Economic Crime - Anti-money laundering supervision and sanctions implementations Contents

5Financial sanctions

The Regime

203.The imposition of financial sanctions is the joint responsibility of the Foreign and Commonwealth Office and HM Treasury. The FCO is responsible for sanctions policy, while HM Treasury is responsible for implementation, through its Office of Financial Sanctions Implementation (OFSI).266

204.Ben Wallace MP, the Security Minister, outlined the sanctions regime:

The Sanctions Act that was recently taken through Parliament lays out clear conditions for when we can lay sanctions. It is a matter of fact that, while we are members of the European Union, we cannot unilaterally lay international or European sanctions without doing it at an EU level. That is the way it is. We can do certain things with the Proceeds of Crime Act. In the Criminal Finances Act, we took through a measure that, if we suspect someone is guilty of human rights abuse, we can confiscate their funds or move to seize their funds if they are in the UK. As far as sanctions go, at the moment, we can do it under United Nations auspices or through the EU. After that, the Act sets out a number of reasons, one of which is human rights abuse, Magnitsky, and one is United Nations designations, basically putting into law what the UN says. In the next round, we are seeking to put in a simple condition about serious and organised crime, war crimes and others. It is a Foreign Office lead.267

The Office of Financial Sanctions Implementation (OFSI)

205.In its written evidence, RUSI questioned the effectiveness of OFSI.

The Office of Financial Sanctions Implementations (OFSI) lacks ‘bite’ and should make use of its civil penalty powers under the Policing and Crime Act 2017 to ensure that sanctions violations are dealt with in an effective, proportionate and dissuasive manner. At the current time, there is no evidence to suggest that OFSI acts as any sort of deterrent to UK based sanctions violations.268

Tom Keatinge, of RUSI, in his oral evidence, expanded on that scepticism. He compared OFSI to the US Office of Foreign Assets Control (OFAC) as follows:

Office of Financial Sanctions Implementation was set up within the Treasury in 2016. I think we can safely say, […] at the moment OFSI has yet to show any bite. If you are thinking about sanctions, as a financial institution or as any exporting company, then you know precisely what OFAC is in the US. You know precisely how OFAC can come and deal with you. I do not think anybody really understands what sort of threat OFSI poses to them as an enforcement agency.269

He concluded that:

Until such time as we see OFSI take enforcement action that it can take, I think we will remain light on our reputation as a nation that is going to deal with sanctions evasion.270

He then went on to provide a potential rationale for that inactivity:

We perhaps recall, in early 2014 I think it was, when sanctions about Russia were starting to be discussed, an official was photographed walking down Downing Street with a bit of paper that said words to the effect of, “we need to be careful this does not affect the City of London”. That was back then. Do I think that the thought will go through people’s minds? Certainly when pressure has been put on UK financial institutions by OFAC in the US, we know full well that Treasury officials at that time were in close discussion with OFAC about, “Just how hard are you going to come down on British financial institutions”? Clearly, within Treasury they care about the British financial institutions. Are they dissuading OFSI from taking action against them? I have no evidence of that at this point.271

206.Colin Bell, of HSBC, though he had not had much direct contact with OFSI, was positive, though noted some issues:

Our UK teams see the relationship [with OFSI] as an important one. It is an important provider of guidance. We have had comments internally about the licensing regime, because there are quite often some very practical elements in how we manage assets internally. For example, when you ring fence, you sometimes need to move assets from one side of the ring fence to the other. That is a technical violation and you need a licensing regime. The agility and the response of that licensing regime is something we have been discussing with OFSI to improve.272

207.Rena Lalgie, Director of OFSI, appeared confident on their level of resourcing:

In large part due to the creation of OFSI and the powers that followed, we are better resourced, in terms of both people and powers, than we have ever been. That is a journey we have continued on. It is also something, in many ways, on which we are in a good position to support other jurisdictions, many of which do not have that level of resourcing.273

She identified the following areas most in need of the help of OFSI in meeting the sanctions regime requirements:

