“A handbag? Sanctions in the luxury goods sector”

Gavin Irwin focuses on Russia and explores the risks of non-compliance with financial and trade sanctions in the sale of luxury goods.

The Birkin

If you knew where to look, you could buy an entry-level Hermes ‘Birkin’ handbag in London this afternoon for about £10,000 GBP.  However, even pre-owned Birkins often cost two, three or four times that and, in 2022, a rare ‘Diamond Himalaya Birkin 30’ sold at Sotheby’s for $450,000 USD[1].  There is currently a waiting-list to purchase a Birkin directly from Hermes (reportedly 6 years[2]) and so difficult is it to come by one that, on 19 March 2024, a class action suit was launched in California[3] alleging that Hermes unlawfully allows only those customers with sufficient “purchase history” or “purchase profile” with the brand to join the list, thereby discriminating against discerning but arriviste fashionistas. (This will be robustly defended.)

With demand like that, and at prices like that, one can understand why luxury goods have become a focus for sanctions enforcement – if an entry-level Rolex is readily convertible into £20,000 GBP, it becomes an economic resource rather than a wristwatch and, when many governments are putting the squeeze on wealthy Russians, a Birkin can become an alternative to funds rather than simply this season’s must-have.

On 3 October 2023, the Financial Times[4] reported that Singapore was considering subjecting luxury assets, including handbags, to anti-money laundering (AML) controls.  In the UK, luxury goods markets have been a focus of attention for both HMRC, in the context of money laundering, and HM Treasury, through the Office of Financial Sanctions Implementation (‘OFSI’), in the context of financial and trade sanctions.

The UK sanctions regimes

The UK’s Sanctions Strategy was published on 22 February 2024 and makes clear one of its focuses: “[w]e are tackling Russia’s efforts to route activity through other countries to try and bypass sanctions … We are also working with third countries on the risks of circumvention – including … any spikes in the trade of sanctioned goods …”. While that applies to oil-products and military materiel, it also applies to luxury goods and a list of third countries named in European domestic criminal proceedings, as staging points for diversion to Russia, would include many in Central Asia, Turkey, UAE and Hong Kong.

On any view, the aftermath of the second Russian invasion of Ukraine has seen an extraordinary proliferation of financial and trade sanctions. The UK sanctions framework is contained within the Sanctions and Anti-Money Laundering Act 2018 (‘SAMLA’). Numerous countries, or ‘regimes’, are sanctioned under SAMLA, including Belarus, Burundi, Iran and Mali. If an individual is designated under a regime their assets must be frozen.

Russia: Financial Sanctions

Financial sanctions relating to Russia are set out in the Russia (Sanctions) (EU Exit) Regulations 2019 (‘2019 Regulations’) and, as of 8 May 2024, 1701 persons and 298 entities are designated for asset freezing[5]. A person must not intentionally provide or make available funds and/or economic resources to, or for the benefit of, any designated person or entity, knowing that the object or effect, whether directly or indirectly, is: to circumvent a prohibition; or, to enable or facilitate the contravention of any such prohibition.  Economic resources means, “assets of every kind, whether tangible or intangible, movable or immovable, which are not funds but can be used to obtain funds, goods or services”. While a Birkin is a status symbol, it is also capable of being an economic resource.

The knowledge requirement relates to criminal liability but, as of 22 March 2022[6], a civil monetary penalty may be imposed regardless of mens rea (although culpability will be relevant to the amount of such a penalty). The maximum penalty that can be imposed will be the greater of £1 million or 50% of the value of the breach but the assessment must be reasonable and proportionate.

Russia: Trade Sanctions

Separately from the designation and asset freezing provisions, the 2019 Regulations also apply trade sanctions against Russia which include a prohibition on, “the export of luxury goods to, or for use in, Russia”. A UK person must not, directly or indirectly:

• Supply or deliver luxury goods from a third country to a place in Russia.
• Make luxury goods available to a person connected with Russia.
• Make luxury goods available for use in Russia.

Criminal liability attaches to breaches and a person is to be regarded as “connected with” Russia if they are: an individual who is (or an association or combination of individuals who are) ordinarily resident in Russia or is located in Russia; or, a person, other than an individual, which is incorporated or constituted under the law of Russia or is domiciled in Russia.  An ordinary Russian on holiday – no need to be a designated oligarch – would meet the test if they live in Russia.

