The Partial Payment on a Frozen Receivable
A UK-based logistics firm ("LogiCo") has a long-standing contract with a shipping agent in a jurisdiction designated under the UK's Russia sanctions regime. The agent owes LogiCo £1.2m in freight charges for services rendered before the designation. The agent's bank, a non-UK institution, approaches LogiCo with a proposal: it will release £400k from the agent's frozen correspondent account if LogiCo confirms the funds represent "pre-designation contractual debt" and agrees to route the payment through a third-country intermediary. LogiCo's finance director notes the original invoices predate the listing date by 14 months and argues the funds are therefore outside the freeze. Legal counsel flags that the agent is also subject to an asset freeze under the same regime and that the intermediary bank has no UK nexus. The payment is due within 10 days to avoid LogiCo's own covenant breach.
1. Can LogiCo accept the £400k release on the basis that it represents pre-designation debt? Explain the legal analysis and identify the key risk.
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No, not on the reasoning offered. An asset freeze prohibits dealing in funds owned, held or controlled by the designated person - the age of the underlying debt is irrelevant to whether the funds themselves are frozen. The invoice date affects whether a specific licence might authorise a permitted payment (many regimes allow licensing of pre-designation obligations), but it does not create a self-executing exemption.
Key points:
- The funds sit in the agent's account, so they are the agent's funds and are frozen. LogiCo receiving them would be 'making funds available' to a designated person (or dealing in frozen funds) absent a licence.
- Pre-designation debt is typically a licensing ground, not an automatic carve-out. LogiCo must apply to the competent authority (e.g. OFSI) for a specific licence.
- Key risk: the third-country intermediary and non-UK bank create a deliberate structuring pattern. Even if the underlying claim is genuine, routing around the freeze to avoid licensing is the hallmark of circumvention and could expose LogiCo to criminal liability and reputational damage.
Correct action: decline the informal proposal, apply for a licence, and document the reasoning.
2. The finance director proposes accepting the payment and booking it as a 'receipt against aged debt' to avoid covenant breach. What should compliance do, and how should the decision be recorded?
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Compliance should block the transaction and escalate. Booking treatment does not change the legal character of the receipt; accounting labels are not a defence.
Recommended steps:
- Immediate hold - instruct finance in writing not to process or acknowledge the intermediary's proposal.
- Escalate to the MLRO/sanctions officer and, if appropriate, to the board and external counsel.
- Licence application - pursue the lawful route (specific licence for pre-designation contractual obligations) and inform the counterparty's bank that payment must await authorisation.
- Consider the covenant - a covenant breach caused by lawful sanctions compliance is a commercial matter to manage with lenders, not a reason to breach sanctions.
- Voluntary disclosure - if any funds were already moved or acknowledged, consider a voluntary disclosure to the regulator.
Record-keeping: minute the decision, the legal advice relied on, the rationale for declining, the licence application reference, and the escalation chain. Contemporaneous records are what a regulator examines when reconstructing intent.