OFSI Annual Review: April 2021 to August 2022
On Thursday 10 November 2022, the UK Office of Financial Sanctions Implementation (OFSI), published its 2021-2022 annual review, highlighting its shift towards a more proactive rather than reactive compliance and enforcement model.
The report highlights the role of the OFSI and its international partners in helping to put in place the “most stringent financial sanctions in history” as part of a robust response to the Russian invasion of Ukraine. The invasion has influenced how the OFSI operates and will continue to do so in 2023, as the OFSI need to adjust to continue to provide businesses and individuals with the assistance and ability to operate as effectively as possible.
INCREASED DOMESTIC AND INTERNATIONAL COLLABORATION
Collaboration on both a domestic and international level has been paramount in implementing sanctions in a unilateral and effective manner. In the aftermath of the Russian invasion of Ukraine, the OFSI completed 75 engagements with 50 countries and territories.
Additionally, the OFSI has continued to increase its engagement and collaboration with other countries and partners in the United States, Asia, and Europe. Collaboration has ranged from formal capacity building to assistance in improving financial sanctions implementation and facilitating humanitarian activity. An increase in information sharing with unilateral bodies such as the United Nations, European Union, G7, IMF and Financial Action Task Force appears to have helped to improve bilateral relations, and, on a domestic level, the OFSI has been required to work more closely with partner organizations such as the Financial Conduct Authority and National Crime Agency.
This collaboration will be vital in the OFSI continuing to meet its objectives and will likely lead to increased cross-border investigations and enforcement.
The OFSI has continued to maintain and publish the consolidated list of asset freeze targets, which is vital in ensuring individuals and businesses can comply with financial sanctions by ensuring they do not deal with individuals and entities listed as “designated persons.”
As of 31 March 2022, 3,121 designated persons were subject to an asset freeze across 30 regimes with 987 individuals added in the financial year 2021 to 2022 under the Sanctions and Anti-Money Laundering Act 2018. From February to August 2022, 1,271 new Russian regime designated persons were added to the list, highlighting the OFSI’s response to the invasion.
As of 30 September 2021, £12.4 billion of frozen funds were held by UK businesses. During the period 22 February to 20 October 2021, £18.9 billion in frozen funds were reported to the OFSI as being held by or on behalf of persons designated under the Russia regime. This is a significant increase compared to the £44.5 million reported in September 2021 and illustrates the size of the increase in the application of the UK sanctions regime.
We expect that this extension will continue throughout 2023 and will increase the pressure on those subject to the ever expanding UK sanctions regime to ensure their compliance.
The OFSI continues to assess applicants’ requests to carry out activities otherwise prohibited under UK sanctions regulations. Applications have historically focused on the provision of legal services, previous obligations of designated persons, humanitarian assistance, and other extraordinary situations.
The OFSI issued 42 new licenses (17 general licenses) and 107 amendments in the financial year 2021 to 2022, which was an increase on the 118 issued over the previous year. In 2021 to 2022, 17 general licenses were issued to enable parties to undertake specific activities without the need to request a specific license, compared to one in the previous year—a by-product of the Russian invasion of Ukraine.
License applications have also been on the rise since the start of the Russian invasion, with the OFSI receiving 642 license applications under the Russia regime in the first six months of 2022. The OFSI has continued to respond to the Russian invasion by issuing 33 general licenses under the regime, ranging from permissions to wind down bank accounts, enable transactions in relation to designated Russian banks, enabling insolvency payments, and securing energy licenses. One of the most high profile and widely covered instances was the specific and general licenses issued to enable Chelsea Football Club to continue to operate after its previous owner, Roman Abramovich, was designated.
The OFSI has had to adapt in order to respond to the invasion and has recently increased the number of staff dedicated to processing application queries.
The key challenges for the OFSI are training its new staff to process license applications, continuing to increase its resources to meet demand and ensure those recruited into its enforcement team have the relevant experience to take action in what will likely become an increasingly contested process.
The OFSI has continued to build upon its enforcement capabilities in order to react to necessary domestic and international situations. The OFSI continues to assess every suspected breach of UK sanctions regulations with reporting on the rise and continues to refer the most serious cases to law enforcement for prosecution.
In 2021 to 2022, 147 potential financial sanction breaches were considered, an increase from 132 in the previous year. Many of the breaches related to the Belarus regime, with the Syrian, Libyan and Afghanistan regime also accounting for many of the enforcement outcomes in the financial year 2021 to 2022.
The recent extension of the OFSI’s ability to impose financial penalties on a strict liability basis, without the need to prove that a subject had knowledge or reasonable cause to suspect that they were in breach of financial sanctions, will expand their remit even further. This will likely lead to increased challenges from those subject to such penalties and the need for greater resources in the OFSI’s enforcement team to deal with this increase.
Financial sanctions compliance continues to be key to protecting the integrity of the United Kingdom’s financial system, national security and foreign policy goals. The OFSI has faced an increase in workload due to the Russian invasion of Ukraine, which has led to significant delays in it responding to license applications. Should it wish to increase its enforcement presence, which is almost inevitable, it will have to significantly increase its resourcing and capabilities.
The OFSI’s actions to build upon strategic partnerships within the United Kingdom and abroad by increased collaboration and intelligence sharing will likely lead to significant growth in cross border compliance reviews and enforcement action.
It is of note that the OFSI will also look to build upon its definition of ‘relevant firms’ in order to expand reporting requirements to cryptoassest businesses following an increasingly volatile year for the industry.
In conjunction with the OFSI’s newly granted capability to impose financial penalties on a strict liability basis will expand its remit even further.
Whilst it appears that the OFSI has identified its key challenge being resource and capabilities, only time will tell if it is successful in filling the gaps which currently exist.