On 1 April 2017, Part 8 of the Policing and Crime Act 2017 (the "Act") came into force, introducing new powers for the Office of Financial Sanctions Implementation ("OFSI") (part of HM Treasury ("HMT")) to enforce financial sanctions in the UK. Importantly, the Act does not change the substance of any financial sanctions currently in force in the UK, only the framework in which the current restrictions will be enforced.
The most significant of these new powers is the ability for OFSI to impose a monetary penalty on companies and individuals deemed to have breached financial sanctions on the civil standard of proof, rather than pursuing a criminal prosecution. Penalties may be imposed up to a maximum of 1 million, or 50% of the value of the breach in question, whichever is the higher. This new approach demonstrates the UK's intention to "step up" its domestic enforcement of financial sanctions.
In this briefing we provide an overview of the new powers available to OFSI, and of OFSI's guidance on the circumstances in which monetary penalties will be imposed. We also provide a summary of the other provisions of the Act which came into force on 1 April.
19 APRIL 2017
Table of Contents
1. OFSI's power to impose monetary
3. Other changes introduced by the Act 5
4. New OFSI FAQs
5. UK sanctions post-Brexit
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1. OFSI's power to impose monetary penalties
As described in our previous briefing, the Act introduced a new power for OFSI to impose monetary penalties for breaches of financial sanctions in the UK.
Under Part 8 of the Act, OFSI may impose a monetary penalty on an individual or entity if it is satisfied, on the balance of probabilities, that the person concerned has: (a) breached a prohibition, or failed to comply with an obligation, imposed under financial sanctions legislation; and (b) knew or had reasonable cause to suspect that this was the case. OFSI has discretion to determine the amount of the penalty up to a maximum of the higher of 1,000,000 or 50% of the estimated value of the funds or resources that were subject to the breach.
The term "financial sanctions", as used in the Act, applies to a wide range of asset freezing and investmentrelated measures, but does not include trade sanctions.
The target of the penalty has the right to make representations to OFSI and may then appeal to a Minister for their case to be reviewed. If, following his or her review, the Minister upholds the penalty, the affected person has a right to appeal to the Upper Tribunal.
The Act provided that HMT must issue guidance on (a) the circumstances in which it may consider it appropriate to impose a monetary penalty; and (b) how it will determine the amount of the penalty. Following a consultation on draft guidance late last year, the final version of the Monetary penalties for breaches of financial sanctions guidance (the "Monetary Penalties Guidance") was published on 3 April.
Our previous briefing summarised the provisions of the draft consultation version of the Monetary Penalties Guidance. Following the consultation, there have been a number of changes to the wording of the Monetary Penalties Guidance, although the main principles that it contains remain unchanged. We have set out below an overview of some of the key elements of the Monetary Penalties Guidance, together with certain additional clarifying information that can be drawn from HMT's response to the consultation (the "Consultation Response").
When will OFSI impose a monetary penalty?
The Monetary Penalties Guidance confirms that the imposition of a penalty is one of a number of ways in which OFSI may seek to deal with a failure to comply with financial sanctions. OFSI may take the following steps in relation to a particular breach:
issue correspondence requesting details of how the relevant party proposes to improve its compliance practices;
refer regulated professionals to their relevant professional body/regulator;
impose a monetary penalty; or
refer the case to law enforcement for criminal investigation and prosecution.
The Monetary Penalties Guidance confirms that each case will be considered on its own merits and that any mitigating factors relating to the conduct at issue will be considered when deciding how to proceed with a case. OFSI will assess each case and determine which outcome is fair, proportionate and best enforces the relevant sanctions regime.
Penalty imposition process
The substantive stages in the process for imposing a monetary penalty have not changed as a result of the consultation.
The decision-making process consists of three parts:
1. Penalty threshold: OFSI must be satisfied that, on the balance of probabilities, there has been a breach of financial sanctions and the person in question knew or had reasonable cause to suspect that they were breaching sanctions. If this standard is met, OFSI will impose a penalty in circumstances where: (i) the breach involved funds or economic resources being made available directly to a designated person; (ii) there is evidence of circumvention; (iii) a person has failed to comply with a requirement to provide information; and/or (iv) OFSI otherwise considers that a monetary penalty is appropriate and proportionate.