[…] we have long worked with banks across the UK. Actually, the sanctions risk and exposure extends far beyond the financial services industry. We have identified and worked with sectors with particular exposure. We have issued some sector-specific guidance for exporters, but also for charities and NGOs, which will often have a high risk exposure because of the nature of the activity that is taking place. We have also been able to identify where, for specific regimes, there are sectors that we can helpfully work with to help them understand what the regime requires of them, and to support them in their work to assess and manage their risk. For example, on the DPRK/North Korea sanctions that are in place, we have done some quite targeted work, not just with the financial institutions, but also with maritime insurers, to try to help and support them in managing and assessing the risk. We have then proactively worked with EU partners and the G7+ partners, to share the experience we have had of working with the sectors that have particular exposure.274

208.When asked to identify particular sectors where there was a specific sanctions risk, and more work needed to be done, Rena Lalgie highlighted the role that the law firms play in ensuring that financial sanctions as being very significant, and explained how OFSI had supported the Solicitors Regulatory Authority to target outreach to its members to make sure that they ensured they were not holding funds on behalf of designated persons.275

209.Given that the FCO is the lead for sanctions policy and OFSI implements it, the Committee questioned how well that balance worked. Rena Lalgie replied:

Two things are particularly important. The first is that the effort that is put into developing and imposing sanctions follows through to implementing and enforcing them. That is where the journey we have started with the creation of OFSI and the work we have been doing is particularly important. It is also why we have lots of conversations with other countries that are interested in the journey we have been on to really focus on the implementation angle of sanctions. Making sure that they are actually implemented once they are imposed is the first thing I would say is important. The second is to acknowledge that it is part of a single operation that needs to work together. To that end, you are absolutely correct: we work very closely with colleagues in the Foreign Office and with colleagues across the EU who are thinking about the sanctions regime. There is a richness to the information that we see through our implementation, which can really support and help to inform future policy. We have seen examples where the experience of the trickiness around implementing financial sanctions has therefore informed the way in which sanctions regimes have been revised and updated.276

210.When asked about enforcement, Rena Lalgie said that “there were 133 reports in 2017 of suspected breaches” although this did not mean those breaches occurred within that particular year, and noted that not all of those were assessed as being actual breaches. She went on to say:

For companies to have to come in, put on record the steps they are going to take, and satisfy both the NCA and us of the work that they are going to do helps to build that case going forward, which helps us to meet that threshold that there is reasonable cause to suspect in those instances.277

211.When asked why, given the amount of data was available to OFSI, there hadn’t been more enforcement, Rena Lalgie said that “there are cases that have now made their way through to my head of enforcement in OFSI, which would be in scope for the penalty, partly because of severity […] We need to work that through the system properly and make sure we can assure ourselves that the legal thresholds have been met”.278

212.When the Committee pressed Ms Lalgie on RUSI’s comment that there was “no evidence that OFSI acts as any sort of deterrent to UK-based sanctions violations”, she did not agree. She noted that the new civil monetary penalty power was not retrospective; and could only be used for cases where the breaches occur after 1 April 2017. She went on to say that:

We have made clear in our guidance that we will use that power for the most serious breaches of financial sanctions. […] Where we see them coming through, we will not hesitate to use that power. When we do use that power, it will undoubtedly be the most visible form of enforcement action that we take, in part because we have committed to publishing the details of the action that we take: what happened, what occurred in that instance, but also the nature of the penalty.


Through our day-to-day dealings with companies, both on licensing but also on enforcement, we see a growing sense of what their obligations are. We also see, if I may describe it in this way, a growing awareness of the extent to which action can be taken, the new powers that are at our disposal, and a concern about making sure that they stay the right side of the line.279

The Economic Secretary was also supportive of the work of OFSI.

It has only been operational since April 2017. As Rena Lalgie told you, there are the first cases of breaches in the pipeline and a considerable amount of work is ongoing. I would concur that the evidence of the effectiveness of the organisation is not yet publicly available.280

He continued that “[OFSI] has only been operational for 18 months, which is not a reasonable amount of time to evaluate the effectiveness of its activities”.281 Following this oral evidence, OFSI announced on 25 February 2019 its first monetary penalty against a firm of £5,000.282

213.The Office of Financial Sanctions Implementation (OFSI) has only been in existence for a year and a half. It has a number of potential sanctions breaches under investigation. While all breaches will have to be investigated thoroughly, and treated on their own merits, public examples of enforcement will be necessary if OFSI is to be recognised as an effective deterrent. It is necessary for the Government to review the effectiveness of OFSI. We recommend that two years after its formation marks the time for such a review to take place.

