Understanding OFSI Licenses: A Comprehensive Overview

The UK’s Office of Financial Sanctions Implementation (OFSI) plays a crucial role in ensuring that UK financial sanctions are effectively enforced. A key aspect of this enforcement is the licensing regime, which allows certain transactions that would otherwise be prohibited. Understanding OFSI licences is essential for businesses, legal professionals, and financial institutions that may be impacted by financial sanctions. This guide provides a comprehensive overview of OFSI licences, their legal basis, application processes, and practical implications.

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What is Licensing?

In the context of financial sanctions, a licence from OFSI is written permission to carry out an action that would otherwise be in breach of financial sanctions prohibitions. When an individual or entity is subject to an asset freeze, their funds and economic resources must be frozen. It is illegal to deal with these assets or make them available to a designated person unless an exception applies or a valid licence has been granted.

Legal Basis for OFSI Licences

OFSI can only issue licences where there are legal grounds to do so. The legal framework for these licences falls under the Sanctions and Anti-Money Laundering Act 2018 (the Sanctions Act). Each sanctions regime has specific regulations that outline the permitted grounds for granting a licence. Applicants must identify the relevant regulation and justify their request accordingly.

Specific Licences

Grounds for a Specific Licence

Specific licences may be granted under the following circumstances:

• Basic needs – Payments for essential living expenses such as food, rent, and medicines. This allows sanctioned individuals to maintain a basic standard of living, ensuring access to daily necessities.
• Legal fees – Reasonable professional legal fees and associated expenses. This covers costs related to legal representation, court proceedings, and legal advisory services.
• Pre-existing obligations – Payments under contracts or obligations that pre-date the imposition of sanctions. This ensures that existing legal commitments, such as business contracts or financial agreements, can be honoured despite sanctions.
• Routine maintenance – Payment of service charges for maintaining frozen funds or economic resources. This includes fees for asset management, bank charges, or property maintenance associated with sanctioned assets.
• Pre-existing judicial decisions – Compliance with court orders made before sanctions were imposed. If a UK or foreign court has issued a legally binding ruling before the sanctions came into effect, a licence may be granted to ensure compliance.
• Extraordinary expenses – Where exceptional costs arise, subject to OFSI’s assessment. This category covers significant, unexpected financial needs that do not fall under basic needs but are still deemed essential.
• Humanitarian assistance – Activities that support humanitarian relief efforts. Organisations providing food, medical aid, or emergency support in sanctioned regions may require a licence to operate legally.
• Diplomatic missions – Payments required for the functioning of diplomatic and consular missions. This allows embassies and consulates to continue operations, covering rent, staff salaries, and other necessary expenses.

Applying for a Specific Licence

To obtain a specific licence, individuals or entities must submit a formal application to OFSI. The application should include:

1. Applicant details – Full name, address, and contact information.
2. Designated person/entity details – The individual or organisation subject to sanctions.
3. Legal grounds – Reference to the relevant regulation permitting the licence.
4. Purpose of the licence – A detailed explanation of the transaction.
5. Supporting evidence – Documents to justify the request, such as contracts, invoices, and legal opinions.

OFSI will review applications on a case-by-case basis and may request additional information. Processing times vary depending on the complexity of the case.

Practical Examples of Specific Licences

A specific licence may be required in the following scenarios:

• Humanitarian organisations operating in sanctioned countries may need a licence to provide aid and distribute resources.
• Legal professionals advising sanctioned individuals or entities on compliance matters may require a licence to receive payment for their services.
• Accountants and financial institutions holding funds for a sanctioned person may need a licence to release payments for basic needs.
• Insolvency practitioners dealing with sanctioned creditors may require a licence to facilitate payments as part of legal proceedings.

General Licences

Unlike specific licences, general licences apply to multiple parties and allow certain activities to be conducted without the need for a case-by-case application. OFSI issues general licences under the Sanctions Act, specifying the permitted activities, applicable conditions, and expiry dates.

Key Features of General Licences

• Broad applicability – Available to multiple parties rather than a single applicant.
• Pre-defined conditions – Users must comply with reporting and record-keeping requirements.
• No application required – Automatically applicable to eligible entities.

Recent Developments in General Licences

One notable example is the Legal Services General Licence INT/2024/5334756, which permits legal professionals to receive payments from designated persons for legal representation. The latest updates to this licence include:

• Increased fee caps – A maximum of £2,000,000 (including VAT) per designated person per law firm or counsel.
• Expanded permissions for overseas payments – UK law firms with branches in Canada, EU/EFTA member states, and the US can now receive payments into those branches.
• Clarifications for in-house legal teams – In-house legal staff of a designated person are collectively treated as a single ‘law firm’ for fee caps.

Compliance and Reporting Requirements

Both general and specific licence holders must adhere to strict compliance and reporting obligations to ensure transparency and regulatory adherence. These obligations include:

• Record-keeping – Licence holders must maintain comprehensive records of all transactions carried out under a licence. This includes supporting documentation such as invoices, bank statements, contracts, and communications related to the licensed activity. These records must be retained for a minimum period, usually at least six years, to facilitate audits and regulatory reviews.
• Periodic reporting – Licence holders are required to submit reports to OFSI detailing the use of their licence. These reports typically include information on the nature of transactions, counterparties involved, amounts transacted, and any relevant supporting documentation. Regular reporting helps OFSI monitor compliance and assess whether further regulatory action is needed.
• Notification requirements – Some general licences require prior notification before they can be used. This means entities intending to rely on a general licence must inform OFSI in advance, providing details of the intended transactions and ensuring compliance with all conditions specified in the licence.
• Internal compliance procedures – Businesses and financial institutions must implement internal policies and procedures to ensure compliance with OFSI licences. This includes staff training, risk assessments, and regular compliance audits.
• Third-party due diligence – Organisations must conduct due diligence on clients, suppliers, and financial transactions to ensure they do not inadvertently breach sanctions regulations. This includes verifying the identity of counterparties and ensuring that transactions comply with the terms of the licence.

Failure to comply with licensing conditions can result in severe enforcement actions, including:

• Financial penalties – OFSI has the authority to impose substantial fines on individuals and businesses that fail to adhere to licensing conditions.
• Criminal prosecution – In serious cases, non-compliance can lead to criminal charges, resulting in significant fines or imprisonment.
• Revocation of licences – OFSI may revoke or suspend a licence if a holder is found to be non-compliant, affecting business operations and financial transactions.

To mitigate these risks, organisations should seek professional legal advice and ensure they have robust compliance frameworks in place.

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Conclusion: Understanding OFSI Licenses

OFSI licences are a crucial mechanism for ensuring that financial sanctions are effectively implemented while allowing certain essential transactions to proceed lawfully. Businesses, legal professionals, and financial institutions must familiarise themselves with the licensing regime to navigate compliance obligations effectively. Whether applying for a specific licence or relying on a general licence, understanding the requirements and maintaining proper records is essential to avoid legal risks.

For further guidance, refer to OFSI’s official publications and seek professional legal or financial advice where necessary.

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