2. Baseline penalty matrix: OFSI will determine the statutory maximum penalty (the greater of 1 million or 50% of the value of the breach) and then decide what level of "baseline" penalty up to this maximum is reasonable and proportionate in the circumstances. OFSI then applies the socalled penalty matrix (see below) to assess whether any reduction is applicable. In cases where the breach has been voluntarily disclosed, OFSI may apply a reduction of up to 50% in "serious" cases or up to 30% in the "most serious" cases. "Serious" cases will be those that meet the criteria in step 1. "Most serious" cases will be distinguished as those involving, for example, a very
high value, blatant flouting of the law, or severe or lasting damage to the purpose of the relevant sanctions regime. This will be determined on a case-by-case basis.
3. Penalty recommendation: OFSI applies any necessary reduction identified in step 2 in order to come up with a penalty recommendation. The target of the penalty then has the right to make representations in relation to this recommendation. The Monetary Penalties Guidance confirms that the final decision on the penalty (after representations have been made) will be taken by a different person within OFSI to the person who prepared the penalty recommendation.
In relation to step 2 above, it is important to note that the matrix used to calculate the voluntary disclosure reduction to be applied to the baseline penalty amount has changed as a result of the consultation. The new matrix is as set out below.
Baseline penalty minus voluntary disclosure reduction of 50%
Baseline penalty minus voluntary disclosure reduction of up to 30%
No voluntary disclosure reduction
No voluntary disclosure reduction. Penalty likely to be higher than 'serious' cases
In particular, the final version of the matrix has removed the possibility for a deduction of up to 15% from the baseline penalty in 'serious' cases, even where there has been no voluntary disclosure. The Consultation Response indicates that, on reflection, OFSI consider that it sends the wrong message to offer a standard reduction where there has been no voluntary disclosure.
Some of the respondents in the consultation noted that the draft of the Monetary Penalties Guidance purported to express OFSI's jurisdiction as extending beyond the territorial scope of EU sanctions (which generally apply to nationals of EU member states, EU-incorporated entities and acts done within the physical territory of the EU). In particular, the draft Monetary Penalties Guidance stated that OFSI had the power to impose monetary penalties in respect of actions by a local subsidiary of a UK parent company.
OFSI has addressed these comments in its Consultation Response, and in the final version of the Monetary Penalties Guidance, stating that neither the Act, nor the Monetary Penalties Guidance alter the reach of UK financial sanctions. The specific example in the Monetary Penalties Guidance which refers to non-UK subsidiaries of UK companies has been amended to note that OFSI's ability to impose a penalty in these circumstances depends on the relevant company's "governance". We expect that this may be intended to refer to a situation where the UK parent company itself commits an offence by approving or otherwise facilitating actions by its non-UK subsidiary which would contravene the relevant sanctions legislation, although further clarity would be welcome in this area. Some comfort can, however, be taken from OFSI's statement that "we will not artificially bring something within UK authority that does not clearly and naturally come under it" and the fact that OFSI has stated that it will make clear to any person on which it seeks to impose a penalty why it thinks its powers are engaged.
Aggravating and mitigating factors
The aggravating and mitigating factors to be taken into account when assessing a case in order to arrive at a fair and proportionate penalty will include:
whether there has been the direct provision of funds or economic resources to a designated person;
whether there has been intentional circumvention of sanctions;
the value of the breach (which may be estimated by OFSI);
the harm or risk of harm to the relevant sanctions regime's objectives;
the target's knowledge of sanctions and compliance systems. In this regard, the Monetary Penalties Guidance notes that regulated professionals should meet regulatory and professional standards and their failure to do so may be an aggravating factor;
the behaviour of the parties, including whether the breach seems to be deliberate, whether there is evidence of neglect or a failure to take reasonable care, whether there has been a systems and controls failure or an incorrect legal interpretation, whether the person seems unaware of their responsibilities, or whether there has simply been a mistake;
failure to apply for a licence or breach of licence terms;
repeated, persistent or extended breaches;
reporting of the issues to OFSI;
failure to provide information to OFSI; and
OFSI also reserves the right to consider any material and relevant factor in a given case. In particular, we anticipate that any cases involving non-asset freezing financial sanctions (such as the Russia-related capital markets restrictions) may give rise to consideration of factors which do not appear in the above list.
