Robust due diligence essential to reducing risks of breaching Russian sanctions

According to data obtained from HM Treasury by Pinsent Masons, 75 companies voluntarily disclosed to the UK’s Office of Financial Sanctions Implementation (OFSI) that their business operations breached financial sanctions aimed against Russia in the year to February 2024.

Sanctions expert Stacy Keen of Pinsent Masons said that many of the breaches are likely to have been accidental, but businesses hoping to obtain lenient treatment from the UK authorities for inadvertent breaches of the sanctions regime should self-report them.

"In many instances, firms are breaching sanctions in the hours or days after the UK adds an entity to the sanctions list – the transaction to which the breach relates may already be underway,” she explained.

“A challenge for businesses is that individuals and organisations subject to sanctions remain eager to keep a foothold in the UK, to trade with UK counterparties or to access UK investments. They will often do that through shell companies or trusts where it is harder to see who the ultimate owner/controller is. Therefore, companies need to ensure they have robust due-diligence and risk monitoring protocols in place. A key aspect of this is ensuring data held on clients, intermediaries and service providers is up-to-date and comprehensive,” she said.

As of today’s date, 1,707 individuals and 334 businesses with links to Russia appear on the UK sanctions list. The number of individuals and businesses designated under the UK’s Russian sanctions regime rose by 15% in the year to February 2024.

Financial sanctions breaches can attract civil penalties of £1 million or 50% of the value of the breach, whichever is greater. Breaches can also be referred for criminal prosecution where unlimited fines can be imposed as well as terms of imprisonment. The largest civil penalty that has been issued in the UK for a breach of financial sanctions is £20.5m, for breaches that took place between 2015 and 2018.

Many UK companies did not have to grapple with the implications of the sanctions regime prior to 2022, the year when the UK, US and EU imposed additional trade and financial sanctions targeting Russia, but have since had to set up sanctions-specific compliance protocols and processes. Keen said that these companies may be more susceptible to sanctions breaches as their compliance approach is in its infancy.

“Global multinationals may have fairly developed procedures in monitor their risk of breaching sanctions. Small and mid-cap companies with limited links outside of the UK and its ally nations are far less likely to have these in place,” she said.