Financial Sanctions: OFSI Annual Review
Gavin Irwin contributes to LexisNexis Corporate Crime Analysis, first published by LexisNexis on 16 November 2022.
The Office of Financial Sanctions Implementation’s (OFSI) fifth Annual Review (the Review), for the period April 2021 to August 2022, was published on 10 November 2022 and, inevitably, describes much of OFSI’s recent work in reaction to Russia’s second invasion of Ukraine on 24 February 2022.
What time period does the review cover?
The expanded timeframe of the Review lies outside the financial year (covering April 2021 to August 2022) and is intended to encompass the first six months of the war. In his introduction, Giles Thomson, director of OFSI, states that the:
‘…unprecedented size, scale and complexity of these new sanctions highlight the central role sanctions play in UK foreign, security and economic policy…the implementation of these measures has underlined and significantly intensified the demands on OFSI and will result in a permanent and profound transformation to the way it operates.’
What are the key takeaways from OFSI’s Annual Review for 2021-2022?
Mr Thomson gave evidence before the Treasury Select Committee on 22 June 2022 and, in answers to questions, described how OFSI resources had been increased and were being deployed and, in particular, that staffing had been increased from 45 (in 2021) to approximately 70 (in June 2022) and was expected to grow and to stabilise at around 90 by April 2023. The Review confirms that OFSI expects to have approximately 100 staff by the end of 2022.
OFSI is actively involved with the work of multilateral bodies including the UN, EU, G7, International Monetary Fund (IMF), World Bank, Financial Action Task Force (FATF), FATF-style regional bodies and in developing relationships with the Crown Dependencies and Overseas Territories. Although not mentioned in the Review, on 17 October 2022, OFSI and US Office of Foreign Assets Control issued a joint statement reiterating their close working relationship and explaining the rationale underpinning their co-operation.
Cross-government/public/private sector engagement
OFSI has moved to, ‘a more proactive, evidence-led communications model’, in order to mitigate or avoid the unintended consequences of designations and prohibitions involving:
- convening meetings, roundtables and working groups with the private sector and with senior industry and government stakeholders to co-operate on implementation issues
- a three-month campaign focusing on licensing, including a series of webinars for the private sector on the basics of financial sanctions as well as more targeted ‘deep dives’ into complex issues
In addition, cross-government liaison has become increasingly important and OFSI regularly contributes to HM Treasury’s technical assistance unit which assists Overseas Development Aid-eligible countries in meeting the FATF standards.
Between 24 April 2021 and 24 August 2022, OFSI added 1,271 new Russia regime designated persons to the consolidated list. As a consequence, between 22 February 2022 and 20 October 2022, a total of £18.39bn in frozen funds were reported to OFSI—a very significant increase from the previous year (£44.5m).
In the financial year 2020 to 2021, OFSI issued 43 new licences and made 75 amendments across 11 regimes. (In the financial year, 2021 to 2022, OFSI issued 42 new licences and made 107 amendments across nine sanctions regimes).
While the majority of new licences and amendment licences were for the Libya regime, in the first six months since the invasion, OFSI:
- received 642 licence applications, the majority under the prior obligations, basic needs and legal fees grounds (applications in relation to legal fees alone constituted only 2% but it was a component in some applications made on multiple grounds (44% of the total))
- issued 33 General Licences in connection with the Russia regime covering a wide range of permissions ranging from the wind down of accounts and transactions arising from the designation of Russian banks, enabling insolvency payments for Russian bank subsidiaries, to securing energy supplies and enabling continued access to internet and news services in Russia
The Review makes clear that:
- the core purpose of licensing is to mitigate the unforeseen circumstances of financial sanctions by limiting the impact on UK individuals, organisations and humanitarian-related supply chains where possible
- OFSI prioritises applications: for humanitarian assistance licences, where there is a threat to human life, involving issues of personal basic needs, and those deemed to be of particular strategic, economic or administrative importance
- due to the overall number of licensing cases, OFSI is having to take a ‘strict approach’ to prioritising other cases by urgency and there may be time lags before it can begin assessing less urgent cases
OFSI issued two monetary penalties in the last financial year, both to fintech firms. Most of OFSI’s enforcement action is not publicised and the Review states that, ‘all outcomes help support compliance with financial sanctions’, including warning letters, suggested compliance improvements and the referral of cases to relevant regulators, intended, ‘to promote better practice and behavioural change’.
In 2021 to 2022, OFSI considered 147 reports of suspected financial sanctions breaches (a slight increase from the 132 reports the previous financial year) but the number of cases has an ‘upwards trajectory’ (since the invasion of Ukraine, 236 breach reports have been received).
New powers granted to OFSI
During this review period, on 15 June 2022, the Economic Crime (Transparency and Enforcement) Act 2022 came into force which granted OFSI additional powers, namely:
- adopting a strict civil liability test for imposing monetary penalties for breaches
- amending the HM Treasury’s role in the administrative review of OFSI monetary penalties
- creating a new power to publicise details of breaches even if no monetary penalty has been imposed
- widening existing powers for the sharing of information between government organisations
These have yet to bed in.
The year ahead
In the year ahead, in addition to continuing and enhancing the co-operation and co-ordination described above, OFSI states that it will develop a ‘Licensing Strategy’ involving: increased resourcing for its general licensing function, the strategic development of the use of general licences (the creation of one General Licence is likely to free-up a considerable proportion of the resources currently tied-up in considering individual applications), the consideration of whether new licensing grounds and policies are needed and updating licensing processes and systems.
Whether the extraordinary number of designations continues apace in 2023 remains to be seen but given Mr Thomson’s statement to the Select Committee, in June 2022, that a number of Russia cases were ‘in the pipeline’, an upturn in civil penalties and potentially criminal prosecutions is predicted.