OFSI fines wine industry for violating financial sanctions // Cooley // Global law firm

On September 27, 2022, the Office of Financial Sanctions Implementation (OFSI) announced this imposed a £30,000 fine on a UK registered company for violating the Ukraine (European Union Financial Sanctions) (No. 2) Regulations 2014 and the Council Regulation (EU) No. 269/2014 (Misappropriation of Ukraine and Human Rights), as internalized by British law. Below we have summarized the details of OFSI’s investigations and their implications, including how the investigations illustrate OFSI’s broad spectrum of financial sanctions and enforcement policies.

Facts of the OFSI investigation

The Hong Kong International Wine & Spirit Competition (HKIWSC) – an English public limited company – organizes an annual wine and spirits competition. Wine companies presenting their products must pay a fee to enter, and winners of this year’s competition will receive marketing and promotion for their wine at trade shows throughout the year.

One of the participants in the 2017-2020 competition was the State Unitary Enterprise of the Republic of Crimea Production-Agrarian Union (Massandra), a designated organization under British sanctions. As a result, all British persons, entities and persons within the United Kingdom are prohibited from trading with, and providing any funds or economic resources to, Massandra since its designation. However, during this period, Massandra sent 78 bottles of wine to HKIWSC and paid fees totaling £3,919. In return, the HKIWSC released Massandra’s products.

On December 7, 2020, a third party filed a suspected violation report with OFSI detailing dealings between the HKIWSC and Massandra. After investigating this report and obtaining further information from the HKIWSC through the exercise of its information powers, OFSI identified five potential violations between 2017 and 2020. Four violations were related to receiving funds and bottles of wine — material economic resources — that Massandra sent to the HKIWSC. Another violation related to advertising provided by HKIWSC to Massandra in connection with its participation in the annual competition, as OFSI determined that “the advertising provided to HKIWSC by Massandra following participation in its competitions constitutes an intangible economic resource was. This is because Massandra’s advertising would be exchanged for funds or used based on the reasonable inference that it was for the purpose of increasing Massandra’s wine sales.

Insights into OFSI enforcement

This case serves as a timely reminder of the scope of the Financial Sanctions Rules and provides valuable insight into OFSI’s enforcement process. Special:

  • All UK companies should ensure they comply with applicable UK financial sanctions, wherever their operations take place.
  • When considering the application of the restriction on making “economic resources” available to a sanctioned person, entity or body, companies need to be aware that “economic resources” are construed to include tangible and intangible economic resources.
  • OFSI has demonstrated that the provision of public relations is an intangible economic resource, so companies must be reminded that they conduct a comprehensive review of their activities when assessing sanctions compliance.
  • OFSI does not need to determine the financial value of the intangible asset before imposing a penalty.
  • This case concerned the wine industry, underlining how financial sanctions apply to all sectors.
  • The voluntary reporting of a breach should not be underestimated as a key mitigating factor. Indeed, in its announcement, OFSI concluded that there were no mitigating circumstances since HKIWSC had not made any voluntary disclosure.

Importance of risk reduction

In its public announcement, OFSI also emphasized that companies can reduce the risk of financial sanctions violations by:

  • Raising awareness of financial sanctions.
  • Assess their business to determine if they are doing business with sanctioned companies or individuals.
  • Considering their global exposure to high-risk jurisdictions and taking action to mitigate trade with specific individuals and entities.

If you have questions about this penalty or sanctions in general, please reach out to one of the Cooley contacts listed below.

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