Sanctions - ownership and control issues

Ownership and control of entities has received significant media attention recently following the introduction of the UK Register of Overseas Entities on 1 August 2022. The Register requires foreign entities that own land or property in the UK to provide information about their beneficial owners and (in some cases) managing officers. This is intended, at least in part, to support the UK’s anti-money laundering and sanctions regimes.

In addition, the concept of ownership and control of entities is highly relevant in the context of the increased sanctions and asset freezes imposed as a result of Russia’s military action in Ukraine.

This article explores some of the issues firms need to consider from a sanctions perspective.

The UK Office of Financial Sanctions Implementation (OFSI) requires firms to freeze the assets of any designated person on the Consolidated List.  This requirement to freeze assets extends to any legal entity, meaning any corporate or unincorporated entity, which is owned or controlled by a designated person, whether that ownership is direct or indirect.

This means that financial institutions must ensure they identify any designated person who owns or controls any of the firm’s legal entity customers. While this is often straightforward, in some cases, for example in the case of complex structures, identifying ownership or control can be difficult and time-consuming. To add to the challenge, many sanctioned persons will deliberately seek to hide their ownership of entities and other assets precisely to avoid the entity or asset being subject to an asset freeze.

Most of us are familiar with the 25% threshold for identifying ultimate beneficial owners for the purposes of anti-money laundering. In the context of an asset freeze, the percentage threshold for ownership of an entity is different. OFSI’s guidance states that it is someone who owns more than 50% of a legal entity’s shares or voting rights. Note that this may be held directly or indirectly.

Even if a person does not have the necessary shares or voting rights, the OFSI criteria may be met by virtue of them having control of the entity. This is similar in principle to considerations of control that are set out in anti-money laundering laws and regulations.

OFSI broadly describes control as a situation in which a person has the right (directly or indirectly) 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 that the affairs of the entity are conducted in accordance with their wishes. Examples of such control may include:

• Having an agreement with other shareholders that allows them alone to control the entity
• Being able to exert a dominant influence over the entity as a result of an agreement with the entity or any other provision, including where they are not the holder of that right (e.g. it is done through a front company)

When a designated person has ownership or control over an entity, by whatever means, then financial sanctions will apply in their entirety to that entity, and this includes the freezing of the entity’s assets. It also means that a firm must not make funds or economic resources available in any way to the entity, in the same way that funds and economic resources are frozen for a designated person.

It is important to note that other significant sanctions administrators and enforcers also apply asset freeze requirements to entities owned or controlled by designated persons. However, firms should also be aware that the rules and applications may vary to some degree depending on the jurisdiction (for example, there are differences in the rules relating to the aggregation of holdings of different designated persons).

It is essential that a firm has in place appropriate, risk-based procedures for identifying the ultimate beneficial owners of entities which are the firm’s customers. These procedures should take a ‘look through’ approach to ensure that even in complex or obscure structures the true ultimate beneficial owners are identified and screened against relevant sanctions lists.

It is also important that staff have a good understanding of what is meant by control and how to identify situations where such control exists even where the relevant percentage threshold has not been met. In addition, staff should be alert to typologies and red flags that may indicate that a designated person is seeking to evade identification, perhaps through the use of shell companies, straw men or other complicit parties. 

Where designated persons have the requisite ownership or control, the funds of the entity should be immediately subjected to an asset freeze in accordance with OFSI requirements (or any requirements set out in other relevant sanctions regimes). 

Failure to apply sanctions and asset freezes can lead to significant fines and even custodial sentences. OFSI also has new powers to impose civil monetary penalties for sanctions breaches on a strict liability basis. Therefore, providing appropriate training to staff in these matters is an important factor in ensuring a firm does not breach sanctions.

Bruce has been working in financial services for nearly 40 years, 25 of these as a learning professional focusing on compliance for a wide range of financial services companies, mainly through the analysis, design, creation and implementation of global training programmes for Tier 1 Banks and FTSE 100 companies. He has been Global Head of Compliance Learning for such firms three times and has provided compliance learning consultancy to similar companies many times. 

Bruce has vast experience in successfully delivering compliance-related training in Europe, The Middle East, the Far East, India, North America and Africa. Bruce’s training is highly effective with a clear focus on how adults learn most effectively, using innovative design and delivery, which combines a stimulating, culture-sensitive, learning environment with the highest standards of professionalism and a focus on the required knowledge, skills and behaviours of banking professionals.

Bruce provides excellent training events on compliance, with a specific focus on financial crime, including all aspects of anti-money laundering, anti-bribery and corruption, fraud and sanctions.