Designated Persons (‘DP’) and their lawyers would be forgiven for getting excited on 22 May 2023 with the release of the Office for Financial Sanctions Implementation’s (‘OFSI’) new ‘Prior Obligations’ Licence (INT/2023/3024200) which, on its face, promises a great deal. The devil, however, is in the detail.
The Licence comes amidst what OFSI describe as “…unprecedented numbers of licence applications to permit prohibited transactions or activities owing to more sweeping and far-reaching sanctions imposed relating to Russia and Belarus.”
“It is extremely important to OFSI that UK persons are not unintentionally disadvantaged by the financial sanctions imposed on Russian and Belarusian DPs”, OFSI say.
DPs are typically subject to asset-freeze, rendering payments to and from their accounts a criminal offence. Certain actions that may amount to a breach of a freeze may be rendered permissible by a Licence.
OFSI may issue General Licences under the various regulations that implement sanctions thanks to s.15 of the Sanctions and Anti-Money Laundering Act 2018, which provides that licences may be general or issued to a category of persons or a particular person (specific).
General Licences are typically issued where OFSI receive or anticipate receiving a large number of applications for a Specific Licence to enable a DP to do a particular, typically uncontroversial, thing. For example, DPs are permitted to make gas and electricity payments in relation to properties they own or rent in the UK under Licence INT/2022/2300292; and are permitted to pay their lawyers under Licence INT/2023/2954852.
Specific Licences can be granted where the grounds of the particular regulations in question are satisfied. In The Russia (Sanctions) (EU Exit) Regulations 2019 Specific Licences may be granted to a DP where, for example, they seek to make payments for their ‘basic needs’ (including for food, tax, and rent); or as a result of an ‘extraordinary situation’ (natural disasters being an example).
DPs will note that, notwithstanding the reference to ‘obligations’ in OFSIs new General Licence, its scope is in fact limited to contracts, which excludes tax and other non-contractual obligations.
In essence, the Licence enables DPs to make payments to (and for the benefit of) UK persons in satisfaction of a contractual obligation. That contract, according to paragraph 4, must have arisen before the DP became designated; and the total value of the payment that is sought to be made must not exceed £200,000. As with many General Licences, payments must not made directly or indirectly to another DP pursuant to the permissions that it grants.
The few paragraphs that follow include like provisions for those UK persons receiving the payments, and permit processing of the same.
Paragraph 8 specifies that the Licence only applies where there is a clear, demonstrable, and enforceable contractual obligation agreed pre-designation. These requirements tie in with reporting obligations later in the Licence.
The sting in the tail comes, for now, with Annex A – contracts that are expressly excluded from the General Licence.
Ongoing Prior Obligations
Annex A includes a number of exclusions, not least contracts involving bonds, derivatives, credit default swaps, and legal fees. The express exclusion of contracts valued over £200,000 appears again here, despite being part of the body of the Licence itself.
Critically, OFSI have excluded what they call ‘ongoing prior obligations’. These, OFSI say, are contracts “…signed prior to the date a DP was designated and the services have been incurred post-designation.”
Suddenly, the scope of the Licence is greatly narrowed. The only contracts that could fall under this Licence are therefore those that were agreed and performed prior to designation (uncertainty about whether a service can be ‘incurred’ aside).
Those relying on the Publication Notice do so at their peril: it contains no mention of this critical exclusion.
Like most General Licences, OFSI have included some reporting requirements for those making payments under the Licence. Here, the requirements are particularly onerous. DPs must provide:
- the legally enforceable contractual obligation;
- any other document, communication or other record which sets out the obligation;
- the relevant invoices being paid;
- the amount received;
- the date on which the funds were transferred and received; and
- confirmation that no other UK person will use the Licence to receive funds or economic resources arising from the same contractual obligation.
Obligations must, therefore, be not only clear, demonstrable, and enforceable but also capable of being evidenced to OFSI. This excludes oral or informal contracts (even if legally enforceable) which will be incapable of being correctly reported. It is noted that OFSI require the obligation, as opposed to merely evidence of the same.
DPs and their lawyers will be aware, of course, that getting it wrong can have serious consequences. Criminal offences, on the ‘knows or has reasonable cause to suspect’ basis, can flow from payments that are impermissible. Certainty in the wording and deployment of General Licences is therefore critical.
Provided that the stars align, this new General Licence will have some applicability to those DPs wishing to make otherwise prohibited payments. Those who do seek to do so would be well advised to seek professional advice, given the liability risks of operating in this complex and cutting-edge area of law.
OFSI correctly identify the importance of not disadvantaging UK persons to whom money is owed by DPs, and issuing General Licences in an attempt to allow DPs to fulfil their obligations is welcome, but more than anything this Licence feels like a missed opportunity. Carefully and effectively drafted General Licences could not only meet the purpose of the Regulations but also relieve OFSI from the mountain of Specific Licence applications on their desk, many of which remain outstanding for several months before receiving any attention. The limited number of General Licences is surprising: despite the fact that the funds would go from the pockets of DPs to the UK Treasury (which would, in part, be used to fund support to Ukraine, for example) there is no General Licence to permit the payment of UK tax. There are issues of scope too: the General Licence for the payment of gas and electricity bills does not extend to other utility bills such as for the supply of water and sewerage.
For those great number of obligations falling outside the scope of this and other General Licences DPs will, in most cases, remain reliant on making Specific Licence applications. Licence applications must be properly argued pursuant to the relevant regulations to have any chance of being granted.