OFSIs annual review - what are our five key takeaways

On 10 November 2022, the UK's Office of Financial Sanctions Implementation (OFSI) published its annual review. In the wake of an unprecedented year for sanctions which included a rapidly evolving, global response to Russia's invasion of Ukraine, we've picked our five key takeaways from the review:

1. OFSI scales up in light of Russian invasion

Undoubtedly the most significant takeaway from OFSI's annual review has been the impact of Russia's invasion of Ukraine. The sanctions authority reported that it would be scaling up to over 100 full-time employees by the end of 2022, an increase which is unsurprising in light of the record number of new designations made under the Russian sanctions regime since February 2022¹:

• Over 1,200 new listings since the Russian invasion, all of which were published on the day of the designation and notified by email to 30,000 subscribers;
• £18.39 billion in frozen funds reported to OFSI as being held by or on behalf of persons designated under the Russia sanctions regime between 22 February and 20 October 2022; which
• marks a +41,000% increase from the £44.5 million of reported frozen funds for the Russia sanctions regime as at September 2021.

OFSI recognises that Russia sanctions are likely to continue to dominate its work over the coming year. Aside from its recruitment drive, OFSI is "seeking to move from a reactive to a proactive compliance and enforcement model" and to accelerate its ongoing transformation programme as a means to adapt to the challenges ahead.

Our own experience suggests that amongst the issues OFSI has had to address, the question of whether persons designated as targets of UK asset freezes "own or control" particular assets – such as companies – has taken up a significant amount of OFSI capacity.

2. Collaboration at home and abroad

International

Prior to the Russian invasion, OFSI was already focused on consolidating its global network through collaboration with overseas partner agencies. The need to respond to the war caused the regulator to significantly increase the pace of this initiative, particularly in its support for the creation of global implementation units, and cross-border enforcement collaboration with OFAC, the US sanctions agency.

OFSI conducted over 75 engagements in the wake of the invasion, with over 50 countries or territories. It's stated that international collaboration will remain an area of "acute focus", as it seeks to enhance its policies and products by drawing on the experience and ideas of international partners. This begs the question of whether we will see updated guidance on financial sanctions inspired by these engagements from OFSI next year? Although the UK government has published statutory guidance on Russia sanctions, and OFSI has updated its existing guidance on that sanctions regime, other major senders of sanctions such as the US and EU are ahead of OFSI when it comes to publishing detailed FAQs.

Domestic

OFSI's reliance on greater collaboration is also on display closer to home. The authority has reported holding 40 bespoke roundtables with industry and government members since the invasion and is exploring ways to build on this in the long term.

Similarly, the increase in enforcement activity has inevitably called for a more joined-up approach between OFSI and UK partner organisations including the Financial Conduct Authority and National Crime Agency. In light of the FCA's announcement this summer of plans to roll out a new analytics-based sanctions compliance tool, the evolution of the OFSI-FCA relationship is one to watch.

3. Enforcement activity on the rise 

New powers

In June this year OFSI gained new enforcement powers with the passing of the Economic Crime (Transparency and Enforcement) Act 2022. These included:

• a new strict civil liability approach to breaches of financial sanctions;
• a new power to publicise details of financial sanctions breaches even where no monetary penalty has been imposed (although it is worth noting that most of OFSI's enforcement action has not been publicised); and
• widening powers to make broader provision for the sharing of sanctions information between government organisations.

The report noted that the majority of OFSI's enforcement action takes place out of the public eye. Although monetary penalties are published, in cases where OFSI determines that neither a penalty nor criminal action is appropriate, it also has the option to issue a warning letter or refer of concerns to relevant regulatory bodies where it is proportionate to do so.

OFSI has indicated that it will take on additional complex enforcement cases over the coming year to maximise its new powers and larger workforce.

Enforcement trends

In terms of OFSI's enforcement statistics for the past year, there were:

• 147 reports of suspected financial sanctions breaches (up from 132 the previous year);
• 236 reports of suspected breaches have been made since the invasion of Ukraine in February; and
• 2 monetary penalties imposed by OFSI in 2021 to 2022 with a combined value of £86,393.45.

Interestingly, both penalties were imposed on Fintech companies, which could indicate that is now a priority industry for OFSI. This tallies with the recent expansion of the definition of 'relevant firms' to impose reporting requirements on cryptoasset businesses, a change which OFSI justified as "developing policy to meeting the current risk climate and addressing UK exposure."

4. Licensing

Prior to the Russian invasion, the number of new and amendment licences issued by OFSI during 2021 to 2022 was only slightly up on the previous year, from 118 to 149. The main grounds for specific licences continued to be basic needs, legal services and routine holding and maintenance, with the majority (99) relating to the Libya regime.

Since February, OFSI has been overwhelmed by a very large volume of licensing applications, with 642 received under the Russia regime in the first 6 months since the invasion. It has sought to prioritise cases where there is a threat to human life, with further delays expected before it begins to clear the backlog. In the period between 24 February and 24 August 2022, OFSI issued 33 general licences in connection with the Russia regime.

In light of this situation, OFSI has said it will look to develop a new general licensing strategy which combats some of the issues faced over the past 6 months and is more responsive to the needs of licence applicants and sanctions implementers. This is likely to include:

• increased resourcing of OFSI's licensing function;
• strategic development of OFSI's use of general licences; 
• consideration of whether new licensing grounds and policies are required to address novel situations; and
• updating of licensing processes and systems.

5. Don't forget sanctions outside of Russia…

While this briefing has been unsurprisingly Russia-focused, OFSI's enforcement statistics reflect the ongoing global nature of its work:

• suspected breaches reported under the Libya, Syria, Iran and Afghanistan regimes together accounted for the majority of OFSI's enforcement outcomes in the year 2021 to 2022;
• 2 general licences were issued under the Belarus regime following the designation of the Belarusian Air Traffic Control after the forcing down of a Ryanair flight; and
• OFSI's cross-departmental work over the past year included the introduction of a UN-level humanitarian exemption for the Afghanistan regime.

The full OFSI report can be accessed here.

To keep track of all the latest Russian sanctions developments, access our Russia Sanctions Tracker here.

Authors: Tom Cummins, Ross Denton, Sophie Law, Neil Donovan and Catherine Lillycrop

1. OFSI decided to include additional reporting data from 24 February to 24 August 2022 (the first 6 months of the Russia-Ukraine war), as well as reporting on data from the financial year 2021 to 2022.