Luxury goods are exhaustively defined and, in addition to cigars and caviar, include, “travel goods, handbags or similar articles”, provided the sales price per item exceeds £250.  (The sales price of any specified item excludes value added taxes but includes freight/transport costs.)  Consequently, luxury goods retailers must be vigilant that they do not sell some luxury items to some Russians, whether on holiday or just passing through – an Hermes tie is fine (RRP £215[7]) but a Birkin is a no go.

It should also be noted that the 2019 Regulations apply a second form of trade sanctions against Russia, making it a criminal offence to provide, directly or indirectly, certain professional and business services to a person connected with Russia.  Those services include, “business and management consulting services”, “public relations services” and, “advertising services”, all of which are defined in the 2019 Regulations. For luxury goods manufacturers and retailers, these may be relevant to branding, product placement and sales support.

A new trade sanctions regulator

On 12 December 2023, HM Treasury announced[8] the creation of a new body – the Office for Trade Sanctions Implementation (‘OTSI’).  OTSI will be a sister organisation to OFSI, will have similar powers and is expected to be up and running later in 2024.  It will be responsible for: curbing the activities of companies avoiding sanctions by sending products to Russia through other countries; and, the civil enforcement of trade sanctions, including those against Russia.

Guidance for the haute couture sanctions runway

On 18 April 2023, OFSI (which remains the trade sanctions regulator until OTSI is up and running) first published guidance[9] on sanctions compliance in luxury goods markets and, on 26 July 2023, the EU issued its version[10] (since updated). HMRC also issues guidance[11] on AML compliance in luxury goods markets. All should be read together with the Trade-Based Money Laundering guidance issued by the Financial Action Task Force[12] (‘FATF’) and the Importers and Exporters “FAQ” issued by OFSI[13] (both in December 2020).

In addition, the following guidance relevant to the trade in luxury goods has recently been issued or updated:

• On 16 April 2024, OFSI updated its Russia Guidance[14].
• On 1 May 2024, OFSI launched its dedicated ‘FAQs’, including, by way of example, FAQ 17, “Might payment terms for goods and services whose trade is not prohibited under the Regulations be considered as a relevant loan?” [15].
• On 2 May 2024, OFSI updated its Enforcement and Monetary Penalties Guidance, clarifying how it assesses suspected breaches of sanctions[16].
• On 13 May 2024, OFSI updated its Financial Sanctions General Guidance, revising and clarifying its approach to licensing[17].

Enforcement activity

While, as of 19 April 2024, there have not been any civil monetary penalties issued under the 2019 Regulations, for either financial or trade sanctions breaches, the direction of travel is clear.  On 28 March 2024, Anne-Marie Trevelyan MP, Minister of State for the Indo-Pacific, in correspondence with the Chair of the Foreign Affairs Committee, wrote that[18]:

• Around $285 billion USD of sovereign Russian assets have been “immobilised”.
• As of 23 October 2023, £22.7 billion GBP in designated Russians’ assets were frozen in the UK (up from £7.98 billion GBP in September 2022).
• In 2022-2023, OFSI recorded 473 suspected breaches of financial sanctions – a significant increase on the 147 cases recorded in 2021-2022.
• Monetary Penalties resulting from designations pursuant to the 2022 invasion of Ukraine will “come to fruition” and should be expected in 2024.

The first criminal prosecution for breaches of the 2019 Regulations has been commenced and is due to be tried at Southwark Crown Court in March 2025*.

The other side of the coin for luxury goods retailers

So far, this article has addressed the destination of luxury goods but what about payment for them? Enforcement activity continues in relation to money laundering (ML) through pre-paid cards.

HMRC supervises and enforces the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017. High-value dealers are defined as, “any business or sole trader that accepts … high value cash payments of €10,000 or more (or equivalent in any currency) in exchange for goods. Cash means notes, coins or travellers cheques and includes when a customer deposits cash directly into the dealers bank account or when they pay cash to a third party for the dealer’s benefit”.

High value payments may be constituted of: a single cash payment of €10,000 or more for goods; several cash payments for a single transaction totalling €10,000 or more, including a series of payments and payments on account; or, cash payments totalling €10,000 or more which appear to have been broken down into smaller amounts so that they come below the high value payment limit.

