October 17, 2022
On 27 September 2022, following a ministerial review, the Office of Financial Sanctions Implementation (OFSI) imposed a monetary penalty of £30,000 in accordance with s. 146 of the Policing and Crime Act 2017 (PACA) against Hong Kong International Wine and Spirits Competition Limited (HKIWSC) for breaching UK[1] and EU[2] sanctions regulations. According to the relevant legislative provisions, it is prohibited to make funds or economic resources available, directly or indirectly, to a sanctioned party.
Between September 2017 and August 2020 HKIWSC received three payments and seventy-eight wine bottles from the sanctioned State Unitary Enterprise of the ‘Republic of Crimea’ Production-Agrarian Union (Massandra) for entry into HKIWSC’s 2017, 2018, 2019 and 2020 competitions.
OFSI identified two types of breaches: four relating to the provision of funds and tangible economic resources (i.e. the wine bottles) and one relating to the provision of intangible economic resources in the form of the publicity that was made available to Massandra by entering its wine into competitions. OFSI imposed the monetary penalty because it was satisfied that, on the balance of probabilities, HKIWSC knew or had reasonable cause to suspect that it was in breach of the relevant prohibitions. No voluntary disclosures were made in this case, therefore a penalty discount was not applied.
Intangible Economic Resources: A Novel Interpretation
This decision represents a material development as OFSI’s determination that publicity constitutes an intangible economic resource, i.e. an asset that may be exchanged for funds, is not intuitive, nor currently envisaged by the available guidance.
OFSI based its determination on the “reasonable inference” that publicity would increase Massandra’s wine sales, and PACA expressly allows the imposition of monetary penalties when the exact financial value of the resources being made available cannot be determined[3]. However, publicity may more conventionally be construed as a service, and it does not squarely fit within the definition of ‘economic resources’, i.e. “assets of every kind, whether tangible or intangible, movable or immovable, which are not funds but can be used to obtain funds, goods or services”[4].
Publicity is not conventionally treated as an asset on a company’s balance sheet and there is no way of directly exchanging ‘publicity’ for ‘funds, goods or services’. Publicity may lead to increased sales which in turn may lead to increased profits, yet the path from publicity to funds is not linear. It would have been different – and perhaps more coherent – if OFSI were to have held that the publicity increased Massandra’s goodwill in the form of brand recognition, and that such goodwill constituted an intangible economic resource. This construction would preserve the linearity of the exchange between ‘economic resources’ and ‘funds’ envisaged by the definition in the legislation, as goodwill is conventionally recognised as an asset which can directly be used to obtain funds.
Key Takeaways
This case serves as a useful reminder of the following:
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[1] Regulations 3(1) and 6(1) of the Ukraine (European Union Financial Sanctions) (No. 2) Regulations 2014
[2] Articles 2(1) and 2(2) of Council Regulation (EU) No. 269/2014
[3] Policing and Crime Act 2017, s. 146(4)
[4] Sanctions and Anti-Money Laundering Act 2018, s. 60
[5] Policing and Crime Act 2017, s. 146
The following Gibson Dunn lawyers prepared this client alert: Irene Polieri, Michelle Kirschner, and Patrick Doris.
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