The UK’s Office of Financial Sanctions Implementation (“OFSI”) has imposed a monetary penalty of £465,000 against a multinational law firm’s Russian office (the “Russian Office”) for breaching UK financial sanctions against Russia following its invasion of Ukraine in February 2022. This is the first time OFSI has enforced against a law firm.
The Russian Office was a limited liability partnership incorporated in the UK, and it operated in Russia until the office’s closure on 31 May 2022 (with the firm’s Russian employees shifting to work for a local, standalone firm in Russia (“Local Firm”)). By being a UK-incorporated entity, the Local Firm was subject to UK sanctions jurisdiction even when operating in Russia.
The penalty concerns six payments totalling £3,932,392.10 made by the Russian Office to designated persons subject to a UK asset freeze between 25 and 31 May 2022. Over the course of these seven days, as the Russian Office was winding down its presence in Russia, it made payments to Alfa-Bank, Sovcombank Life, and Sberbank. The largest payment (£3,915,232.31) involved the Russian Office mistakenly transferring funds to the Local Firm’s account at Alfa-Bank rather than a non-sanctioned Raiffeisenbank account. Once the Russian Office identified the mistake later in the day, the Local Firm arranged for the funds to be transferred to Local Firm’s non-sanctioned account at Raiffeisenbank.
At the time of the breaches, the Russian Office’s finance team had authority to approve payments locally, without having to obtain specific authorisation from its parent firm in London (the “Parent Firm”). The Parent Firm voluntarily disclosed the breaches on behalf of the Russian Office after they occurred. OFSI imposed a monetary penalty finding that the breaches occurred as a result of (i) inadequate due diligence and sanctions screenings and (ii) errors caused by the hasty closure of the Russian Office.
Aggravating and mitigating factors
OFSI cited the following aggravating factors in its decision to impose a penalty:
- The funds were made available directly to designed persons. The repeated nature of the payments was serious, and the total value significant.
- The harm or risk of harm to the regime’s objective at a time when attempts to elicit behavioural change from Russian designated persons were a critical government priority.
- The Russian Office had significant awareness of sanctions risk and failed to take reasonable care.
- The Russian Office’s systems and policies proved ineffective as they were not properly followed.
- A failure by the Russian Office’s most senior finance staff to conduct proper due diligence or understand the application of ownership and control in UK sanctions regulations in relation to these payments.
OFSI also considered the following mitigating factors:
- The Parent Firm’s initial disclosure to OFSI came almost immediately after it first discovered there had been a breach by the Russian Office, and was followed by subsequent further voluntary reporting five days later. All reporting was voluntary, prompt, and contained significant detail.
- The Russian Office committed the breaches whilst in the process of closing down its operations within Russia in support of UK policy objectives.
OFSI did not consider the fact that the main payment was quickly transferred by the Local Firm out of the sanctioned Alfa-Bank account to the non-sanctioned account as a mitigating factor. This was on the basis that the funds were transferred out of that account and into the non-sanctioned account by the Local Firm, not by the Russian Office, notwithstanding the fact that the Local Firm made the change at the request of the Russian Office, the overlapping nature of the two firms, and that presumably only the Local Firm could correct the error.
Outcome
OFSI assessed a base penalty amount of £930,000, but provided a 50% discount based on the Parent Firm’s voluntary disclosure. The Parent Firm, on behalf of the Russian Office, exercised its right under the Policing and Crime Act 2017 to a ministerial review. The Minister delegated the review to a senior Treasury official with no prior involvement in the case; however, OFSI’s decision was upheld in full. The Parent Firm agreed to pay the penalty on behalf of the Russian Office, although OFSI reiterated that no findings were made against the Parent Firm.
Key takeaway
While OFSI stressed that it was issuing the monetary penalty against the Russian Office, and that it had found no fault with the actions of the Parent Firm, the penalty serves as a reminder that all businesses, particularly those with exposure to high-risk sanctions environments such as Russia, should ensure they have the appropriate procedures in place and that these are adhered to by local teams.
The case further indicates that OFSI is willing to impose penalties notwithstanding prompt disclosure and in a context where a firm was trying to wind down its Russian exposure in line with UK government priorities. OFSI noted in its press release that this penalty, and its August 2024 penalty against Integral Concierge Services Limited, mark the first of several in OFSI’s pipeline for Russian sanctions enforcement. We therefore expect to see further enforcement resulting from the actions that firms took following Russia’s invasion as they scrambled to comply with rapidly changing sanctions.
For further information, please contact:
Carlton Greene, Partner, Crowell & Moring
cgreene@crowell.com