The Monetary Penalties Guidance makes clear that OFSI wishes to encourage voluntary reporting of suspected breaches. As noted above, the penalty calculation process incorporates substantial discounts where matters are self-reported to OFSI. The Monetary Penalties Guidance also notes that "we regard voluntary disclosure of a breach of financial sanctions by a person who has committed a breach as a mitigating factor when we assess the case. It will also have a real effect on any subsequent decision to apply a penalty".
The Monetary Penalties Guidance and the Consultation Response contain a number of points relevant to the making of such voluntary disclosure.
A disclosure will not be regarded as voluntary if OFSI considers that disclosure to have been prompted or forced on a person by the fact that OFSI is already assessing the case.
Where multiple parties are involved in a breach, OFSI will expect a voluntary disclosure from each of those parties. It will, however, consider the facts and timing of each disclosure individually, such that the mere fact that another party has disclosed first will not necessarily lead to the conclusion that a later disclosure by another party has no value.
Although the Monetary Penalties Guidance indicates that OFSI expects disclosures to be "materially complete", the Consultation Response confirms that OFSI will take a common sense approach to the possible tension between timely and materially complete disclosures, saying that "we know it takes time to establish facts, and sometimes not all the facts will be available immediately. We are looking for a good-faith disclosure and willingness to work with us, and will support approaches to these issues made in that spirit".
OFSI is "happy to consider marginal issues, particular circumstances, conflicts or any other issue around voluntary disclosure as part of a person's representations". It would therefore, presumably, be open to the target of a penalty to make representations as to why its disclosure should be regarded as meeting OFSI's standards for voluntary disclosure (and thereby qualify for a reduction in penalty).
The section in the Monetary Penalties Guidance on voluntary disclosure includes a paragraph on legal professional privilege, noting that some documents are protected by privilege. The Monetary Penalties Guidance says that "an offence is only committed where a person fails to produce a document 'without reasonable excuse'. We consider that relying on legal professional privilege could be such a reasonable
excuse not to disclose a document". It may be that OFSI has included this wording to reflect the fact that it does not require a materially complete disclosure to include legally privileged material, although the position is slightly unclear.
Publication of penalty details
The Act includes a requirement for HMT to publish reports at appropriate intervals about the imposition of monetary penalties. The Consultation Response confirms that OFSI has determined that this requirement will be met by publishing a summary of each monetary penalty case after it concludes (despite consultation respondents noting that the Act appears to envisage a periodic reporting scheme rather than the publication of the detail of each penalty). The Monetary Penalties Guidance therefore confirms that a summary of each penalty case will normally be published once the penalty has been finalised.
The Monetary Penalties Guidance indicates that although OFSI may conclude that there are circumstances in which it is not appropriate, or not in the public interest, to publish such a case summary (for example where doing so has such an impact that a reasonable person would consider it disproportionate to do so), this will be a high standard to satisfy, and OFSI will usually expect to publish a case summary. In circumstances where OFSI is satisfied that a summary should not be published, it will either publish an anonymised report or include the case in statistical information and any aggregated reporting that it publishes.
Companies should therefore be aware that, in addition to the potentially significant financial impact associated with the imposition of a penalty, there will be a presumption in favour of publishing details of the penalty, potentially leading to associated reputational damage. Companies or individuals that are the target of a penalty may make representations on the effect of publication of a case summary. OFSI has also indicated that it would be prepared to consider representations from third parties referred to in a case summary, although it is not clear from the consultation response document how such a process might work. This is an area that OFSI has indicated will be kept under review, with an update to the Monetary Penalties Guidance if required.
