Introduction

If Part 8 of the Policing and Crime Bill (the Bill) makes it through Parliament in its current form, it will significantly expand the penalty toolkit of the relevant UK regulators when they are considering taking enforcement action for breach of EU/UK financial sanctions. Most significantly,

  • The Bill will give power to HM Treasury (through its recently created Office of Financial Sanctions Implementation (OFSI)) to impose administrative fines/penalties on organisations and individuals that are considered to have breached EU/UK financial sanctions. 
  • For these purposes, a civil standard ‘balance of probabilities’ test will be applied, instead of the criminal standard of proof. 
  • The Bill will also enable deferred prosecution agreements to be entered into. 

These new powers will make it much easier for the regulators to impose fines/penalties and additional compliance obligations where they consider there has been a breach of sanctions. Companies will be expected to adopt rigorous internal compliance regimes to minimise the chance of breaching sanctions, and the Bill gives powers to enforcement agencies to force companies to adopt compliance procedures following a breach of sanctions if they do not do so willingly.

Significant increase in penalties and expansion of enforcement options

Currently, where there is a breach of financial sanctions in England and Wales the enforcement options of the enforcing authorities are limited to pursuing a formal criminal prosecution or sending a warning letter. Where a prosecution is successful the maximum penalties are up to two years imprisonment (for individuals) and/or an unlimited fine, in the sense that the level of fine is at the discretion of the sentencing judge. There is currently no alternative enforcement option available for imposing fines/penalties should criminal prosecution not be in the public interest. The choice for the regulators is essentially whether or not to pursue a prosecution or send a warning letter.

Under the Bill, the maximum custodial sentence for a breach of financial sanctions would increase to seven years. Moreover, the Bill aims to provide a much broader and flexible array of enforcement powers which can be deployed where there is evidence that sanctions have been breached.

Monetary Penalties

In support of these new enforcement powers, the Government argues that there are cases where a breach is sufficiently serious that it merits more than a letter, but not so serious that criminal prosecution is in the public interest. The Bill addresses this issue by proposing a new monetary penalties regime as an alternative to criminal proceedings for parties suspected of breaching financial sanctions. According to the Government, these powers will be used where OFSI is satisfied that a person knew, or had reasonable cause to suspect, that its actions were in breach of the sanctions but it is not in the public interest to pursue a criminal prosecution, SCPO or DPA (see below), and where the level of the breach or conduct of the individual or organisation is such that a warning letter alone is unlikely to bring about a sufficient change in behaviour. If that person is a company, then HM Treasury will also be able to impose a financial penalty on appropriate officers of the company, in circumstances where the breach by the company took place with the consent or connivance of the officer, or was due to his/her neglect. The standard of proof for imposing these penalties will be the balance of probabilities, a far lower standard than the criminal standard of reasonable doubt.

For these administrative sanctioning powers, the Bill currently (as amended) sets the maximum financial penalty for a breach at £1,000,000.00, or a percentage of the total amount of funds/economic resources to which the breach relates, whichever is greater (there has been some debate around the percentage value, with one suggested amendment of 200% rather than the 50% that was originally proposed; it remains to be seen if there is more discussion around the percentage threshold). HM Treasury intends to make public the details of any penalties imposed. A party subject to a penalty would be able to request a review of the decision by applying to a Minister in the first instance, and there would also be scope for judicial review of the Minister’s decision.

There is currently uncertainty as to precisely how OFSI would implement this new financial penalty regime were it to become law. OFSI does not itself have statutory investigative powers and will rely on cooperation with law enforcement agencies. The government has not yet issued guidance as to the particular factors that would be taken into account in deciding whether to pursue an administrative penalty or prosecution, or the precise methodology that would be used to calculate the amount of the administrative penalty. Indications are that individual cases would be considered following initial law enforcement enquiries and the person(s) suspected of breaching financial sanctions would be given an opportunity to make representations to OFSI concerning their alleged conduct.

Regardless of these uncertainties, it seems reasonable to conjecture that the lower standard of proof involved in deciding whether to pursue an administrative penalty means that there will be an increased risk of enforcement action being taken under the new regime than was the case with the present system that requires a criminal prosecution to be brought, in order for fines are to be imposed for breaches of financial sanctions. It follows that companies will need to adopt a high standard of internal controls and oversight, aimed at ensuring compliance with EU/UK financial sanctions. This will be particularly important for directors and other senior management given the increased exposure of individual officers to the risk of penalties being imposed against them personally, should the companies they manage be found to be in breach of sanctions. There will also be increased reputational risks as details of breaches will be published.

Deferred Prosecution Agreements

As a further enforcement tool, the Bill provides that where a prosecutor is convinced beyond a reasonable doubt that a company has breached a financial sanction, the company would be able to enter into a Deferred Prosecution Agreement (DPA) with that prosecutor. Under a DPA, the prosecutor would suspend proceedings against the company as long as it complies with specific terms. These could include, for example, paying back any profits made from the alleged breach, cooperating with further investigations into the offence, or implementing a compliance programme. If the company complies with the DPA for a certain period, the charges against it would be dropped.

DPAs are relatively recent additions to English law, and as yet it remains to be seen how prosecutors will use them generally, let alone in relation to the financial sanctions regime. However, the evidence so far suggests they are more likely to be available to companies which did not deliberately breach sanctions, and, on discovery of the breach, cooperate fully with the authorities (for more details, see our briefing “Serious Fraud Office enters into first deferred prosecution agreement in the UK”).

Serious Crime Prevention Orders

If a party is convicted of breaching a financial sanction, the Bill would allow the Court to impose a Serious Crime Prevention Order (SCPO). An SCPO allows law enforcement agencies to enforce targeted restrictions on a party in order to prevent further offences. Breaching an SCPO is a criminal offence, with a maximum penalty of five years. A party subject to an SCPO can appeal to a court to have it varied or removed.

The Government’s intention is to use SCPOs to provide regulatory oversight in the manner of the FCA to companies that are not FCA supervised. It envisages SCPOs that place specific requirements on companies to ensure they comply with financial sanctions following a breach.

The Bill has had its Second Reading in the House of Commons and was still at Report Stage on 26 April 2016. After Report Stage, the Bill goes to the Legislative Grand Committee and Third Reading of the Bill will take place on a date yet to be announced. It remains unclear at this stage precisely when the Bill would become law.