In the Budget of 8 July 2015, HM Treasury announced the establishment this year of an Office of Financial Sanctions Implementation, with the aims of strengthening both the service to the private sector and UK’s implementation and enforcement of financial sanctions. At the same time, an intention to increase the penalties for non-compliance with sanctions was announced. This article considers what this means for firms, and for the UK’s view of the role of sanctions looking forward.
The EU and the US have generally coordinated the sanctions measures they impose, especially with the most politically sensitive programmes such as Iran, Russia/Ukraine, Syria and Burma, even if there remain some differences in the detail of their respective measures. However when it comes to enforcement, there has been a sharp contrast. While the US imposes seemingly ever-larger fines on banks (culminating in the $9.8bn fine for BNP Paribas) and other foreign companies for breaches of US sanctions, the Member States of the EU have been relatively passive when it comes to actually monitoring or enforcing EU financial sanctions compliance. On the trade sanctions, there have been some prosecutions for those caught exporting goods in breach of the export bans, but on the financial sanctions there has been virtually no enforcement.
HM Treasury seems to have decided that now is the time to rectify this imbalance:
- In the March Budget, it announced that it would review its structures for the implementation of financial sanctions, and that this review would “take into account lessons from structures in other countries, including the US Treasury Office of Foreign Assets Control”.
- In the July Budget, having completed this review, it has announced that:
- an Office for Financial Sanctions Implementation will be established this year; and
- penalties for financial sanctions breach will be increased.
What will change in practice?
The Treasury has had a financial sanctions unit for some years. But this new announcement seems intended to signal a substantive escalation in approach, rather than a mere administrative rebranding. Little detail has been offered so far, but the announcement contains both carrot and stick elements. It indicates that the new Office will:
- provide a high quality service to the private sector; but also
- ensure that sanctions are properly enforced.
In reality, delivering on these objectives will require resourcing, and it is not yet apparent whether further resources are being allocated to achieving them.
The penalties for breach of sanctions are relevant only if there is a credible likelihood of the sanctions being enforced. For firms, the increased penalties will make little difference – the potential level of fine for breach is already unlimited. But in cases where individual responsibility is established, an increase is not surprising - the current maximum sentence of two years for a breach of financial sanctions is unduly low compared to the 7 year maximum for a breach of the complementary trade restrictions.
How much changes in practice may depend on funding. A well-resourced OFSI could be a genuinely valuable facility for firms and their advisors, although without a commitment to additional funding (whether from central funds or from the proceeds of enforcement actions), this news may amount to nothing more than a change of name for an existing unit.
On the enforcement side, it would not be surprising if the newly-established OFSI were to look for some early opportunities to flex its muscles with some actual enforcement actions – with the financial, insurance and energy sectors being obvious targets for scrutiny.
Will firms welcome the news?
Firms should welcome the establishment of an office with an express mission to ensure that sanctions are properly understood. Many of the problems associated with sanctions compliance arise from the fact that the EU regulations are subject to frequent revisions and are inevitably imprecise, but with little guidance or other facility available to firms to enable them to understand how the restrictions are to be applied in practice. A new OFSI with a remit to provide a high quality service to the private sector should go some way to addressing this problem, and it is to be hoped that it may take the opportunity to be more proactive in publishing clarificatory notices where ambiguities in EU sanctions requirements are identified.
The emphasis on enforcement may be less welcome, although in practice may not add significantly to firms’ compliance burden since the substantive requirements will not change, and most firms rightly take a relatively risk-averse approach to sanctions requirements already. However there may be some change: it has not been uncommon to hear firms take, informally at least, a lower-risk approach to compliance with US obligations, where the enforcement risk is perceived as high, than with EU obligations where it is perceived as low. This announcement may prompt a re-evaluation of the perception of relative risk.
The USA, the UK and the rest of the EU
It is clear from the increasing deployment of financial sanctions against the likes of Iran, Russia/Ukraine and Syria, as well as in stemming the funding of terrorist groups, that they are becoming an increasingly favoured instrument of US and EU foreign policy. But their effectiveness depends on their effective enforcement. The US is rumoured to have been frustrated for some time that the EU’s inactivity on the enforcement of its financial sanctions was undermining the efforts that are made to achieve the high level of EU/US parity of the measures imposed. The news that the UK plans to become a more proactive enforcer of sanctions will no doubt be welcomed in Washington, and may have been prompted by such concerns.
The sanctions responsibilities in the EU are split between EU and Member State level. Sanctions laws are (with a few exceptions) made at EU level, with the 28 EU Member States negotiating and agreeing unanimously the law to be made. However responsibility for administering the sanctions (ie considering licence requests and other such discretionary elements) and for enforcing the sanctions, falls to the competent authority of each of the 28 Member States.
This announcement by HM Treasury seems to be calculated to send two messages; a message to the US that the UK intends to play a full enforcement role, but also a message to other Member States that the EU needs to up its game in terms of sanctions implementation and enforcement if it is to be taken seriously, which is necessary in order for the sanctions to bite.
What do firms need to do and how can Dechert assist?
Firms with robust compliance policies in place do not need to do anything except to continue to comply with the sanctions measures. Firms which do not have a sanctions compliance policy, or who feel that their policy may be inadequate, should take this as a reminder to correct the position before it is too late. Firms may also want to review their contractual and other arrangements to ensure that they understand, and are comfortable with, the level of legal risk and responsibility which falls on them through their existing contractual arrangements. Firms that have concerns as to past or on-going breaches may want to consider, with their legal advisers, how best to minimise their potential exposure in view of the increased risk of enforcement.