Article

A designation challenge fails and two enforcement actions are announced the UKs Russia sanctions in motion

Published Date
Sep 8, 2023
Related people
Three decisions in recent weeks have demonstrated the breadth of the UK Government’s sanctions-related powers and underline a push by the UK to demonstrate the robustness of its sanctions and a focus on their enforcement.

In Eugene Shvidler (the Claimant) v Secretary of State for Foreign, Commonwealth and Development Affairs [2023] EWHC 2121 (Admin) (the Case), the High Court rejected the Claimant’s arguments that his designation was disproportionate and discriminatory, thereby highlighting the difficulties that designated persons will face in attempting to overturn their designation in the UK. The Case was seen as an important litmus test of the UK Government’s designation powers, as it was the first such case in relation to the UK’s Russia sanctions to be brought by an individual where the High Court has given judgment. Overall, it demonstrates the UK Government’s broad discretion when it comes to designating persons as asset freeze targets. 

Second, HMRC fined a UK company £1 million in relation to the unlicensed trade of goods in breach of the UK’s Russia-related trade sanctions. This was an unusually large fine to be imposed by HMRC in relation to such violations.

Finally, a disclosure notice published on 31 August 2023 by OFSI (the Notice) against a UK fintech company demonstrates the strict approach that the UK Government is taking when enforcing its Russia-related sanctions.

The backdrop to these decisions is the UK’s determination to crack down on sanctions violations and circumvention in concert with its international allies (see, for example, our article here).

Background to the Case

The Claimant, a UK-US dual national, was designated by the Secretary of State for Foreign, Commonwealth and Development Affairs (the Secretary of State) pursuant to regulation 5 of the Russia (Sanctions) (EU Exit) Regulations 2019 (the Regulations). While the grounds for the designation have evolved over time, they now rest on him being associated with a person who is involved in obtaining a benefit from or supporting the Government of Russia due to (i) the Claimant being associated with Mr Roman Abramovich, and (ii) the Claimant having worked as a non-executive director of Evraz plc.

The Claimant challenged the designation on two grounds: (i) the designation disproportionately interferes with his rights under the European Convention on Human Rights (ECHR), and (ii) the Secretary of State (who makes designation decisions on behalf of the UK Government) exercised his discretion to designate the Claimant in a discriminatory manner in breach of the ECHR.

Key takeaways from the judgment

The High Court rejected the Claimant’s arguments and, in so doing, its judgment highlights the broad discretion conferred on the UK Government when designating persons under the Regulations.

While acknowledging that the decision to designate an individual under the Regulations must be proportionate, the High Court’s judgment was prefaced with the note that the objective of “encouraging Russia to cease actions destabilising Ukraine or undermining or threatening the territorial integrity, sovereignty or independence of Ukraine” is of the “greatest importance”. 

A few points in the judgment that then follows are of note:

  • the Claimant’s significant compensation for his role within one of Mr Abramovich’s companies (which included a severance package of approximately USD10 million) should not be treated simply as “incidents of his employment”, but highlighted an association with Mr Abramovich;
  • obtaining a financial benefit can include being appointed as a nominee director on the board of a company part-owned by a person who is involved in obtaining a benefit from or supporting the Government of Russia;
  • sanctions may be imposed on someone, like the Claimant, who in all likelihood cannot himself influence President Putin to end the war, but is a friend or colleague of someone, like Mr Abramovich, who is more likely to be able to exert that pressure on President Putin. As such, the relationship may be indirect, and the designated person himself does not have to be involved in politics;
  • sanctions may be imposed for past acts, and their purpose may be to be a signal to others, even if the designated person has, since their designation, taken measures to withdraw from their associations with the Russian Government;
  • whether there are less intrusive actions that can be taken, as opposed to imposing a sanctions designation, is a matter for the Secretary of State’s judgment; and
  • the Secretary of State does not need to prove that every individual designation is effective to satisfy the purpose of the sanctions regime, which can often depend on the cumulative effect of sanctions designations.

Overall, this judgment highlights the broad discretion available to the Secretary of State when designating individuals under the UK’s Russia sanctions regime.  It imposes a high bar for designations to be overturned, making the prospect of a successful challenge unlikely, though, of course, each case will ultimately turn on its facts and, reportedly, the judgment is subject to appeal. 

