Compliance
The Standard Chartered Bank Case
First Imposition of Monetary Penalty by OFSI
Abstract
The Economic Secretary to the Treasury imposed two monetary penalties for violation of sanctions issued by the Office Financial Sanctions Implementation on the 18th of February 2020.
The measures were applied following the review disciplined by s147 of the Policing and Crime Act 2017 (PACA 2017).
The sanctions have been elevated against Standard Chartered Bank for breaches of Article 5(3) of EU Council Regulation 833/2014 and Regulation 3B of The Ukraine (European Union Financial Sanctions) (No.3) Regulations 2014.
Those are the first penalties elevated by the OFSI since its creation, for a total amount of £20.47 million GBP.
The article illustrates the facts and the major issues,
- The infringement of sanction regime
- Why it occurs
- How the Bank address the sanctions
- The penalties review procedure ex S.147 of the Policing and Crime Act 2017
- Best practice for compliance
1. The infringement of section regime
The breach was related to the set of sanctions imposed in July 2014 by European Union (Including UK) upon the illegitimate annession of Crimea by Russia.
The EU Regulation 833/2014 imposes a specific set of sectoral-based restrictive measures in view of Russia’s actions to destabilise the situation in Ukraine, including prohibitions on the purchase or provision of investment services or debt to a number of sanctioned entities.
The O.F.S.I. imposed the monetary penalties because it was satisfied, on the balance of probabilities, that the Standard Chartered Bank breached the prohibition imposed by the EU financial sanctions legislation.
Those measures intended to prevent certain Russian banks, companies, and their subsidiaries from accessing EU primary and secondary capital markets, including access to loans.
In particular, Article 5 of Council Regulation (EU) No 833/2014 (Article 5), restricts certain activities involving transferable securities and money market instruments, and the provision of certain forms of loans and credit to the targeted entities.
2.Why it occurs
Standard Chartered Bank made a series of 102 loans to Denizbank A.Ş. between 8 April 2015 and 26 January 2018, violating the restrictive measures under the EU Ukraine (Sovereignty and Territorial Integrity) regime.
The Bank, in order to avoid the sanctions regime, has applied to those loans the exception expressly indicated within Article 5(3)(a) of the EU Regulation.
This exception permits loans or credit which have the specific and documented objective of financing the import or export of non-prohibited goods between the European Union and any third country, to ensure that legitimate EU trade is not harmed.
The exemption requires that the financed trades concern goods coming in or out of the EU by the EU nexus.
Denizbank A.Ş. insted was almost wholly owned by Sberbank of Russia with the result that the restrictions also applied to Denizbank A.Ş., and with no regard of its function in the transaction
O.F.S.I. assessed that 70 loans, within a transaction value over £266 million G.B.P., did not have an EU nexus and thus did not qualify for exemption.
However, only for 21 of these loans with a value of £97.4 million G.B.P., issued after 1 April 2017 the sanctions raised.
The same transactions were also penalised under the powers given to HM Treasury accordingly with section 146 of P.A.C.A. 2017.
O.F.S.I. assessed that Standard Chartered Bank was aware of the sanctions regime and instead of adopting the right compliance steps, had introduced dispensations enabling such loans.
The failings persisted over an extended period of time, leading to Standard Chartered Bank repeatedly making new loans to Denizbank A.Ş.
3. How the Bank address the sanctions
However Standard Chartered Bank disclosed the suspected breaches of financial sanctions to O.F.S.I., carried out an internal investigation of the breaches, provided a detailed report of the investigation to O.F.S.I., offering continuous collaboration.
As a consequence, penalties were reduced by 30%, following the process set out in O.F.S.I.’s published guidance on case assessment.
4.The Review ex S.147 of the Policing and Crime Act 2017
On 7 January 2020 the Bank, not satisfied with the result, exercised its right under PACA 2017 to a review by a Minister of the Crown of both penalties.
Under these provisions, the Minister may:
a. uphold the decision to impose the penalty and its amount,
b. uphold the decision to impose the penalty but substitute a different amount, or
c. cancel the decision to impose the penalty.
The review was carried out by the Minister personally, as result The Minister agreed that Standard Chartered Bank had made the 21 loans, with a combined estimated transaction value of £97.4 million GBP, directly available to a person subject to the prohibitions contained in Article 5(3) of the EU Regulation.
However, the fact that:
- the Bank acted in good faith
- they did not wilfully breach the sanctions regime
- Intended to comply with the relevant sanctions regime
- fully cooperated with OFSI
- the Bank has taken remedial steps following the breach
lead the Minister to reduce both penalty amounts.
In conclusion, Standard Chartered Bank did not exercise their right of appeal to the Upper Tribunal within the time limit in which to do so and have paid the penalty.
The case is now concluded.
5. Best practice for compliance
O.F.S.I. does not mandate a particular standard of financial sanctions compliance.
It is good practice for firms to review their own due diligence and compliance processes, in correlation to their risk appetite, to ensure that breaches of financial sanctions are prevented or recognised, in order to take appropriate measure.
Restrictions set out in financial sanctions regimes vary between regimes, which means different jurisdictions pose different sanctions. Some restrictions, for example an asset freeze, are wide in scope.
Firms and individuals must ensure that they fully understand both the prohibitions and exemptions contained within financial sanctions legislation. Adopt appropriate policies and processes to manage sanctions risk and ensure compliance with the relevant prohibitions is mandatory.
Firms should put in place risk-based compliance, including policies which recognise the different risks across different jurisdictions and mitigate them appropriately. A preventive action is for Firms to monitor their business activities and make sure they carry out appropriate financial sanctions, screening or checks, and act on the results in the correct way.
Those measures are nowadays very effective by the adoption of specific software platforms.
O.F.S.I., from its side, values voluntary disclosure and co-operation is a sign of good faith and makes enforcing the law simpler, easier, quicker and more effective.
A prompt and complete voluntary disclosure of a breach of financial sanctions in ‘serious’ cases will make up to a 50% reduction in the final penalty amount, as happens in this case.
April 2020
by Daniele Lupi