Lessons from EN+

214.The listing of EN+ was a recent test of the effectiveness of the financial sanctions regime. The Foreign Affairs Committee, in its Report Moscow’s Gold: Russian Corruption in the UK, provided the following background:

En+ Group is an energy firm that, at the time of its initial public offering (IPO) on the London Stock Exchange, was controlled by billionaire and Kremlin associate Oleg Deripaska. En+, in turn, held a controlling stake in Rusal, a major Russian aluminium firm. VTB Capital and Gazprombank—both subject to sanctions since 2014—were among the banks involved in the listing, which was facilitated by UK legal firm Linklaters.283

215.Tom Keatinge, RUSI, expressed concern that the EN+ listing had been allowed to proceed in London.

When I saw the offering circular for that and I saw my former employer was a bookrunner on the transaction I thought, “What were people thinking?” You see it in the debate around where the Saudi Aramco listing is going to happen. In the competition between financial centres, decisions are made around who is going to win the great prize of listing company x, y or z. That is a competition. It may well be the case that, in reviewing documents at a listing authority, perhaps decisions are made that lead to companies being listed that in hindsight we wish were not listed in London. If you read the risk factors in the EN+ offering circular, it is a horror story, but yet the underwriters were willing to underwrite the transaction. The listing authority was willing to list the transaction and there it is, floated on the market.284

216.However, in written evidence, Sir Tom Scholar, Permanent Secretary to the Treasury, was clear that the FCA had undertaken due diligence on the EN+ listing, and checked with OFSI on the sanctions position. He told us that:

In the case of the EN+ Group, while reviewing the draft prospectus, the FCA noted the company’s intention to use the float proceeds to repay existing debt outstanding to VTB Bank, which is a sanctioned entity under EU Council Regulation 833/2014. This Regulation does not prevent the repayment of existing debt to sanctioned entities.

In reaching its decision on whether to grant the application for listing, the FCA needed to take a view on whether the listing would be permitted under the sanctions regime, and discussed this with the OFSI. The FCA subsequently concluded that there would be no breach of sanctions and that the company met the applicable conditions for listing.

Under the applicable legislation, the Treasury (including the OFSI) has no power to intervene to block a flotation on national security grounds.285

217.The Chancellor emphasised to the Committee the importance of due process in the decisions around the implementation of sanctions:

[…] If an entity is sanctioned there will be restrictions on what that entity can do but we do have a rule of law-based system. Sanctions are based on very clear criteria. They are open to challenge in the courts and all of this is done according to very strict rules. If there is an entity that is sanctioned and there are restrictions on it being involved, for example, in a listing process of another entity, we would enforce those restrictions.286

218.Rena Lalgie, Director of OFSI, was also adamant that proper checks had been undertaken in the case of EN+, and explained the constraints of the sanction regime in place at the time.

OFSI fully implements the sanctions regimes that are in place at the time. […] The FCA can consult with relevant Government Departments when going through the process, but the decisions around the listings and whether to grant applications, as you have rightly pointed out, is one for the FCA. I can assure the Committee that, in that particular instance, as part of the discussions that we had, there was very careful consideration of the interaction between sanctioned entities and their European subsidiaries.287

She reiterated that: “We must implement the regulations as they are specified. If we act in circumstances that go beyond that, it would be unlawful””.288

219.On EN+, Alison Barker, from the FCA, was firm about the FCA’s position:

There were no reasonable grounds for the FCA to reject the application. Disclosures were made clearly in the prospectus and all normal processes were followed from the FCA’s perspective. We operated within the remit that we operate within, in the contacts that we make.289

220.In response to questioning about the EN+ listing, the Economic Secretary noted that:

