A recent fine imposed by a UK regulator highlights how financial sanctions regulations can still apply in cases where the sanctions target is an intermediary and not the intended end-beneficiary of payments themselves, an expert has said.

Stacy Keen of Pinsent Masons, the law firm behind Out-Law, was commenting after the Office of Financial Sanctions Implementation (OFSI) imposed a £50,000 fine on fintech company TransferGo Limited for breaching financial sanctions regulations.

Over a period of around 21 months up to 18 December 2019, TransferGo facilitated a series of 16 payments to accounts held at the Russian National Commercial Bank (RNCB). During that period, the RNCB was subject to EU sanctions imposed in relation to Russia’s annexation of Crimea. The EU’s sanctions regulations applied directly in the UK during that time as it preceded the end of the Brexit transition period. RNCB remains a sanctions target under the UK sanctions regime, which now operates distinctly from the EU sanctions framework.

According to the OFSI, TransferGo had claimed that because “the relevant clients and beneficiaries” of the payments it instructed were not themselves subject to financial sanctions restrictions, the payments to their accounts with RNCB were not breaches. However, the OFSI said that this was “an error” of assessment because it considers “funds held in bank accounts [to] ultimately belong to those banks”.

The regulator said that because TransferGo is regulated in the UK by the Financial Conduct Authority as an authorised payment institution, it was obliged to inform it of breaches of financial sanctions regulations as soon as practicably possible. TransferGo did not disclose the offending transactions and no voluntary disclosure discount was given. Businesses that voluntarily disclose breaches of financial sanctions regulations in the UK can be granted up to a 50% discount on the level of penalty the OFSI can choose to impose.

TransferGo exercised its right to a ministerial review of the OFSI’s action. However, the economic secretary to the Treasury upheld OFSI’s decisions both to impose the penalty and on the amount of the penalty. TransferGo’s request for anonymity was also rejected as the minister considered that this would run contrary to the objectives of OFSI’s sanctions enforcement regime and would not be in the public interest.

Keen said: “The imposition of this penalty demonstrates that a failure to appreciate the application of financial sanctions is no defence. TransferGo argued that there was no breach because the payors and the beneficiaries of the funds were not sanctions targets. However, OFSI considers that the funds held in bank accounts ultimately belong to the bank. Therefore, transferring funds to accounts held by a bank that is a sanctions target is a breach, if the person knew, or had reasonable cause to suspect, it was doing so. This is so, even where the account holder is not designated as a sanctions target. To avoid a breach, it is important that the due diligence and sanctions screening carried out extends to the banks and financial institutions involved in transactions, as well as all other parties in the transaction.”

“Although the fine may appear relatively modest, it is important to note that the total value of the transactions underlying the breach was only £7,764.77. The maximum penalty that could have been imposed was £1,000,000 and OFSI has already demonstrated that it will issue blockbuster fines where it considers it appropriate to do so,” she said.

“In line with its published guidance on monetary penalties for breaches of financial sanctions, OFSI will consider a range of factors to arrive at a reasonable and proportionate baseline penalty.  These include the facts surrounding the breach, the value of offending transactions, the maximum penalty available, and the seriousness of the breach. Once that baseline has been determined, an assessment will be made on what, if any, reduction should apply. A voluntary disclosure and cooperation are of considerable importance in minimising financial exposure with a 50% discount being available where they are present,” Keen said.