In June 2013, FATF published guidance[19] on the use of pre-paid cards.  That guidance should be read together with HM Treasury’s Advisory Notice in relation to ‘High Risk Third Countries’, updated on 26 February 2024[20]. Critical Prepaid Card Red Flags (and Credit Card Red Flags) include:

• When a customer holds an excessive number of cards.
• Customers who present unusual or suspect identification documents.
• Customers who are reluctant to provide the information required or to proceed with the transaction.
• An unusually large number of authorizations fail.
• Transactions that consistently occur outside of the cardholder’s area of residence.
• No logical explanation for transactions.
• Transactions that are out of character for the Cardholder.
• Multiple transactions slightly beneath reporting thresholds.

While the authorities are currently focused on ML risks posed to financial institutions, dealers in luxury goods receiving payments by cash and/or pre-paid cards should remain vigilant. Whether it is ‘logical’ to buy a Birkin is a matter of perspective and may depend on the height of your Blahnik heels.

Back to the Birkin …

Luxury goods retailers must of course be careful not to supply or deliver luxury goods to Russia and/or any third country from where they may be diverted to Russia, but they must also be vigilant with Russian customers, wherever they are. Not only must retailers avoid selling luxury items to persons connected with Russia, but they must also be alive to persons unconnected with Russia engaging in red-flagged ML behaviour. Meanwhile the guidance continues to flow like paint at the launch of an Alexander McQueen collection.

As to getting your hands on a Birkin, while it may be “je t’aime”, you’ll be lucky to join the queue.

*Gavin Irwin is instructed for one of the three defendants in these proceedings and continues to advise a number of UK companies and high-profile individuals on their exposure to the UK’s financial and trade sanctions regimes.

[1] https://www.sothebys.com/en/articles/the-top-6-most-expensive-hermes-birkin-bags

[2] https://baghunter.com/blogs/insights/hermes-handbag-first-time-buyer-guide#:~:text=There%20are%20long%20waiting%20lists,list%20in%20the%20first%20place

[3] Cavalleri, Glinoga and Others v Hermes International and Hermes of Paris INC., Case 3:24-cv-01707-AGT

[4] https://www.ft.com/content/c8dd1325-cecd-412b-a143-1db034761308

[5] https://assets.publishing.service.gov.uk/media/663b67734d8bb7378fb6c3ac/Russia.pdf

[6] Under the Policing and Crime Act 2017, as amended by SAMLA and the Economic Crime (Transparency and Enforcement) Act 2022

[7] https://www.hermes.com/uk/en/category/men/ties-stoles-and-scarves/ties-bow-ties-and-pocket-squares/#|

[8] https://www.gov.uk/government/organisations/office-of-trade-sanctions-implementation/about

[9] https://assets.publishing.service.gov.uk/media/65cb9deb110683001232ed29/OFSI_-_HVD_Guidance_FP.pdf

[10] https://finance.ec.europa.eu/publications/consolidated-version_en

[11] https://www.gov.uk/guidance/money-laundering-regulations-high-value-dealer-registration

[12] https://www.fatf-gafi.org/en/publications/Methodsandtrends/Trade-basedmoneylaundering.html

[13] https://assets.publishing.service.gov.uk/media/65ca0c6214b83c000ea716bb/Financial_sanctions_guidance_for_importers_and_exporters.pdf

[14] https://www.gov.uk/government/publications/russia-sanctions-guidance/russia-sanctions-guidance

[15] https://www.gov.uk/government/publications/uk-financial-sanctions-faqs/uk-financial-sanctions-faqs

[16] https://www.gov.uk/government/publications/financial-sanctions-enforcement-and-monetary-penalties-guidance/financial-sanctions-enforcement-and-monetary-penalties-guidance

[17] https://www.gov.uk/government/publications/financial-sanctions-general-guidance/uk-financial-sanctions-general-guidance

[18] https://committees.parliament.uk/publications/44255/documents/220088/default/

[19] https://www.fatf-gafi.org/en/publications/Fatfrecommendations/Rba-npps-2013.html

[20] Turkey is the only country to feature on both HM Treasury’s list and in the list of countries above constituting a diversion risk and featuring in European domestic criminal proceedings.