Briefing

Global Investigations and Enforcement: OFSI & NCA Red Alert – Evasion Typologies

After a lengthy period of sanctions implementation, the recently published red alert on Financial Sanctions Evasion Typologies: Russian Elites and Enablers indicates a shift to enforcement.

On 12 July 2022 the National Crime Agency (NCA) and HMTreasury’s Office of Financial Sanctions Implementation (OFSI) issued a RedAlert on Financial Sanctions Evasion Typologies: Russian Elites and Enablers¹.

Enablers have previously been in the sights of UK lawenforcement in relation to money laundering. This alert demonstrates thatfocus, rather than diminishing, is growing in scope with the inclusion offinancial sanctions breaches.

Why now?

Unlike the US the UK has historically had a relativelybenign sanctions environment with OFSI only issuing 7 monetary penalties sinceit was given those powers in 2017. However, the growing economic pressureapplied to Russia as well as the unprecedented volume and speed of newsanctions implemented globally in the past three months has pushed this to theforefront, as this red alert and recent statements from OFSI indicate. Givingevidence to the UK Treasury Select Committee on 22 June 2022 Giles Thompson,the Director of OFSI, stated that enforcement cases were increasingly becomingthe priority and outlined the steps that OFSI is taking to address this byincreasing staff numbers, including by bringing in experienced investigatorsfrom the Financial Conduct Authority (FCA) and HM Revenue and Customs (HMRC),and working with the NCA, whose Combatting Kleptocracy Cell has responsibilityfor criminal sanctions evasion and high-end money laundering by “corruptelites” and their “key enablers”, to upskill OFSI staff infinancial investigation skills and intelligence handling. Meanwhile the FCA, ina recent letter in response to a Treasury Committee inquiry2 , has alsoindicated that having given firms that they regulate a reasonable period torespond to sanctions they are now increasing their assessment work on thesanctions controls to pro-actively test compliance and where issues are identifiedwill liaise with OFSI and other government partners as appropriate. The alert,which was prepared with input from law enforcement and financial sectorpartners as part of the Joint Money Laundering Intelligence Taskforce (JMLIT),meets one of OFSI and the NCA’s other aims, which is awareness raising anddeterrence, by educating businesses about the methods and techniques used byDesignated Persons (DPs) and their enablers and facilitators in order to evadefinancial sanctions. However, as with the FCA’s “Dear CEO” letters,the alert can also potentially be used as a standard by which businesses’compliance with sanctions can be measured when considering enforcement action.

Who is the alert aimed at?

The alert is aimed at raising awareness amongst individualsor businesses who DPs may attempt to use to evade sanctions, for example, bythe DP’s assets being transferred or sold to trusted proxies, while in realitythe DP maintains influence over the assets. These ‘enablers’ are often trustedbusiness associates, close contacts or even relatives of DPs but also includelawyers, accountants, investment advisors, wealth managers, payment processors,private equity, trust and company service providers, estate agents, auctionhouses, company directors, intermediaries/agents and private family offices. Byfacilitating sanctions evasion enablers are not only exposing themselves toliability for the sanctions breach but may also have liability for moneylaundering offences due to the assets becoming the ‘criminal property’ oncesanctions evasion has taken place.

It is important to note, particularly given the increasedinternational cooperation around sanctions, that the money laundering offencecould also be engaged where sanctions imposed by other jurisdictions, such asthe EU or US, are breached even if there were no sanctions in place in the UKagainst the DP at the time. Any enabling offences will be assessed based on thelevel of involvement ranging from unwittingly involved (e.g. where businesseswere not aware of their obligations at all or do not have the right systems andcontrols in place), wilfully blind (e.g. where businesses should have knownwhat they were doing, did not invest in the right systems and controls and/ordid not prioritise sanctions compliance sufficiently), to criminally complicit(e.g. willingly setting out to either ignore or circumvent sanctions) at thehighest.

Sanctions indicators (or red flags)

The alert includes 34 indicators to look out for whenassessing whether there is an attempt at evasion of financial sanctions. Whilethe indicators are not at face value evidence of a sanctions breach, they arepotential red flags and essentially place an onus on businesses to demonstratethat, as part of their internal systems and controls for detecting sanctionsbreaches, they took the indicators into account when assessing customer ortransaction risk.

Industry recommendations

In addition to the indicators the alert contains sixindustry recommendations in relation to spotting financial sanctions evasionwhich companies ought to take into account when assessing the overall businessrisks or individual customer risks. These recommendations are summarised below:

Arms-length transactions need to be documentedand should not be taken at face value by firms. This is important whenassessing indirect control a DP may exert over the entity.
Failure to undertake appropriate due diligence,for example wilful blindness in relation to source of funds or wealth checks,will be considered a red flag for complicity and both breach and/orcircumvention offences.
Complex corporate structures and the commercialjustification for them should be assessed carefully as part of enhanced duediligence for high-risk clients.
When assessing aggregation of ownership bear inmind that this can be complicated by the differing approaches to aggregation ofownership applied across EU, UK and US and more than one owner seeks to divesttheir shareholding.
Where firms are presented with documentationthat purports to present a change in ownership by a company linked to a DP, itis important not only to conduct enhanced due diligence, but to follow up withthe relevant competent authority (OFSI in the UK) to understand if firms havereason to believe that ownership has not been transferred appropriately.
In instances where companies have provided theirown legal assessments regarding the transfer of ownership, firms should alsocarry out their own legal assessment in order to come to their owndetermination.

Call to arms

In addition to reminding businesses that they must reportany frozen assets or a breach of sanctions to OFSI, the alert encouragesbusinesses in the regulated sector (broadly those businesses subject toanti-money laundering regulation) to report any activity that they identify asa result of the alert to consider whether they ought to submit a suspiciousactivity report (SAR). It then goes further than that, inviting businesses toshare information even if it would not meet the requirements for a SAR (i.e.knowing or suspecting a person is engaged in money laundering), reflecting a’call to arms’ approach. If a business is considering making a report to theNCA outside of the SAR regime we strongly recommend that legal advice is soughtbefore doing so to ensure that your business is protected from any potentiallitigation, for example in connection with any obligations of confidentiality.

Key takeaway

After a lengthy period of sanctions implementation acrossthe globe, enforcement is now clearly at the top of the regulatory agenda andthe current red alert robustly underscores this. Expect to see more enforcementactivity in this space over the coming months and years and a more joined-upapproach between regulatory bodies, law enforcement and the regulated privatesector. While the ‘recommendations’ form part of the non-statutory guidance oncompliance, taken together with the lengthy list of indicators and emphasis oncollaboration between enforcement agencies, it would not be an overstatement tosay that these are the expected compliance standards going forward. Buryingheads in the sand or taking a reactive rather than proactive stance is not thebest approach and could leave the door open to breaches occurring and potentialenforcement action; seek legal advice if in doubt.

Footnotes

1. https://www.nationalcrimeagency.gov.uk/who-we-are…

2. https://www.nationalcrimeagency.gov.uk/who-we-are…