The FCA is responsible. They seek views but, at the time when it was listed, there were no reasons not to list it. The challenge we have in a global environment is, if in another jurisdiction another country puts in a sanction, how we respond to that. There is a piece of work to be done. This is a legitimate concern about how, when we have a national security concern, an individual’s role within a firm is reflected in the listing process.290

221.The Economic Secretary did though confirm he wanted the power to block a listing on National Security grounds.291

It is perverse to have a situation where the FCA gives, to all intents and purposes, a clean bill of health for a listing when, a few months later, another jurisdiction can issue sanctions and we have no meaningful way of reflecting that.292

222.The EN+ listing occurred due to a weakness in sanctions policy, not implementation. The evidence heard by the Committee suggests that while the proposed listing was carefully analysed given its sensitivities, the narrowness of the sanctions regime meant that the listing could not be blocked.

223.In the face of this seeming failure of the sanctions regime, the Economic Secretary has suggested that there should be a power for the Government to block a listing on National Security grounds. On the face of it, this would create a new focussed power outside the sanctions regime. If the Committee is to be persuaded that such a power is necessary and appropriate, the Government needs to set out very clearly when such a power would be used, what effect it might have on UK listings and financial services, and most importantly, why it would be needed, especially when sanctions are in the full control of the UK post-Brexit. We would expect full, wide and timely consultation on such a power to inform its scope and design.


224.There has been a recent focus on the use of the UK’s financial system by Russian citizens, potentially for illegitimate use. This is supported by the FCA Financial Crime Survey, where a ranking of how frequently firms consider jurisdictions to be high risk in 2017 placed only Iran and Panama higher than Russia.293 For example, Deutsche Bank in its written evidence provided one example of this potential Russian misuse of the financial system:

The Russian Laundromat is the name given to a complex scheme used to launder billions of dollars in funds stolen from Russian government or obtained via organised crime. Money was moved from shell companies set up in jurisdictions such as the UK, Cyprus and New Zealand into EU banks through Latvia, with funds legitimised via the Moldovan court system.294

225.However, the Committee heard notes of caution on focussing exclusively on Russia. Mark Hayward, from NAEA Propertymark, told us:

The programme “McMafia” might have increased people’s perception of this happening every day, but I have no evidence from members that Russia is necessarily at the front of the queue of foreign buyers—there is a whole host of them out there. […] From speaking to good compliance officers and directors of central London firms, I know that they are doing things correctly, but they are concerned that if they report an interested party or start asking questions, that interested party disappears quite quickly and yet is able to buy from someone else who may not be as rigid as they are in their procedures.295

226.On Russia, Donald Toon, of the NCA, also argued that some caution should be used, telling us that, for him the issue was “the criminality, not the nationality”:296

We see issues with PEPs [politically exposed persons] and with illicit assets linked to PEPs, not just from Russia but from a wide range of different countries.297


[Since the Skripal incident] we have certainly increased the overall effort we are putting into the corrupt elites agenda. A significant chunk of that is Russia. The Prime Minister made that position clear in Parliament shortly after the incident. That is quite true. We are putting a significant effort into understanding and tackling that problem. Across economic crime, we would not say that is distracting or reducing our capability to deliver ongoing casework at this point.298

227.It has recently been reported that some visas were being refused to Russians. Mr Toon was unable to discuss operational matters and noted that the decisions are for the Home Office, not the National Crime Agency. However, he was able to confirm that “when we identify people who are not UK citizens and may have visa issues, it is absolutely normal and routine for us to identify that point to the Home Office and identify the concern”.299

228.Colin Bell, from HSBC said that its approach was not country-specific but that it was based on risk.

[…] As an institution, we take a global standard, we apply it everywhere and we have a consistent standard in the way we think about customers. […] We think about that risk through a number of components. We think about the country of origin. We think about the type of business that they are in […]. We think about the products that they want to use. We look at that collection of considerations and we take a view on the level of risk. We use that determination, if we think somebody is higher risk, to look at how much scrutiny we subject them to. It could be an enhanced due diligence process. It could be additional monitoring once they are on board […] That is not a Russia-specific view of the world; that is a risk view of the world. When you look at Russia, you would apply exactly the same lens to a Russian business or client as you would to somebody from any other country.300

