The law
Article 5(3) of EU Council Regulation 833/2014 (the Regulation) prohibits any EU person from making or being part of any arrangement to make a loan or credit with a maturity of over 30 days with (i) a sanctioned entity, or (ii) amongst others, a non-EU incorporated entity whose proprietary rights are directly or indirectly owned more than 50 per cent by a sanctioned entity.
Notwithstanding this, the Regulation exempts “loans or credit that have a specific and documented objective to provide financing for non-prohibited imports or exports of goods and non-financial services” between the EU and any non-EU state. The purpose of this exemption is to ensure that legitimate EU trade is not harmed and requires that any financed trades relate to goods coming into or out of the EU.
Facts
Between 8 April 2015 and 26 January 2018, Standard Chartered Bank made 102 loans to Denizbank A.Ş., a private bank in Turkey. During that time, Sberbank of Russia was the majority shareholder of Denizbank A.Ş., and Sberbank was also designated under Annex III of the Regulation. By virtue of Sberbank’s shareholding, Denizbank A.Ş. was brought under the EU sanction regime, as it was a non-EU incorporated entity whose proprietary rights are owned more than 50 per cent by a sanctioned entity.
When Denizbank A.Ş became a sanctioned entity, Standard Chartered Bank ceased all of its trade finance business with the entity. However, OFSI’s determined that Standard Chartered Bank still permitted some loans to be made when it believed that the EU trade exemption in Article 5(3)(a) of the Regulation applied.
OFSI’s assessment
OFSI’s assessment revealed that, on a balance of probabilities, 70 out of the 102 loans (with a transaction value of over £266 million) were not exempt under Article 5(3)(a) of the EU Regulation. Notably, because 21 of these non-exempt loans (with a transaction value of over £97.4 million) were issued after 1 April 2017, OFSI could penalise such breaches under powers given to HM Treasury under section 146 of the Policing and Crime Act 2017 (PACA 2017). OFSI deemed these 21 loans as “most serious” breaches and accordingly, penalised the bank for these loans.
OFSI imposed a total fine of approximately £31.5 million (£11.9 million on 5 August 2019 and £19.6 million on 6 December 2019). However, Standard Chartered Bank exercised its rights under PACA 2017 to have the penalties reviewed by a Minister. Whilst the Minister upheld OFSI’s decision to impose the penalty, he considered that because Standard Chartered Bank had acted in good faith by (i) reporting the potential breaches to OFSI, (ii) conducting an internal investigation, (iii) cooperating with the authorities, and (iv) taking remedial steps, the fine was reduced by 30 per cent to £20.47 million.
Standard Chartered Bank did not appeal the fine and has since satisfied it.
Notable action from OFSI
Previously, OFSI had only imposed a limited number of monetary penalties: in January 2019, OFSI issued its first monetary penalty against Raphaels & Sons Plc in the sum of £5,000; thereafter, OFSI issued two further monetary penalties, in March and September 2019, for £10,000 and £146,341 respectively.
Accordingly, it is notable that this is the first time that OFSI has imposed a substantial penalty and provided some clarity on its assessment of monetary penalties and sanctions breaches. It is unlikely this will be the last time that OFSI imposes a substantial fine using the powers granted to it.
Other comments
The case can be viewed as illustrating the importance of reviewing and re-evaluating from time to time decisions as to whether types of transaction are prohibited or not. There is a danger that initial mistakes in applying the sanctions to a particular set of facts can cause faulty interpretations to be ‘baked into’ a company’s procedures, with the potential for greater legal liability as a result. Notwithstanding this, OFSI’s statement makes it clear that being pro-active (e.g. self-reporting), cooperating with the authorities and implementing measures to remedy breaches are mitigating factors that OFSI will take into account when determining the quantum of any monetary penalties.
Please visit www.gov.uk for OFSI’s official statement.
Client Alert 2020-199
