Age like fine wine: OFSI imposes financial penalty on UK wine company for managing tangible and intangible economic resources of sanctioned winery

October 17, 2022

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On 27 September 2022, following a ministerial review, the Office of Financial Sanctions Implementation (OFSI) imposed a fine of £30,000 pursuant to s. 146 of the Policing and Crime Act 2017 (PACA) against Hong Kong International Wine and Spirits Competition Limited (HKIWSC) for breach of UK[1] and EU[2] penalty settlement. 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, the HKIWSC received three payments and seventy-eight bottles of wine from the sanctioned State Unitary Enterprise of the Agrarian Production Union of the “Republic of Crimea” (Massandra) for participating in the 2017, 2018, 2019 and 2020 HKIWSC competitions.

The OFSI has identified two types of breaches: four related to the provision of funds and tangible economic resources (i.e. bottles of wine) and one relating to the supply of intangible economic resources in the form of advertising made available to Massandra by having its wine participate in competitions. The OFSI imposed the monetary penalty because it was satisfied that, on a balance of probabilities, HKIWSC knew or had reasonable grounds to suspect that it was in violation of the relevant prohibitions. No voluntary disclosure was made in this case, therefore a penalty reduction was not applied.

Intangible economic resources: a new interpretation

This decision represents an important development because OFSI’s determination that advertising is an intangible economic resource, i.e. an asset that can be exchanged for funds, is not intuitive, nor currently considered by guidelines available.

The OFSI based its decision on the “reasonable inference” that the advertising would increase Massandra’s wine sales, and the PACA expressly authorizes the imposition of monetary penalties when the exact financial value of the resources made available cannot be determined.[3]. However, advertising can more conventionally be interpreted as a service, and it does not fit perfectly into the definition of “economic resources”, i.e. “goods of any kind, tangible or intangible, movable or immovable, which are not funds but can be used to obtain funds, goods or services”[4].

Advertising is not traditionally treated as an asset on a company’s balance sheet and there is no way to directly exchange ‘advertising’ for ‘funds, goods or services’. Advertising may lead to increased sales which, in turn, can lead to increased profits, but the path from advertising to funds is not linear. It would have been different – ​​and perhaps more coherent – ​​if the OFSI had considered that advertising increased Massandra’s goodwill in the form of brand recognition, and that this goodwill constituted an intangible economic resource. This construction would preserve the linearity of the exchange between ‘economic resources’ and ‘funds’ envisaged by the definition of the legislation, goodwill being traditionally recognized as an asset directly usable to obtain funds.

Key points to remember

This case serves as a useful reminder of the following:

  • The scope of legislative provisions is not always predictable on the basis of a careful reading of the text. OFSI’s creative construction of what constitutes intangible economic resources is an example of this. The OFSI may favor generous and overly inclusive interpretations of key terms if it is motivated to apply them.
  • Many categories of assets can fall under the set of intangible economic resources. The OFSI report makes explicit reference to intellectual property rights. This inclusion is to be expected given that intellectual property rights are traditionally treated as intangible assets and can be easily exchanged for cash. Other inclusions may be less conventional, as this execution case shows.
  • The OFSI has the power to impose heavy penalties even for relatively minor violations. The total cumulative value of tangible economic resources and funds received by the HKIWSC was estimated at £3,919.62. Nevertheless, the fine was £30,000. In cases where the breach relates to funds or economic resources, the OFSI is authorized to impose a monetary penalty in excess of £1 million and 50% of the estimated value of the funds or resources. In all other cases, the maximum penalty is capped at £1million[5]. In particular, the penalties may be reduced in the event of voluntary disclosure. This highlights the value of proactive reporting backed by strong internal compliance systems that can detect breaches before the regulator does.
  • The OFSI continues to investigate and impose penalties for breaches of EU regulations and UK regulations that occurred before December 31, 2020. The breaches in this case occurred between 2017 and 2020 and were therefore breaches EU Regulations and the now repealed UK Regulations implementing the EU Regulations. If violations prior to 2021 are identified internally, it is worth considering voluntary disclosure, as the regulator can impose penalties if they become aware of historical non-compliance.

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[1] Regulations 3(1) and 6(1) of the Ukraine (European Union Financial Sanctions) Regulations 2014 (No. 2)

[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 attorneys prepared this Client Alert: Irene Polieri, Michelle Kirschner and Patrick Doris.

Gibson Dunn attorneys are available to answer any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work, the authors or the following members and leaders of the firm’s International Business practice group:

Europe
Attila Borsos – Brussels (+32 2 554 72 10, [email protected])
Nicolas Autet – Paris (+33 1 56 43 13 00, [email protected])
Susy Bullock – London (+44 (0) 20 7071 4283, [email protected])
Patrick Doris – London (+44 (0) 207 071 4276, [email protected])
Sacha Harber-Kelly – London (+44 (0) 20 7071 4205, [email protected])
Michelle M. Kirschner – London (+44 (0) 20 7071 4212, [email protected])
Penny Madden – London (+44 (0) 20 7071 4226, [email protected])
Irene Polieri – London (+44 (0) 20 7071 4199, [email protected])
Benno Schwarz – Munich (+49 89 189 33 110, [email protected])
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Asia
Kelly Austin – Hong Kong (+852 2214 3788, [email protected])
David A. Wolber – Hong Kong (+852 2214 3764, [email protected])
Fang Xue – Beijing (+86 10 6502 8687, [email protected])
Qi Yue – Beijing – (+86 10 6502 8534, [email protected])

United States
Judith Alison Lee – Co-Chair, International Business Practice, Washington, DC (+1 202-887-3591, [email protected])
Ronald Kirk – Co-Chair, International Business Practice, Dallas (+1 214-698-3295, [email protected])
Adam M. Smith – Washington, DC (+1 202-887-3547, [email protected])
Stephenie Gosnell Handler – Washington, DC (+1 202-955-8510, [email protected])
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Courtney M. Brown – Washington, DC (+1 202-955-8685, [email protected])
Christopher T. Timura – Washington, DC (+1 202-887-3690, [email protected])
Annie Motto – Washington, DC (+1 212-351-3803, [email protected])
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Samantha Sewall – Washington, DC (+1 202-887-3509, [email protected])
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Scott R. Toussaint – Washington, DC (+1 202-887-3588, [email protected])
Shuo (Josh) Zhang – Washington, D.C. (+1 202-955-8270, [email protected])

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