is OFSI’s eighth civil monetary penalty to date and demonstrates that companies must consider intangible benefits – specifically, in this case, publicity – as economic resources subject to assets freeze regulations.  OFSI’s commentary on the case also reinforces application of financial sanctions to all sectors and that companies are responsible for their own compliance with them.

The Facts

The Company organises the annual Hong Kong Wine and Spirits Competition (the Competition), which is designed and run by influential figures in the Asian and international wine industry. Successful competitors showcase their wine to Asia’s trade professionals at the Hong Kong International Wine and Spirits Fair. Among other things, winners of the Competition receive year-round marketing support, and their wines are showcased at trade fairs and tastings with industry VIPs.

The State Unitary Enterprise of the ‘Republic of Crimea’ Production-Agrarian Union (Massandra), a joint stock company, is one of the largest wine producers in Crimea. On 25 July 2014, Massandra was designated as an EU asset freeze target.

According to OFSI’s penalty notice², between 2017 and 2020, the Company received from Massandra three payments and 78 bottles of wine worth an estimated £3,919.62 in connection with Massandra’s entry into the Competition throughout that period. 

On 7 December 2020, a third party submitted a suspected breach report to OFSI detailing a payment received by the Company from Massandra. Thereafter, OFSI conducted an investigation that identified four breaches of the asset freeze restrictions – receipt of funds and wine – by the Company.  OFSI also identified a breach in connection with provision of publicity by the Company to Massandra in connection with its entries into the Competition.

No voluntary disclosure discount was available in this instance as the Company did not voluntarily disclosure the potential breaches to OFSI.  As is its right under the Policing and Crime Act, the Company requested a ministerial review of OFSI’s decision: the Minister upheld OFSI’s decision both to impose the penalty and the amount of the penalty.

Key Learnings

1. Companies should consider their potential sanctions risk exposure broadly to include the potential provision of intangible economic resources.

UK sanctions prohibit making economic resources available to an asset freeze target.  According to OFSI guidance, “economic resources… generally means assets of every kind – tangible or intangible, movable or immovable – which are not funds, but may be used to obtain funds, goods or services.”³ OFSI determined that the publicity the Company made available to Massandra following entry to the Competitions was an “intangible economic resource” because it was likely that Massandra would use the publicity to increase its wine sales. OFSI stated in the penalty notice that, “as well as publicity, intangible economic resources could include certain types of intellectual property.”  How OFSI determined the financial value of the publicity for the purposes of calculating the penalty is not clear.  The Massandra case illustrates the need for companies to consider their potential sanctions risk exposure broadly, to include the potential provision of intangible economic resources, and not just financial transactions and tangible economic resources.  

2. OFSI continues to investigate and penalise breaches from a range of sectors.

Financial sanctions apply to all sectors, not only the regulated sectors. This is the fourth OFSI civil monetary penalty falling outside the financial services sector and demonstrates the breadth of OFSI’s enforcement interest.

OFSI’s penalty notice includes “Notes on Compliance,” guidance providing lessons from the case to assist companies in complying with UK sanctions. In this case, the Notes of Compliance state that “it is not sufficient for any company to rely on the banking sector to conduct due diligence on their behalf. This is especially important if a company has global customers and/or operates internationally.” 

Frozen assets reports and notifications to OFSI of suspected breaches submitted by financial institutions are key sources of information that lead to enforcement actions.  Accordingly, companies across all sectors should ensure they have their own compliance measures in place to identify and manage sanctions risks.

3. Ministerial review is used again (this time to no avail).

In OFSI enforcement actions, a person receiving a monetary penalty has a right to seek a Ministerial Review.  This is a process by which OFSI’s decision is reviewed, usually by the Economic Secretary to the Treasurer (the Minister). At the conclusion of a Ministerial Review, the Minister may:

• uphold the decision to impose the penalty and its amount;
• uphold the decision to impose the penalty but substitute a different amount; or
• cancel the decision to impose the penalty.

The right to Ministerial Review has now been exercised in five of OFSI’s eight published civil enforcement actions. On two occasions, Ministerial Review has led to a reduction in the value of the monetary penalty levied.  In one of those cases, the Ministerial Review process was used as a means to submit new information in connection with the apparent violation;⁴ in the other, the Minister found among that the breaching party did not “wilfully breach the [relevant] sanctions regime” and reduced the monetary penalty by approximately 33%.⁵  In the three remaining cases – including the Massandra case – the Minister upheld both OFSI’s decision and the value of the penalty.⁶