The UK government brought in various measures to restrict the use of assets as a result of the invasion of Ukraine. The measures are known as the sanctions regime. Andrew Griffith, the economic secretary to the Treasury, said: “As staunch defenders of democracy, the UK is united with its allies in opposition to Russia’s barbaric and unprovoked invasion of Ukraine. We have imposed the most severe sanctions ever on Russia and it is crippling their war machine”. Sanctions have now been imposed on over 1,271 people – including the former Chelsea FC owner Roman Abramovich – according to a recent review of the Office of Financial Sanctions Implementation (“OFSI”).
What does this mean for those not on the sanctions list?
Those not on the list of sanctioned people might still see the consequences of the sanctions regime. For example, in the context of a property deal, there could be a financial sanction such as an asset freeze, imposed upon someone you were looking to transact with. There are other types of sanctions (for example trade, immigration and arms embargoes). But we focus here on the freezing of assets as a financial sanction.
When a person is subject to an asset freeze, they must not deal with their assets, or make them available to, or for the benefit of, a “designated person”. In short, the law restricts anyone from:
- receiving payment from or making funds available to designated persons on the sanctions list;
- dealing with their economic resources;
- making even legitimate payments to those persons.
So in a property context, tenants are susceptible to breaching the sanctions regime because payment of rent to a sanctioned landlord may be unlawful. This can place a tenant in a difficult position because, as a matter of contract law, if a tenant withholds payment due under its lease, the lease contains mechanisms for the landlord to seek redress for non-payment of rent and other amounts payable under the lease. These mechanisms include:
- adding interest to late payments; an/or
- the more draconian right of forfeiture. In certain circumstances and subject to the landlord complying with the statutory procedure, that right enables the landlord to re-enter the premises after the rent due under the lease is unpaid for a specified period of time to regain possession of the premises.
The OFSI, part of the Treasury, helps to ensure that financial sanctions are properly understood, implemented and enforced in the UK. It handles asset freezes, restrictions on making funds available, and/or economic resources available to or for the benefit of designated persons either directly or indirectly. Its powers are primarily in the Sanctions and Anti-Money Laundering Act 2018. The OFSI helps everyone understand their financial sanctions obligations, monitors compliance and assesses suspected breaches.
What are the consequences of breaching the sanctions regime?
In short:
- financial penalties;
- reputational damage; and/or
- a prison sentence.
The OFSI can impose monetary penalties on any person who breaches financial sanctions. In this context, this could be landlord and also the tenant. The maximum penalty is the greater of (a) £1,000,000 and (b) 50% of the estimated value of the funds or resources involved in the transaction. The OFSI takes several factors into account when considering a proportionate penalty value: this will be based on the facts of each case with reductions applied particularly in cases that have been voluntarily disclosed to the OFSI.
Increasing regulation
Most recently, the Economic Crime (Transparency and Enforcement) Act 2022 (“2022 Act“) has introduced further changes to the sanctions regime. The 2022 Act has made it easier for the OFSI to impose monetary penalties because the 2022 Act has made breaching sanctions requirements a strict liability offence. In other words, there is no longer a requirement to prove that the individual or entity committing the breach had knowledge, or reasonable cause to suspect, that they were in breach of financial sanctions. This amendment applies only to civil liability and imposing a monetary penalty. It is not relevant to any assessment of whether a criminal offence has been committed under the sanctions regulations.
How could a tenant comply with the rules if a landlord is sanctioned?
On its website, the OFSI publishes a list of people who are subject to financial sanctions. The first step is to check whether a party, such as the landlord, is a designated person according to that list. If so, in certain circumstances, a tenant can apply for a licence from the OFSI to enable payments to continue to be made to its landlord.
A licence can be obtained where the proposed transaction (here the payment of rents) covers either prior obligations (such as a pre-existing lease) or the payment of fees/service charges for routine holding or maintenance of frozen funds or economic resources (such as the payment of rents or service charges). The OFSI needs as full an explanation as possible, and evidence of the proposed transaction for which you need a licence. It may also ask for:
- the amount of an intended payment;
- the intended purpose of the transaction/funds;
- the intended payment route;
- details of the sender and receiver of funds (including any intermediaries and beneficiaries);
- how the funds will be accounted for; and/or
- an explanation of the reasonableness of any proposed payment.
There is no guarantee that the OFSI will grant a licence. The OFSI can issue a licence only where there are legal grounds to do so. The OFSI expects that legal and professional advisers will have fully considered the relevant law and formed a view about an application before the OFSI is approached for guidance or an application is submitted.
If the OFSI grants a licence, then it would authorise payments that would otherwise be prohibited by the sanctions regime.
Any other tips?
The OFSI recommends applying for a licence as early as possible before a licence is needed. Licence applications can be legally and commercially complex. A high-profile licensee is Roman Abramovich. It has been reported that the former Chelsea FC owner holds an OFSI licence to enable ground rent payments to continue to be made to the Crown Estate for a property on Kensington Palace Gardens in West London, owned by Roman Abramovich or companies associated with him.
How has the market responded to the sanctions regime?
Jeremy Grey, a managing director at James Andrew International which manages buildings in London, told Bloomberg on 30 November 2022 that “the lesson is it’s going to go on for a long time. There’s no light at the end of the tunnel — when I spoke to the government about sanctions back in 2011 they said most of the funds they’ve frozen never get unfrozen.”
The sanctions regime is here to stay. Various governments in recent years have made the direction of travel clear. Increased surveillance and regulation on many aspects of financial dealings, especially property related dealings, is something all parties need to be aware of as it is not just the sanctioned party that could be caught.
Key points
- It is a criminal offence to make a payment to a sanctioned designated person.
- Check OFSI’s register of designated persons before proceeding, and consider applying for a licence.
- Seek legal advice if you are concerned a transaction may breach the sanctions regime