Sanctions, ownership and related issues

The evolving UK sanctions regime: five practical points for businesses  

Published on 28th Mar 2023

The increasingly complex sanctions landscape over the past 12 months provides lessons in managing risk 

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Following the Russian invasion of Ukraine on 24 February 2022, the United Kingdom along with the European Union and the United States took significant, and unprecedented, steps to strengthen and expand their existing sanctions regulations. The UK's existing Russian sanctions regulations have been repeatedly amended since February 2022.  

In the weeks and months that have followed, the scope of the strengthened sanctions has grown significantly. At first they targeted those closest to the Kremlin - oligarchs, banks and other organisations - before gradually expanding to capture a wide range of individuals, businesses, and sectors, including the financial sector, and the provision of professional and business services such as accountancy, IT and management consulting, and legal services.  

In the same period the UK government has taken steps to bolster the powers of the UK sanctions enforcement body, the Office of Financial Sanctions Implementation (OFSI), introducing new legislation to make the breach of financial sanctions a strict liability offence for the purpose of imposing regulatory fines, significantly increasing OFSI's enforcement headcount, and the issue (and, indeed, re-issue) of updated and expanded guidance on sanctions compliance and OFSI's approach to enforcement. The most recent example is guidance on the assessment of "control" by a Designated Person and on the new restrictions on providing Trusts services.  

The last twelve months have, therefore, seen an evolution in the UK's approach to sanctions.  In many instances, the imposition of these sanctions has had an unforeseen (and perhaps unintended) impact on a number of UK businesses, preventing them from carrying what would previously have been "business as usual" transactions. Firms in sectors beyond those traditionally affected by sanctions are now being caught by the impact of the sanctions regime. Based on the experience of the last twelve months, our top five practical points for clients dealing with an increasingly more complex sanctions landscape are set out below. 

1. The importance of compliance 

For sanctions, prevention is key, and enforcement agencies have little time for companies that fail to identify risks and/or implement measures to mitigate them through effective compliance functions.   

In order to mitigate their sanctions risk effectively, companies should ensure that their sanctions compliance programmes are risk-based and proportionate.  

An effective programme should include the following five core components: senior management commitment; risk assessment; policies, procedures and internal controls; training; and audit.  

2. Sanctions affect all sectors 

In the last 12 months, it has become ever more apparent that all sectors can be and are affected by sanctions, including cybersecurity, real estate, tech, retail, charity and insurance. Previously, sanctions were not on the radar of many in-house counsel outside of settings that have long been alive to sanctions risk, such as the "old energy" sector, import and export, the financial industry, and regulated entities.  

3. Ownership and control: an evolving concept 

Under the UK sanctions regime, a company is owned or controlled if another person/company holds (whether directly or indirectly) (a) more than 50% of shares; (b) more than 50% of the voting rights; or (c) the rights to appoint or remove a majority of the board of directors; or that this other person/company is able to control the affairs of the company such that the results are in accordance with that person/company's wishes. 

Even if a company is not a sanctioned entity, if it is owned or controlled by a Designated Person (such as a parent company) it will be subject to sanctions as if it were a sanctioned entity itself.  

Trusts can be established as a way to attempt to circumvent the sanctions regime's ownership and control stipulations. If the ultimate beneficiaries of a trust are the family members of a Designated Person, further enquiries should be made as to when the trust was established, its stated purpose (if any) and whether it is a discretionary trust.  

4. OFSI licences: of restricted scope and lengthy timeline 

In practice, when dealing with a sanctioned entity, there will be few cases where a licence will come to the aid of a potential commercial transaction.  

Licences are most common in company wind down situations, the provision of legal services and humanitarian activity. 

The turnaround for licences is slow. Applicants should expect to wait a minimum of six weeks for a response to a licensing application, and likely a minimum of three months for a decision on the application.  

A general licence allows parties to undertake specified activities which would otherwise be prohibited by the sanctions regime. These licences are issued by OFSI on behalf of HMRC, and OFSI therefore does not accept applications for general licences. They will only be issued under conditions deemed appropriate by HMRC, and usually be considered in response to unforeseen circumstances.  

5. The developing enforcement outlook

Breaching the regulations is a criminal offence and could result in large fines and/or a custodial sentence.  

In June 2022, OFSI announced that it would impose civil monetary penalties on a strict civil liability basis meaning that it no longer had to prove that a person had knowledge or "reasonable cause" to suspect they were in breach of the sanctions. However, to date, OFSI has not imposed any monetary penalties for a breach of the Russian regulations.  

If your business is facing sanctions concerns, speak to one of our experts.


* This article is current as of the date of its publication and does not necessarily reflect the present state of the law or relevant regulation.

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