First enforcement actions

The judgment in the Case comes at a time when HMRC has fined a UK company £1 million in relation to the unlicensed trade of goods in breach of the Regulations, with further enforcement actions likely to follow.

Perhaps more importantly, on 31 August 2023, OFSI used its new disclosure enforcement power for the first time to publish details of a financial sanction breach where OFSI has decided that the breaches are not serious enough to justify a civil monetary penalty, but nevertheless warranted some form of enforcement action. 

An FCA-regulated fintech company was subject to an enforcement action despite:

  • only making the relatively modest sum of £250 available to a company owned or controlled by a person designated as a UK asset freeze target through the withdrawal of said sum by an employee of the company from a cash machine using a debit card;
  • discontinuing its relationship with the sanctioned person;
  • a lack of evidence of deliberate sanctions evasion;
  • making a voluntary disclosure;
  • fully cooperating with OFSI; and
  • having taken steps to improve the aspects of its sanctions compliance process which led to the breach occurring by recruiting specialist staff and ensuring weekend coverage by their sanctions team.

The underlying facts demonstrate that OFSI is determined to take a robust and strict approach to enforcement as the delay in stopping the withdrawal from the account was partly a consequence of the company’s escalation process following a sanctions hit.  That process was the result of a high false positive rate for sanctions alerts and was therefore intended to take into consideration both the company’s regulatory requirement to pay due regard to the interests of its customers and treat them fairly, and its legal obligations to comply with financial sanctions.

The Notice suggests that companies must:

  • promptly address sanctions risks;
  • have carefully considered what steps are appropriate to manage their sanctions risk exposure; and
  • maintain proportionate sanctions screening and alert review functions including, for example, at weekends where they conduct business at such times.

In effect, OFSI is setting a very high compliance bar, consistent with its expectations in terms of due diligence (see our article here) and, in broad terms, with the FCA’s findings from its recent assessments of sanctions systems and controls (see here).

Companies should expect these disclosure notices, published even where no monetary penalty is imposed, to significantly increase in number.  OFSI has updated their guidance to include a section on such disclosures.  In a recent blog, OFSI also described this new tool as an important step to allow them to “tailor its enforcement action according to the different severities of breaches”.

Should you have any questions on the matters discussed in this article, please contact Matthew Townsend, Jonathan Benson, or your usual contact at Allen & Overy LLP.

In Eugene Shvidler (the Claimant) v Secretary of State for Foreign, Commonwealth and Development Affairs [2023] EWHC 2121 (Admin) (the Case), the High Court rejected the Claimant’s arguments that his designation was disproportionate and discriminatory, thereby highlighting the difficulties that designated persons will face in attempting to overturn their designation in the UK. The Case was seen as an important litmus test of the UK Government’s designation powers, as it was the first such case in relation to the UK’s Russia sanctions to be brought by an individual where the High Court has given judgment. Overall, it demonstrates the UK Government’s broad discretion when it comes to designating persons as asset freeze targets. 

Second, HMRC fined a UK company £1 million in relation to the unlicensed trade of goods in breach of the UK’s Russia-related trade sanctions. This was an unusually large fine to be imposed by HMRC in relation to such violations.

Finally, a disclosure notice published on 31 August 2023 by OFSI (the Notice) against a UK fintech company demonstrates the strict approach that the UK Government is taking when enforcing its Russia-related sanctions.

The backdrop to these decisions is the UK’s determination to crack down on sanctions violations and circumvention in concert with its international allies (see, for example, our article here).

Background to the Case

The Claimant, a UK-US dual national, was designated by the Secretary of State for Foreign, Commonwealth and Development Affairs (the Secretary of State) pursuant to regulation 5 of the Russia (Sanctions) (EU Exit) Regulations 2019 (the Regulations). While the grounds for the designation have evolved over time, they now rest on him being associated with a person who is involved in obtaining a benefit from or supporting the Government of Russia due to (i) the Claimant being associated with Mr Roman Abramovich, and (ii) the Claimant having worked as a non-executive director of Evraz plc.

The Claimant challenged the designation on two grounds: (i) the designation disproportionately interferes with his rights under the European Convention on Human Rights (ECHR), and (ii) the Secretary of State (who makes designation decisions on behalf of the UK Government) exercised his discretion to designate the Claimant in a discriminatory manner in breach of the ECHR.