Although the case summaries are unlikely to provide extensive detail on the precise nature of specific breaches, the Monetary Penalties Guidance confirms that the summary will usually include any compliance lessons that OFSI wishes to highlight in the case, which may be of assistance to other companies in ensuring that their sanctions compliance programmes meet OFSI's expectations.
3. Other changes introduced by the Act
Implementation of UN sanctions
The Act seeks to avoid the delay (and associated risk of asset flight) that can arise between the UN Security Council designating an individual or entity as subject to sanctions and that designation being reflected at EU level (and thereby in UK law). From 1 April 2017, all new UN financial sanctions listings will have direct effect in the UK (meaning that UN designated persons will immediately be added to the UK consolidated list of financial sanctions targets) for a period of 30 days, or until the EU implements the UN designation.
The United Nations and European Union Financial Sanctions (Linking) Regulations 2017 is the instrument which links current sanctions-related UN Security Council Resolutions ("UNSCs") to the corresponding EU Regulation. In the future, where a person is designated for the purposes of a UNSC, they will be deemed to be included in the designated persons list for the corresponding EU Regulation.
Increased penalties for breach of financial sanctions and additional criminal enforcement options
As mentioned in previous briefings, from 1 April, the Act provides for an increase in the criminal penalties available for breaches of financial sanctions to a maximum of seven years' imprisonment.
It is now also possible for breaches of financial sanctions to be dealt with through a deferred prosecution agreement or serious crime prevention order.
4. New OFSI FAQs
In parallel with the publication of the Monetary Penalties Guidance, OFSI also issued a revised version of its general guidance on financial sanctions (the "Sanctions Guidance").
The main change to this document has been to update it with details of the new monetary penalty regime and the other changes to the UK financial sanctions framework introduced by the Act. However, companies may also be interested to note that the new version of the Sanctions Guidance contains the following changes:
limited additional guidance on OFSI's approach to the licensing ground for "basic needs of the designated person and dependent family members": the Sanctions Guidance now confirms that this licensing ground will cover those expenses which are necessary to ensure that the very existence of the designated person is not imperilled, noting that these needs will vary as between legal entities and natural persons; and
additional information on the roles of OFSI and the Financial Conduct Authority (the "FCA") with regard to sanctions compliance: the Sanctions Guidance clarifies the distinct roles of OFSI and the FCA but notes that OFSI will look to work together with the FCA where appropriate "to ensure overall compliance with the sanctions regime".
HMT's response to the consultation on the Monetary Penalties Guidance notes that OFSI also plans to introduce sector-specific factsheets on financial sanctions. It is not entirely clear what these factsheets will cover as the reference in the consultation document appears in the context of a discussion of the interaction between the monetary penalty regime and import and export restrictions. However, companies will no doubt welcome further guidance from OFSI on the steps that it expects particular sectors to take to comply with their financial sanctions obligations.
5. UK sanctions post-Brexit
With the notice under Article 50 of the Treaty on the European Union of the UK's intention to leave the EU, the two year process of the UK's exit from the EU formally began on 29 March 2017. One of the many legal issues to be determined will be the way in which the UK approaches its current sanctions framework post-Brexit, since the majority of the sanctions currently in force in the UK have directly effective EU Regulations as their basis.
The House of Lords EU External Affairs Sub-committee has recently announced that it is launching a new inquiry into UK sanctions policy after Brexit. The inquiry will explore:
the advantages and disadvantages of future co-operation between the UK and EU on sanctions policy;
how such co-operation might take place;
examples of EU co-ordination with non-Member States on sanctions (for example, it is anticipated that the models adopted by Norway and Switzerland may be under consideration for the UK);
the current sanctions regime and how this will be transposed into UK law, including through the Great Repeal Bill; and
the impact of a separate UK sanctions regime on the UK's ability to achieve its foreign policy goals.
We will continue to report on the likely impact of Brexit on the UK's sanctions framework.
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Herbert Smith Freehills LLP 2017
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