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Clifford Chance

Clifford Chance

Regulatory Investigations and Financial Crime Insights

Update to OFSI Enforcement Guidance – Assessing Ownership and Control

The UK's sanctions authority, the Office of Financial Sanctions Implementation ("OFSI"), has today published updated guidance on its enforcement powers for breaches of financial sanctions legislation.

The updated guidance contains some much-anticipated further information on the level of due diligence OFSI expects persons to conduct when determining ownership and control.

However, it appears recent judicial opinion has not resonated with OFSI. In the case of PJSC National Bank Trust and PJSC Bank Otkritie v Mints and others [2023] EWHC 118 (Comm), the Commercial Court was asked to determine the effect of the sanctions imposed by the UK government in response to Russia's invasion of Ukraine on ongoing litigation which had been commenced in June 2019. The second Claimant, Bank Otkritie, had been sanctioned and there was disagreement between the parties as to whether the first Claimant was also subject to an asset freeze by way of the ownership and control provisions of the sanctions legislation. In her judgment dated 27 January 2023, Mrs Justice Cockerill opined (at para 241) that it seemed "implausible that it was intended that such major entities as banks were intended to be sanctioned by a sidewind, in circumstances where they would have no notice of the sanction and be unable themselves to challenge the designation". Her comments were based on OFSI's previous guidance which had stated that "the UK Government will look to designate owned or controlled entities/individuals in their own right where possible". Mrs Justice Cockerill commented (at para 244) that the guidance indicated "that it is not the intent for complex investigations to have to be made or evidence gathered – because the list should generally set out the persons targeted".

Whilst the test for establishing ownership and control of an entity is contained in the relevant sanctions regulations, OFSI has said expressly that it does not prescribe the level or type of due diligence to be undertaken when attempting to establish ownership and control. However, OFSI's updated guidance states that when considering enforcement action against a person who has dealt with funds or economic resources of a person controlled by a designated person, or has made funds or economic resources available, it will consider the level of due diligence conducted and whether it was appropriate to the degree of sanctions risk and nature of the transaction. OFSI will also consider the "degree and quality of research and due diligence conducted".

In contrast to Mrs Justice Cockerill's comments on complex investigations not being required, OFSI has instead stated that it expects "careful scrutiny of information obtained as part of any ownership and control assessments". As to the efforts required to obtain information, OFSI states that it may consider demonstration of any or all of the following efforts as potentially mitigating:

  • An examination of the formal ownership and control mechanisms of an entity to establish whether there is available evidence of ownership and control by a designated person
  • An examination of actual, or the potential for, influence or de facto control over an entity by a designated person
  • Open-source research on an entity and any persons with ownership of, or the ability to exercise control over, the entity, together with an examination of whether such persons are, or have links to, designated persons such that further investigation may be warranted
  • Direct contact with the entity and/or other relevant entities to probe into indirect or de facto control, including, where appropriate, seeking commitments by UK persons as to the role of any designated person or person with links to a designated person
  • Regular checks and/or ongoing monitoring of the above where appropriate.

OFSI's guidance also provides a long list of areas of enquiry that it may expect to be undertaken, depending on the sanctions risks and nature of the transaction. The list includes the usual CDD type documents most financial services firms would obtain as part of their normal processes, such as corporate constitutional documents and percentage of shareholdings. But it also includes certain areas of enquiry which may not, until now, have been considered as part of "usual" CDD processes, such as: information relating to the circumstances of board appointments, including backgrounds, experience and relationships with designated persons; commercial justifications for complex ownership and control structures; and indications of continued influence by a designated person, including through personal connections and financial relationships. In addition, OFSI has expressly stated that it expects due diligence assessments to be monitored and reviewed at appropriate times where relationships or activity are ongoing.

We suspect that this guidance is unlikely to discourage financial institutions and others from proceeding with caution and exercising detailed and time-consuming investigations into ownership and control.

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