Last time, we looked at the record penalty imposed by the US Office of Foreign Assets Control (OFAC) for ‘violating Russia sanctions and reporting obligations’ and what it means for UK property firms. Here, we discuss why a strong compliance culture matters for UK legal, real estate and finance organisations and highlight the importance of a compelling blend of culture and policy.
The importance of sanctions
The first recorded economic sanctions were used by the ancient Athenians to ban traders from the southern city of Megara in order to weaken its economy. In recent years, countries from Afghanistan to Zimbabwe have been sanctioned by both the EU and the UN for a range of reasons, including national security, human rights enforcement, counterterrorism and punishment and deterrence. The recent OFAC penalty was imposed as a result of violations of sanctions against Russia after its invasion of Ukraine in 2022, which include penalties on finance, commerce, transport, energy and the media.
The UK government has issued its own sanctions guidance against Russia, but many other countries, entities and individuals are listed on the comprehensive UK Sanctions List. For UK legal, real estate, and finance organisations, adherence to strict sanctions compliance is essential to avoid both monetary and reputational damage.
In these instances, sanctions compliance is often regarded as a policy issue that can be addressed through documentation, screening, and expert legal advice. However, the recent OFAC case demonstrates that sanctions failures can arise not from a lack of policy but from poor compliance that isn’t embedded in routine behaviours or decision-making processes.
Lessons from the OFAC case
The record penalty, of over $4.6 million, which was imposed on a real estate investor who dealt in property which was owned by a sanctioned Russian individual, is a timely reminder for UK-based organisations of the importance of an effective compliance culture which is grounded in policy, whether the property in question is in the UK or not.
The most important lesson that UK legal, real estate, and finance organisations can learn from the case is that, despite warnings, including a cease-and-desist letter, US Person-1 continued with the transaction, in clear violation of and disregard for sanctions rules, even after the risks became apparent. OFAC found that the individual prioritised commercial objectives over legal and ethical considerations, demonstrating an obvious lack of compliance.
For UK firms, especially those with links to US individuals or firms, cross-border exposure, funding or infrastructure, now is the time to reinforce policy through robust compliance procedures.
Strong policies are essential
Reputable UK firms will already have strong sanctions policies, robust onboarding processes for new clients and effective screening tools in place. However, recent enforcement actions, such as that taken by the Office of Financial Sanctions Implementation (OFSI) against the Moscow branch of a UK-based law firm for failures in screening and payment processing, demonstrate that the government and its departments will act swiftly and firmly against breaches of UK financial sanctions and that the highest standards of compliance are required.
There is little doubt that the law firm in question had written sanctions policies in place. However, the action taken against it demonstrates that written controls can be ineffective unless compliance is applied effectively
Staff training for effective compliance
Enforcement actions demonstrate that breaches can occur when staff at all levels do not understand what sanctions entail or what ‘blocked’ property means, and do not feel empowered to escalate concerns when red flags present themselves. This is due to poor compliance culture, rather than a lack of policy.
For UK organisations that deal with property matters, therefore, embedding compliance into everyday practices is vital, and it begins with training. Staff must be made aware that title deeds or transactional documents may not immediately reveal sanctioned interests, and that offshore entities, unusual ownership chains, hesitancy to provide full disclosure, or even last-minute changes to documentation should set alarm bells ringing.
Without this sort of thorough, practical assessment, staff may fail to understand the risks involved in sanctions and rely on one-off screening procedures at the beginning of a property transaction, rather than ensuring that risk assessment continues throughout the process.
Escalation processes
How organisations respond when concerns are raised also shapes effective compliance culture. Staff must understand a firm’s straightforward escalation process if they suspect a potential issue, know precisely what to do and, most importantly, feel confident that they are supported by management if they raise concerns.
Property transactions, especially ones involving complex ownership structures or overseas jurisdictions, can create delays which may attract criticism. This can result in risks being ignored for the sake of expediency or to speed up the process. If this happens, compliance failures are far more likely. UK firms with effective compliance processes prioritise caution over speed, therefore reducing their exposure to serious breaches.
Reporting and transparency
UK providers of financial or legal services have a legal obligation to report any suspected breaches of sanctions, and any firms that fail to do so may be fined or prosecuted. Prompt, accurate reporting, therefore, is essential to indicate a strong compliance culture.
In the OFAC case, the record penalty was imposed for not only dealing in blocked property but also for reporting obligation failures and for providing ‘inaccurate and incomplete’ information. In the UK, legal, real estate and finance organisations are legally required to report any suspected breaches of sanctions or frozen assets to the Office of Financial Sanctions Implementation (OFSI) to help the organisation ‘detect and address illegal activity’.
UK firms that are transparent and engage early with the regulator can mitigate their own risk and prevent unfavourable outcomes if reporting is delayed or incomplete.
How to protect your organisation
UK firms that have sanctions compliance embedded into their daily operations can also protect themselves from both reputational and financial damage.
In a sector in which trust and credibility are paramount, any enforcement action will attract scrutiny from the regulators and the press and will damage both client confidence and long-standing relationships, creating harm which can be as costly as financial penalties.
Clients and investors routinely expect firms to demonstrate that they hold robust ethical standards and manage risk effectively, so by embedding sanctions compliance into routine practices, organisations can avoid transactions that can be rendered ‘null and void’, as in the OFAC case, and protect both their commercial interests and their professional integrity.
Compliance as a cultural requirement
The most valuable lesson that UK firms dealing with property matters can take from the OFAC judgement is that sanctions compliance is not simply a technical matter, nor is it the responsibility of compliance teams alone. It must be embedded in an organisation’s culture, constantly reinforced as a value through leadership actions, and underpinned by training on escalation and reporting mechanisms.
Only by implementing a strong compliance culture will firms protect themselves from costly penalties, reputational damage and operational disruption.
If you’d like more information about how we can help your organisation remain compliant in the face of international property sanctions, contact us.
