OFSI publishes financial services threat assessment report

The Report sets out that is likely that UK financial services firms have not disclosed all suspected breaches to OFSI. Additionally, it states that non-compliance is often linked to improper maintenance of frozen assets and breaches of licence conditions. The Report also flags that it is almost certain that Russian designated persons have increasingly used enables to breach sanctions and that those enablers have used alternative payment methods, such as cryptoassets, to breach financial sanctions prohibitions on Russia.

Most identified suspected breaches reported to OFSI by UK financial services firms are linked to Russian sanctions, but compliance in relation to all sanctions regimes is crucial. Other concerning jurisdictions include Belarus, Iran the Democratic People’s Republic of Korea and Libya.

OFSI has identified some substantial delays in identifying and reporting breaches. The Report reiterates that OFSI values self-disclosure and financial services firms should therefore proactively seek to identify and report sanctions breaches. 

Some of the common issues identified by the Report are the improper maintenance of frozen assets, breaches of licence conditions, and inaccurate ownership assessments. Additionally, the Report reiterates that a breach does not have to occur within UK borders for OFSI’s authority to be engaged, rather there simply has to be a connection to the UK. OFSI specifically recommends that UK firms involved in correspondent banking remain alert and for financial services to employ enhanced due diligence processes.

The Report defines an enabler as any individual or entity providing services or assistance on behalf of or for the benefit of designated persons to breach UK financial sanctions prohibitions. The Report sets out three levels of complicity for enablers: complicit, wilfully blind and unwittingly involved. The Report notes that there has been increased activity by non-professional enablers linked to Russian designated persons (such as family members, associates or other proxies).

Since February 2022, most enabler activity has been linked to Russian designated persons’ lifestyle and assets. Enablers assist Russian designated persons by facilitating payments for, for example, superyachts and UK properties, often through non-bank payment service providers. Without an OFSI licence, these payments could breach UK financial sanctions.

OFSI confirms that UK financial services firms are well placed to identify these enablers. Financial services firms should therefore be aware that these enablers (i) are typically small companies providing services related to ultra-high-net-worth lifestyles, (ii) whose relationship with the designated person predates designation and (iii) leverage multiple methods of payment including cash and cryptoassets as well as traditional banking payments.

Since February 2022, assets of significant value belonging to Russian designated persons have been frozen. In response to this OFSI has identified that enablers have claimed ownership of frozen assets on behalf of Russian designated persons, often using complex corporate structures to do so

OFSI encourages financial services firms to take note of certain reg flags. These include spotting individuals with limited profiles and little relevant professional experience, inconsistencies with name spellings or translations particularly those stemming from Cyrillic spellings and recently acquired non-Russian citizenships particularly from countries which offer golden visa schemes.

The Report highlights that suspected breaches of UK financial sanctions prohibitions by Russian designated persons often involve intermediary jurisdictions and that Russian designated persons have traditionally sought to obscure their ownership interests through a small number of favoured intermediary jurisdictions. In the first quarter of 2024, cases referencing the UAE made up the largest proportion of suspected breaches to the OFSI, followed by Luxembourg, the Cayman Islands and the Republic of Cyprus. Financial services firms should be aware that transactions involving these jurisdictions may require further scrutiny particularly if other red flags are present. 

The Report highlights OFSI’s commitment to proactively engage with stakeholders to ensure UK financial sanctions are properly understood, implemented and enforced in the UK. Further sector specific assessments will be published in 2025 which financial services firms should take note of as and when they are published.