Yesterday the Office for Financial Sanctions Implementation’s (OFSI) annual review landed, with some alarming news. In the nearly two years since Russia’s full-scale invasion of Ukraine, despite £22.7 billion of assets frozen in relation to Russia, and a 200% staffing increase, there has been zero enforcement for post-February 2022 sanctions breaches in relation to Russia.
Lots of assets frozen…
According to OFSI’s annual report, almost £23bn worth of funds or economic resources belonging to, owned, held, or controlled by a designated person under the Russia regime were frozen between February 2022 and October 2023.
As OSFI notes, this figure reflects the value of assets when they are sanctioned, and doesn’t take into account subsequent depreciation in their value. Beyond the headline figure there is also no further breakdown, such as by asset class.
Confusingly OFSI has separate figures for what is frozen ‘in-year’ under the Russian regime at the point of designation, and what is reported as frozen annually across all regimes, using different methodologies for each. Additionally, the annual figures are reported over a year after they were collected and include assets frozen outside of the UK.
This leads to a real lack of clarity and makes it genuinely hard to get meaningful up to date data and to compare across years. OFSI says in-year reporting allows it to see the value of assets as they are frozen, rather than monitoring changes over time, but the result is that the statistics on frozen assets come across as a bit of a shambles.
…but almost no sanctions enforcement
In the report, OFSI says it recognises the importance of “proportionality” when it comes to enforcement. It is questionable however whether the lack of any penalties for breaches so far – with zero fines handed out for Russia sanctions breaches since the full-invasion despite OFSI recording 473 suspected breaches – does amount to the proportionate response needed to deter sanctions evasion. The two fines it did issue in 2022/23 related to breaches of sanctions on Syria and on Russia for its first 2014 invasion of Ukraine.
OFSI has issued seven non-public warning letters in the reporting period, and closed 51 cases with no further action, 44 of them relating to Russia. This is despite OFSI receiving much stronger powers in 2022 to issue fines on the basis of strict liability; i.e you do not need to have known about a breach to get a fine. Since April 2023 (the end of the period the review covers) OFSI has in addition issued a single public notice about a sanctions breach.
OFSI says that as of April 2023 it had 172 cases under live investigation. That suggests that alongside zero penalties for breaches of Russian sanctions, less than half of recorded breaches appear to have resulted in investigations.
Beyond proportionality, OFSI does not give any explanation for why its enforcement of suspected breaches has been so limited. It may be that OFSI has been overwhelmed issuing licences – which let you do things that would otherwise breach of sanctions – drawing resources away from enforcement. Or it may be that OFSI is struggling to get cases over the line which are going to be complex and involve lots of litigation.
To be fair, it’s not clear other jurisdictions are way ahead on Russia-related civil enforcement. The US for example has only issued three fines for breaches of financial sanctions on Russia since the invasion, worth around $2.3m (although it’s not clear if these breaches relate to conduct that occurred before or after the invasion).
Across all sanctions regimes, however, the UK civil enforcement response pales in comparison to the US. OFSI issued two fines over the 2022/23 financial year, worth £45,000, while the US’ Office for Foreign Asset Control (OFAC) issued 19 fines worth $72 million in the same period.
What’s happening to OFSI staff levels?
In the financial year 2022-23, OFSI says it increased resources in its enforcement team by 175%, in its licensing team by 160% and in its guidance and engagement team by 120%, “significantly expanding OFSI capability and capacity.”
There is no doubt that staffing at OFSI has considerably ramped up. At the time of invasion, OFSI had just 45 full-time equivalent (FTE) staff which increased to 100 at the end of 2022, and according to OFSI’s head of guidance and engagement, by May 2023 it had 140.
Confusingly, however, the Annual Report states that OFSI’s aim now is to reach 135 FTE by the end of the 2024 financial year – but doesn’t reveal how many staff it currently has, just that it had 100 at the end of 2022. It’s not clear whether OFSI’s staffing levels have now plateaued, whether it is losing staff, whether it’s struggling to recruit, or why its ambition for its staffing levels for next October are lower than what the agency said it had in spring this year.
And what’s happening to criminal enforcement?
The OFSI report is unhelpfully silent on how many referrals it has made to law enforcement bodies, so there is no transparency about how many criminal cases might be underway.
While the National Crime Agency (NCA) has reported that its new Combatting Kleptocracy Cell has “secured almost 100 disruptions” against “Putin-linked elites and their enablers”, almost nothing is known publicly about their performance and the nature of cases that may be in the pipeline, while the two cases that have come to public attention through the courts (against Mikhail Fridman and Petr Aven) have struggled to progress.
The US by contrast is far ahead of the UK when it comes to criminal enforcement. As of February 2023 the US has indicted over 30 individuals and two corporate entities accused of sanctions evasion, export control violations, money laundering, and other crimes – with defendants arrested in over a half-dozen countries, as well as seizing, forfeiting, or restraining over $500 million in assets belonging to Russian oligarchs and others.
Reporting suggests there appears to be more criminal enforcement action underway in some European countries as well (though some of these relate to breaches of trade, rather than financial, sanctions), with the Dutch media reporting 45 live criminal investigations into Russia sanctions evasion; the Latvian press claiming around the same time the authorities had initiated 150 criminal investigations evasion of sanctions on Russia and Belarus; while the Swiss authorities have reportedly registered around 100 cases for suspicions of sanctions breaches.
OFSI’s states that it will move towards more “proactive” sanctions enforcement. However, it also said last year that it would implement a “new, intelligence-led, proactive” approach to compliance and enforcement. Some hard questions need to be asked of OFSI by Parliament about why its enforcement is consistently so weak in relation to the Russian sanctions regime.
It is essential that the agency’s strong words begin to translate into robust action in order to provide a strong deterrent for sanctions evasion. Otherwise, the motivation to identify and freeze assets – evident in large parts of the private sector – will start to dissipate with the realisation that rogue actors continuously face no consequences for failing to do so.