Russia: Payments were result of human error
The Russian arm of top City firm Herbert Smith Freehills (HSF) has been fined £465,000 for breaching UK financial sanctions imposed on Russia.
The Office of Financial Sanctions Implementation (OFSI) said this was half of the sum it had planned to levy because of the London-based parent quickly self-reported.
OFSI stressed that it found no fault with the actions of HSF London, which closed the Moscow operation in May 2022 following Russia’s invasion of Ukraine.
OFSI said it made six payments worth £3.9m to three banks that had been made subject to an asset freeze – at the time, the Moscow finance team had authority to approve payments locally.
Almost all of the money concerned a contract HSF entered into with a local law firm over the transfer of its lease agreement; this firm was to be operated by former HSF Moscow employees.
The local firm had two bank accounts – one with a non-sanctioned bank and the other with a sanctioned bank.
“In the days before the HSF Moscow was due to close, the remaining staff had limited facilities to finalise transactions at the end of the banking day, and acted in haste. As a result, senior finance officers failed to follow internally agreed screening processes, which resulted in the above payment being made to the local firm’s Alfa-Bank account.
“This was despite being instructed by HSF London more generally not to pay money into Alfa-Bank accounts, whose status as a US and UK sanctioned bank since March 2022 would have been well known.”
After realising this error on the same day, HSF Moscow staff contacted the local firm and it transferred the money to the non-sanctioned bank.
The others were a £13,200 redundancy payment to a member of staff, three life insurance premiums for local staff, and £39.71 to clear an overdraft.
OFSI said the errors were caused by “the hasty closure” of HSF Moscow. Whilst the firm’s withdrawal from Russia was a mitigating factor, “OFSI considers that it should have been conducted in a more orderly fashion”.
It accepted there was no intent or actual knowledge that the payments would in breach of the sanctions, but staff “had reasonable cause to suspect their actions would result in a breach of the regulations”.
Emma Reynolds, economic secretary to the Treasury, said: “This penalty demonstrates OFSI’s firm commitment to pursuing financial sanctions breaches wherever they occur.
“From the largest institutions to the smallest, everyone has an obligation to comply with the UK’s financial sanctions regime. OFSI is prepared to utilise the full extent of its statutory powers to pursue those who commit serious breaches of financial sanctions.”
In a statement, HSF said: “These payments were made as a result of human error, in the final week of the winding-up of our former Moscow office’s operations.
“They do not relate to the firm’s clients or client work, or to any of the firm’s offices other than our former office in Moscow, Herbert Smith Freehills (CIS) LLP.
“The firm self-reported these incidents to OFSI promptly and has cooperated fully throughout their investigation.
“Given the firm’s self-reporting and cooperation, OFSI’s recognition that these payments occurred as a result of good faith errors made during our withdrawal from Russia, and the prompt recovery of the only substantial payment, we were disappointed by the fine that has been imposed. “Nonetheless, we are pleased that this matter has now been resolved. The firm is committed to complying in full with its obligations.”
A Solicitors Regulation Authority spokesman said: “We have looked into this matter, but cannot take action as it is outside of our jurisdiction. We do not regulate HSF Moscow or any lawyers involved in this case.”
James Clark, a partner at City disputes firm Quillon Law, described the case as a “cautionary tale”.
He explained: “Whilst OFSI stressed that it was issuing the monetary penalty against HSF Moscow, and that it found no fault with the actions of the parent company, it was HSF London that was left to pick up the bill.
“OFSI’s decision to impose a monetary penalty and publish detailed findings in that regard demonstrates their commitment to promoting better compliance with the UK sanctions regime, and highlights the importance of disclosing any potential breaches.”
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