A round up of the summer's key financial sanctions developments

As businesses, legal teams and compliance officers are refocusing their minds following summer breaks, it is a useful time to take stock of regulatory developments over the holiday season. From a financial sanctions perspective, there have been a number of key developments, most notably with July seeing an historic agreement between the E3+3 (UK, France, Germany, China, Russia, US), the EU and Iran. As part of the deal Iran has agreed to implement a series of commitments in relation to limiting its nuclear programme in return for a phased lifting of UN, EU and US sanctions targeting Iran.

Under the terms of the agreement, EU and US sanctions relief will be provided through the suspension and eventual termination of sanctions measures, beginning only if and when the International Atomic Energy Agency verifies that Iran has implemented key nuclear-related measures. Further details about the Iran agreement and potential opportunities for businesses emanating from the deal can be found in our previous client briefing and business opportunities analysis.

In the meantime relevant competent authorities, including HM Treasury in the UK ("HMT"), have confirmed that existing sanctions against Iran will continue to be rigorously and robustly administered and enforced. Indeed only a week prior to the announcement of the Iran agreement, the UK Government noted as part of the Summer Budget 2015, that during the course of the next financial year it will be establishing a new "Office of Financial Sanctions Implementation" ("OFSI") within HMT. The Government's intention is that OFSI will therefore be operational by April 2016 and "will provide a high quality service to the private sector, working closely with law enforcement to help ensure that financial sanctions are properly understood, implemented and enforced"1.

Whilst many companies will no doubt welcome greater clarity in relation to the often imprecise scope and application of UK financial sanctions measures, the announcement of the creation of OFSI raises questions as to the UK Government's future policy in relation to financial sanctions compliance and enforcement.

The remainder of this briefing considers whether the creation of OFSI indicates a change of approach from the UK Government in relation to financial sanctions compliance, the risks of non-compliance and how this may ultimately affect your business.

Enforcement of financial sanctions measures in the UK

Over the last 10 years the number of both individuals and entities designated under EU sanctions measures has significantly increased. This reflects the increased emphasis that the EU places on the importance of sanctions measures as a response to geopolitical events such as the Arab Spring and more recently the conflicts in Ukraine and Syria. Words from Kofi Anan reflect the international community's approach to sanctions measures in stating that "in dealing preventively with the threats to international peace and security, sanctions are a vital though imperfect tool. They constitute a necessary middle ground between war and words when nations, individuals and rebel groups violate international norms and where a failure to respond would weaken those norms, embolden other transgressors or be interpreted as consent"2.

Whilst the political will to impose sanctions measures is undoubtedly in place (which is reflected in the increased usage of sanctions measures by the UN and EU) enforcement of those sanctions measures in the UK has not been historically regular or robust.

Indeed, the most recent significant enforcement action of UK financial sanctions was back in August 2010, when the Financial Conduct Authority (then the Financial Services Authority) fined the Royal Bank of Scotland Group £5.6 million for having failed to have adequate systems and controls in place to prevent breaches of UK financial sanctions.

In comparison, and as many businesses are aware, the US Government takes a much more active and aggressive approach to the enforcement of sanctions measures, including bringing enforcement action against non-US banks for breach of US sanctions measures. The largest such fine to date was imposed by the U.S. Department of the Treasury’s Office of Foreign Assets Control ("OFAC") in June 2014 on French headquartered BNP Paribas, which amounted to a substantial $9.8 billion fine.

When announcing the creation of OFSI the UK Government also stated that it would be legislating "early" in this Parliament to increase the penalties for non-compliance with financial sanctions3. This statement is widely regarded as an indicator that the UK will, in fact, be following the US Government's lead, and increasingly taking a leading role in sanctions enforcement within the EU.

Under current UK sanctions measures, breach of the measures can only be addressed by the initiation of a criminal prosecution. The UK courts are then able to impose prison sentences of up to 2 years and/or unlimited fines for breach of financial sanctions measures.