Key takeaways from the judgment

The High Court rejected the Claimant’s arguments and, in so doing, its judgment highlights the broad discretion conferred on the UK Government when designating persons under the Regulations.

While acknowledging that the decision to designate an individual under the Regulations must be proportionate, the High Court’s judgment was prefaced with the note that the objective of “encouraging Russia to cease actions destabilising Ukraine or undermining or threatening the territorial integrity, sovereignty or independence of Ukraine” is of the “greatest importance”. 

A few points in the judgment that then follows are of note:

  • the Claimant’s significant compensation for his role within one of Mr Abramovich’s companies (which included a severance package of approximately USD10 million) should not be treated simply as “incidents of his employment”, but highlighted an association with Mr Abramovich;
  • obtaining a financial benefit can include being appointed as a nominee director on the board of a company part-owned by a person who is involved in obtaining a benefit from or supporting the Government of Russia;
  • sanctions may be imposed on someone, like the Claimant, who in all likelihood cannot himself influence President Putin to end the war, but is a friend or colleague of someone, like Mr Abramovich, who is more likely to be able to exert that pressure on President Putin. As such, the relationship may be indirect, and the designated person himself does not have to be involved in politics;
  • sanctions may be imposed for past acts, and their purpose may be to be a signal to others, even if the designated person has, since their designation, taken measures to withdraw from their associations with the Russian Government;
  • whether there are less intrusive actions that can be taken, as opposed to imposing a sanctions designation, is a matter for the Secretary of State’s judgment; and
  • the Secretary of State does not need to prove that every individual designation is effective to satisfy the purpose of the sanctions regime, which can often depend on the cumulative effect of sanctions designations.

Overall, this judgment highlights the broad discretion available to the Secretary of State when designating individuals under the UK’s Russia sanctions regime.  It imposes a high bar for designations to be overturned, making the prospect of a successful challenge unlikely, though, of course, each case will ultimately turn on its facts and, reportedly, the judgment is subject to appeal. 

First enforcement actions

The judgment in the Case comes at a time when HMRC has fined a UK company £1 million in relation to the unlicensed trade of goods in breach of the Regulations, with further enforcement actions likely to follow.

Perhaps more importantly, on 31 August 2023, OFSI used its new disclosure enforcement power for the first time to publish details of a financial sanction breach where OFSI has decided that the breaches are not serious enough to justify a civil monetary penalty, but nevertheless warranted some form of enforcement action. 

An FCA-regulated fintech company was subject to an enforcement action despite:

  • only making the relatively modest sum of £250 available to a company owned or controlled by a person designated as a UK asset freeze target through the withdrawal of said sum by an employee of the company from a cash machine using a debit card;
  • discontinuing its relationship with the sanctioned person;
  • a lack of evidence of deliberate sanctions evasion;
  • making a voluntary disclosure;
  • fully cooperating with OFSI; and
  • having taken steps to improve the aspects of its sanctions compliance process which led to the breach occurring by recruiting specialist staff and ensuring weekend coverage by their sanctions team.

The underlying facts demonstrate that OFSI is determined to take a robust and strict approach to enforcement as the delay in stopping the withdrawal from the account was partly a consequence of the company’s escalation process following a sanctions hit.  That process was the result of a high false positive rate for sanctions alerts and was therefore intended to take into consideration both the company’s regulatory requirement to pay due regard to the interests of its customers and treat them fairly, and its legal obligations to comply with financial sanctions.

The Notice suggests that companies must:

  • promptly address sanctions risks;
  • have carefully considered what steps are appropriate to manage their sanctions risk exposure; and
  • maintain proportionate sanctions screening and alert review functions including, for example, at weekends where they conduct business at such times.

In effect, OFSI is setting a very high compliance bar, consistent with its expectations in terms of due diligence (see our article here) and, in broad terms, with the FCA’s findings from its recent assessments of sanctions systems and controls (see here).

Companies should expect these disclosure notices, published even where no monetary penalty is imposed, to significantly increase in number.  OFSI has updated their guidance to include a section on such disclosures.  In a recent blog, OFSI also described this new tool as an important step to allow them to “tailor its enforcement action according to the different severities of breaches”.

Should you have any questions on the matters discussed in this article, please contact Matthew Townsend, Jonathan Benson, or your usual contact at Allen & Overy LLP.

 

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