UK Sanctions Update: OFSI Releases Updated Guidance on Ownership and Control Assessments
The Office of Financial Sanctions Implementation (OFSI) has recently updated its Enforcement and Monetary Penalties guidance. This now includes new guidance on how OFSI will assess determinations on ownership and control by UK sanctioned individuals and entities when considering enforcement action. It also looks at the extent to which due diligence will be considered a mitigating (or aggravating) factor.
A key compliance challenge for companies is identifying the ownership and control structure of counterparties. This is particularly relevant in the context of Russia. Additional guidance from OFSI on these issues is therefore a welcome development.
Ownership and Control – the Test
The updated guidance does not change the underlying test for ownership and/or control, which is established under legislation and for which guidance is included in OFSI’s general guidance for financial sanctions. That guidance provides that an entity is directly or indirectly owned or controlled by another person in any of the following circumstances:
- The person holds (directly or indirectly) more than 50% of the shares or voting rights in the entity;
- The person has the direct or indirect right to appoint or remove a majority of the board of directors of the entity; or
- It is reasonable to expect that the person would be able to ensure the affairs of the entity are conducted in accordance with the person’s wishes.
If any of the tests are met, and the person who owns or controls the entity is a UK designated (i.e., sanctioned) person, the entity must be treated as if it is a designated person for the purposes of UK asset freezing sanctions.
OFSI emphasises that there is no prescribed level of due diligence which must be undertaken to establish whether the test has been met. However, the updated guidance:
- Confirms that OFSI may consider appropriate due diligence conducted on the ownership and control of an entity to be a mitigating factor in an enforcement context. Conversely, it also confirms that a failure to carry out due diligence may be considered an aggravating factor; and
- Provides examples of the type of due diligence which OFSI will consider in a UK sanctions enforcement context.
Mitigating and Aggravating Factors
Where OFSI determines that a breach of UK sanctions has occurred, and it considers that an incorrect assessment of ownership and/or control has contributed to causing that breach, OFSI will consider the “degree and quality of research and due diligence” as either a mitigating or aggravating factor. This determines whether to impose a civil penalty, and/or the level of that penalty.
According to the new guidance, OFSI will consider appropriate due diligence on the ownership and control of an entity to be a mitigating factor where the determination reached was made in “good faith” and was a “reasonable” conclusion to draw. No guidance is provided on how “reasonable” will be interpreted. Equally, “a failure to carry out appropriate due diligence”, or the carrying out of any due diligence “in bad faith”, may be considered an aggravating factor.
OFSI will consider whether the level of due diligence conducted was appropriate to the degree of sanctions risk and nature of the transaction. The nature of a person’s contractual or commercial relationship with the entity is also relevant to OFSI’s consideration of the measures undertaken. OFSI has confirmed that it would expect to see evidence of a decision-making process that took account of the sanctions risk and considered what would be an appropriate level of due diligence considering that risk. OFSI has stated that it would usually expect these decisions to be made by reference to an internal policy but recognises that there is no one-size-fits-all approach. OFSI expects scrutiny of information obtained as part of any ownership and control assessments, particularly where efforts appear to have been made by designated persons to avoid relevant thresholds.
OFSI has provided a list of “example areas of enquiry” to establish whether an entity is owned or controlled by a designated person, as follows:
Formal ownership and/or control
- The percentage of shares and/or voting power of shareholders.
- The ownership and distribution of other shares in a company.
- Whether ownership/shareholding has recently been altered or divested, including in possible anticipation or response to financial sanctions. If so, consideration of whether this warrants further investigation into the possibility of joint arrangements or indirect or de facto control.
- The composition of shares, and whether shares have been split into different classes, or other structural changes made.
- Whether changes to ownership and/or control were part of a pre-planned or wider business/financial strategy.
- Corporate constitutional documents, including articles of association or constitution.
- Any commercial justifications for complex ownership and control structures.
- Agreements between shareholders or between any shareholders and the entity (e.g., shareholders’, joint venture, operating, or guarantee agreements).
Indirect or de facto control
- Indications of continued influence (or the potential for it) by a designated person, including through personal connections and financial relationships.
- The presence or involvement of proxies, including persons holding assets on behalf of a designated person.
- Ownership, holdings of shares, or control by trusts associated with a designated person.
- If shares or other ownership interests of a designated person have been divested, the nature of any relationships and prior involvement of the person benefitting.
- If applicable, how recent transfers of shares were funded and whether this was done at an accurate and true valuation.
- Any operational steps taken to ensure that the designated person cannot exercise control over the entity and/or that the designated person cannot benefit from, or use, corporate assets.
- Information relating to the circumstances of board and/or management appointments, including the backgrounds, relevant experience, and relationships with designated persons.
- The running of board meetings and governance processes, including board or shareholders’ meeting minutes concerning recent changes in the entity’s ownership and control relating to the designated person.
- Ongoing financial liabilities directly related to a designated person, e.g., personal loans, loan guarantees, property holdings, equipment etc.
- Other shareholder agreements, voting agreements, put or call options or other coordination agreements in place between the entity and the designated person or controlled entities.
- Whether there are any benefits conferred to the designated person by the entity or transactions between the entity and the designated person.
Where relationships or activity is ongoing, OFSI also notes that it expects that due diligence and assessments are reviewed at appropriate times. The update guidance notes that “ownership and control is not static” and that OFSI’s consideration of the due diligence undertaken will consider the regularity of checks and ongoing monitoring.
The updated guidance further notes that OFSI “may” consider any and/or all of the following actions 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, 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.
Practical steps for companies
Companies should ensure that:
- Appropriate risk assessments are conducted on a periodic basis assessing the company’s exposure to direct or indirect dealings with designated persons.
- A proportionate sanctions policy is in place, tailored to the conclusions of the risk assessments.
- Appropriate counterparty due diligence and sanctions screening procedures are implemented and monitored on a regular basis.
For further help
DLA Piper’s Global Trade & Government Affairs team has extensive experience assisting companies in developing robust internal sanctions compliance procedures, undertaking due diligence to ensure sanctions regimes are not breached and preparing and responding to investigations and enforcement action.
Please do not hesitate to contact us.