This is a different position to that of the US, where OFAC can itself impose civil penalties and reach out of court settlements in relation to sanctions breaches. By contrast, HMT has no power to enter into settlements with UK companies that they have identified as having breached UK sanctions legislation.

If the UK government wants to "up-the-ante" of sanctions enforcement, OFSI may be given powers not only to investigate breaches of sanctions measures, but to also penalise and prosecute such breaches.

We will have to wait to see whether the Government addresses the enforcement powers of OFSI and whether the establishment of the body leads to increased enforcement activity. It would be reasonable however to assume that OFSI will look to get some early enforcement "wins" under its belt, using the intelligence collected by HMT in its role as the competent licencing authority for financial sanctions measures in the UK, and through inter-agency information sharing.

Will OFSI lead to increased certainty?

It has long been the case across different industry sectors in the UK that companies have struggled with a lack of clarity and certainty in relation to UK financial sanctions measures. Taking the latest sanctions measures targeting Russia as an example, there are a number of restrictions which have caused companies a compliance challenge, including a lack of clarity in relation to the concept of "financial assistance". The Russian measures include restrictions on the provision of "financial assistance" in relation to the supply of (i) dual use goods and technology to certain entities in Russia and for a military end use in Russia (ii) goods and technology listed in the Common Military List to any person or entity in Russia or for use in Russia and (iii) certain energy related equipment and technology to Russia or for use in Russia.

There is, however, no definition of what amounts to "financial assistance" in the EU Regulation4 imposing the restrictions or the corresponding UK legislation5, which has left a number of UK companies and financial institutions with questions as to whether activity that they are either conducting, or would like to conduct in Russia, is lawful under the sanctions regime.

Over four months after the introduction of the measures, and due to the number of requests for clarification that were made to the UK authorities, the UK Export Control Organisation did issue a guidance note stating that it "understand[s] the term in its broadest sense, i.e. involvement in any financial transaction which promotes, enables or facilitates the prohibited or restricted trade transaction to which it relates"6 . However, as many companies will be aware, the issuance of such guidance by UK authorities is not commonplace, in contrast to the position in the US where both OFAC and the Bureau of Industry and Security regularly issue guidance on the application of US sanctions measures.

Whilst it can be argued that EU Regulations and UK legislation implementing sanctions measures are intentionally drafted to be wide ranging and include imprecise wording to allow the competent authorities a broad scope to enforce the measures, this is, of course, not very helpful for companies wishing to ensure compliance. In this regard, OFSI may have a positive role to play in providing greater clarity, both to companies that have a high sanctions risk profile and who regularly wish to seek guidance in relation to the legal status of their activities; as well as for companies with a lower risk profile, who are less used to seeking such guidance.

Ensuring compliance

With the creation of OFSI in the coming year, the importance of compliance with sanctions measures has never been more important. Companies should therefore:

  • Ensure that you have comprehensive sanctions compliance policies and procedures implemented within your business and that compliance is regularly monitored and tested. 
  • Ensure that you know who you're doing business with - is your counterparty designated under sanctions measures? Is your counterparty owned or controlled by a person or entity designated under sanctions measures?
  • Check whether you hold any accounts, funds or wider assets for any of the individuals or entities targeted by the sanctions measures and, where necessary, freeze such accounts, funds or economic resources.
  • Ensure your sanctions screening processes are working effectively - how are false positives dealt with, etc.? What is your internal escalation procedure if a sanctions hit is identified?
  • Ensure that any funds or assets that you are holding (even if on behalf of a sanctioned person or entity) are frozen and reported as necessary to the relevant competent authority.
  • Suspend any dealing with accounts, funds or wider assets owned, held or controlled by EU sanctions targets, unless licensed by a relevant EU competent authority. 
  • Consider the options for obtaining a licence to authorise commercial activity in line with exemptions and derogations provided for in sanctions measures.