Insolvency Practitioners: Making Sense of Sanctions Regimes
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The risks
In the United Kingdom, the Office for Financial Sanctions Implementation (OFSI) can prosecute breaches of financial sanctions that may result in fines or custodial sentences.
Under the Economic Crime and (Transparency and Enforcement) Act 2022, businesses face strict liability for sanctions breaches, even where they have no knowledge or reasonable cause to suspect that a transaction to which they are a party is in breach of sanctions.
The fines are substantial, £1 million or 50% of the economic resources dealt with, whichever is greater.
The EU has recently proposed the criminalisation of sanctions violations, and the U.S. Treasury Department's Office of Foreign Assets Control (OFAC), which treats breaches as a serious threat to national security and foreign relations, can impose large fines and prison sentences.
Carve-outs under sanctions regimes
Under the United Kingdom's Sanctions Regulations, OFSI has the power to grant licences for specific purposes that enable sanctioned entities to continue an activity without breaching the sanction imposed on them.
Licence applications are submitted by applicants on a form which is submitted to OFSI. The sanctioned entities must identify the legal basis for why they need to continue a particular financial activity, despite the prohibition.
There is a process for applying for a licence with OFAC which is filed either online or via mail through a letter to OFAC. It is important to include detailed, accurate, and verifiable information to OFAC so that the agency can make an informed decision regarding the application.
The EU has a licensing/authorisation system which is dependent on the internal licensing systems in place in each EU member state.
To obtain further details on the licensing or authorisation system in a particular EU jurisdiction, the regulator of the EU member state in question should be contacted in the first instance.
Recent case developments
CargoLogicAir was a cargo airline whose ultimate shareholder was subject to sanctions. CaroLogicAir's bank threatened to close the company's account even though there was a basic needs licence in place.
CargoLogicAir could not establish alternative banking facilities, with the result that if its account was closed it would be unable to pay its creditors. The problem was overcome by the High Court granting an administration order permitting the Insolvency Service's account to receive funds.
The administrators could make their own licence application to OFSI to use the Insolvency Service account to receive the funds. The administrators would then be able to run the company with a view to rescuing it.
Had CargoLogicAir not had an OFSI licence in place, it is likely that the Court, when appointing administrators, would have adopted a similar approach to that in Re VTB Capital plc [2022] and suspended the order while steps were taken to obtain a necessary licence.
In Petropavlovsk Plc [2022], administrators applied to the court on an urgent basis for directions under paragraph 63, schedule B1 in relation to a below book value sale of a sanctioned English holding company's Russian subsidiaries and assets to a Russian metal producer.
The administrators were worried that the sale might breach sanctions and applied to the court for directions. The court granted the administrators liberty to proceed, but cautioned that the court's authorisation would not bind OFSI as it had not heard submissions from it.
The administrators were therefore not protected from potential criminal liability in the absence of a licence from the regulator.
Key takeaways
The value of an asset is not automatically lost when it becomes distressed or encumbered due to the operation of sanctions regimes. Administration remains a viable means of limiting litigation risk.
However, as can be seen from recent cases, even with the protection of directions from the court, transacting parties remain exposed to the threat of prosecution if the transaction in question violates an applicable sanctions regime.
Steps to consider
Pre-appointment:
- Early engagement with regulators such as OFSI/OFAC, key stakeholders and the company's bank is vital to mitigate risk.
- Understand the company and its structure, its assets, liabilities and creditor position.
Post-Appointment:
- Maintain open dialogue with regulators, and comply with relevant reporting requirements.
- Establish contact with essential suppliers and key stakeholders to mitigate any potential delays, as sanctions can result in a chain of interconnected issues causing unexpected costs and operational paralysis.
If you are in any doubt as to whether any of the global sanctions regimes might be engaged, or you would benefit from advice on how to secure a licence to proceed, please contact Vivien Davies or Vanessa Wilkinson in Fieldfisher's Sanctions Group.