In line with indications that it will prioritise enforcement in the coming year, the Office of Financial Sanctions Implementation (OFSI) has expanded its enforcement guidance concerning the approach it takes when assessing potential breaches of financial sanctions.

Earlier this month, OFSI amended its “OFSI enforcement and monetary penalties for breaches of financial sanctions” guidance (the Guidance) to provide further clarity on how it approaches breaches of financial sanctions where an incorrect assessment of ownership and control of a particular entity has occurred, and in particular the factors which may be relevant to any such assessment. These include the degree of due diligence undertaken, and whether it was appropriate in light of the relevant circumstances.

OFSI has made clear that there is no “one size fits all” approach and its assessment of whether appropriate due diligence was carried out will vary by reference to the particular context.  The Guidance includes a list of non-exhaustive factors which may mitigate any enforcement action that OFSI chooses to take, including where the company undertaking the due diligence has:

  • examined the formal ownership and control mechanisms of an entity;
  • examined any potential or actual influence/de facto control over an entity by a designated person; and
  • undertaken open source research on an entity and any related persons (including persons with ownership over/the ability to control a given entity), together with a review of the extent to which any such persons have links to designated persons.

OFSI will also take into account whether the company undertaking the due diligence had direct contact with the entity in question and/or other entities to make appropriate enquiries, and the extent to which regular checks and ongoing monitoring was carried out may also be a mitigating factor.

In determining whether a person/entity has either formal ownership or control over an entity or indirect/de facto ownership or control over an entity, OFSI have pointed to certain indicative factors (which is not definitive or necessary in all circumstances):

  • In assessing whether an entity has formal ownership or control: the percentage of shares and/or voting power of shareholders, the ownership and distribution of other shares in a company, whether the ownership or shareholding has recently been altered or divested, the composition of shares, whether there have been any changes to ownership/control and the reasons behind this (i.e. whether it is part of a broader corporate strategy), the corporate constitutional documents of an entity, any commercial justifications for a given ownership/control structure, and any relevant agreements relating to the entity (such as shareholder agreements, joint venture agreements, and so on).
  • In assessing whether an entity has indirect or de facto control:  indications of continued influence (or the potential for it), the presence or involvement of proxies, ownership or holdings of shares or other interests which are associated with a designated person, the divestment of certain interests associated with a designated person, recent transfers of shares and the value of those transfers, the circumstances of the board/management, whether there are any operational barriers insofar as designated persons are concerned, governance processes, ongoing financial liabilities, and any other relevant agreements (e.g. shareholder agreements, voting agreements, etc.)

Determining ownership and control remains one of the most challenging aspects of financial sanctions for companies, and OFSI’s position in the Guidance makes clear that there is no prescribed approach; instead, a tailored analysis of various factors such as an organisations governance, structure, and commercial relationships will be required to manage exposure to financial sanctions risks.