229.Stephen Jones, from UK Finance also noted that “there are other externalities that are relevant across the industry. National risk assessments are important in terms of raising sensitivities, as is the imposition of sanctions”.301 He continued:

There is no question that the UK’s risk appetite to Russia in general has changed over recent months. That is an important factor that goes into individual institutions determining what their risk appetite is. There are well-known individuals who have previously lived in London happily, and until six months ago were given visas to do so by the Home Office, who are no longer able to do so. That reflects through, and our members are working closely with the authorities as requested in order to help them understand the quantum and nature of the potential risk in relation to Russia since Salisbury, which has definitely changed risk appetites.302

230.There has been, without doubt, a malign influence on the UK financial system from certain elements of Russian money. This fact has been acknowledged by both financial services and law enforcement. However, as noted by the FCA, illicit Russian money does not need to use novel or unique ways to enter the UK. The UK must achieve a balance between focussing on financial flows from one country, while not distorting the AML system, and creating a risk that other criminals slip by while attention is focussed on individuals with a specific nationality.

The impact of the UK leaving the EU

231.The current UK sanctions regime is based on either UN resolutions or EU measures. The UK does not have an independent sanctioning capacity.

232.The Chancellor noted that there were constraints in operating a sanctions regime while a member of the EU. He noted that following the attempted murders of Yulia and Sergei Skirpal:

I think it is probably fair to say that there are varying degrees of appetite within the European Union for further pressure on this group of individuals and one of the challenges of working within the European Union is that in these areas such as foreign policy, one is required to build a consensus of 28, which means operating frankly at the lowest common denominator quite often.303

233.Given this structure of the UK’s system of sanctions, Tom Keatinge, from RUSI, provided the Committee with an outline of the new freedoms that the UK’s exit from the European Union might bring:

Currently, the majority of sanctions imposed by the United Kingdom either come from the UN or from the EU, terror sanctions apart. Obviously, we will no longer have to go to Brussels and argue whether Mr X or Mr Y should be sanctioned […] We will have more freedom. Whether we will be as effective, not being part of an economic bloc that actually can impose material economic sanctions on countries, remains to be seen. It is important to note that as long as the UK remains a large, global financial centre, actually it is that lever that the European Union most often pulls when it comes to sanctions. We will still have influence.304

234.The Security Minister outlined the benefits that an individual sanctions policy could bring.

[…] we could do similar to what the United States does, which is to individually focus sanctions on groups of individuals. In the United States, after the recent Russian events or cyberattacks, they have listed actual people they believe work in the intelligence services. They really go to the individuals, as opposed to sanctioning the overall country. At that tactical level, you can make a difference.305

235.He agreed with Tom Keatinge about the power of the City of London:

[…] The City of London is one of the main global centres of finance, not just European but global. Therefore, being frozen out of the British banking system is a bit like being frozen out of the dollar by the United States. You will tend not to be a very effective financier, bank or whatever you are as a result.306


Post-Brexit, it is my strong belief that the City of London has to have a reputation for cleanliness and security, as a way to survive outside the European Union. It is not in the Government’s interest to do the opposite […] because the growth we see in both financial regulation and things like bribery and corruption legislation is extra-territorial reach. […] The direction of travel is a global standard of either regulations or sanctions law, and it is in Britain’s interest to be pitching itself as the City of London that is clean and secure with your money.307

236.The United Kingdom’s departure from the European Union could allow additional flexibility in its use of sanctions, though there will always be a need to ensure a multilateral approach. The Government must ensure it is ready to introduce any new powers it believes are necessary as soon as any further flexibility has become available, having consulted appropriately.

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282 OFSI/HM Treasury, Collection: Enforcement of Financial Sanctions, 25 February 2019

283 Foreign Affairs Committee, Moscow’s Gold: Russian Corruption in the UK, Eighth Report of Session 2017–19, HC 932, para 13

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286 Oral evidence from the Chancellor of the Exchequer, 24 April 2018,Q123

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294 Written evidence by Deutsche Bank UK Financial Crime Investigations (ECR0053)

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303 Oral evidence from the Chancellor of the Exchequer, 24 April 2018, Q198

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Published: 8 March 2019