In the UK, HM Treasury (Office of Financial Sanctions Implementation (OFSI)) are charged with enforcing the financial sanctions regimes put in place by the UN, EU and the UK. The purpose of the sanctions regimes is broadly to coerce regimes and individuals into proper standards of behaviour by denying those persons access to key resources for continuing offending behaviour. This behaviour includes terrorist financing, physical action against ethnic groups, nuclear proliferation and most topically, the poisoning of the Skripals’ allegedly by Russia’s intelligence services.
For the real estate industry, the most relevant sanctions against “Designated Persons” are “asset freezes”. In 2016, OFSI issued Guidance to the effect that any letting of property, whether commercial or residential, to a Designated Person could result in the lessor being unable to collect rent, service charge etc without obtaining a licence from OFSI. The relevant ground for applying for a licence is “satisfaction of prior contractual obligation of a Designated Person”. Importantly, the Guidance states that if (inter alia) the lessor leases the property to an already Designated Person, then it is unlikely that any licence would be issued. The nightmare scenario would mean that a lessor is unable to collect rent from such lessee and, at least in the short term, no right of forfeiture of a lease would arise, because such forfeiture rights for asset freezing are not typically included in standard leases. It is therefore most important to undertake sanctions database checks before any lease is entered into – at least on a risk-based approach basis.
On 3 October 2018, HM Treasury issued its first Annual Review of OFSI activities following OFSI’s creation in 2016. Key points from the Review are as follows:
- Sanctions regimes are enforced against 23 countries including Syria, Iraq, Iran, North Korea, Tunisia, Egypt, South Sudan, Venezuela, Yemen, Belarus and Zimbabwe;
- As of September 2017, £12.8bn of frozen funds were held by UK businesses; of which over £12bn related to Libya; and
- According to Land Registry records, 16 properties were subject to asset freezes.
The Review also states that 50 licences were issued over the last year to release frozen assets but importantly, the Review states that nearly all were to pay legal fees. The working assumption should therefore be that a licence is not likely to be forthcoming to pay rent.
So the message for the real estate industry should be to take a risk based approach to sanctions data base checks before any letting is exchanged/completed. Certainly, check any person registered in any of the 23 nations mentioned in the Review.
Finally, it should be noted that the OFSI have the power to impose hefty fines for breaches post 1 April 2017. The Review states that to date, none have been imposed but warns that OFSI will be prepared to do so from now on.
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