Part 8 of the Policing and Crime Act 2017 is now in force. It brings a number of substantial changes to the UK's financial sanctions enforcement regime. The most significant change is that, for the first time, the UK’s Office of Financial Sanctions Implementation (OFSI) has direct powers to impose substantial civil financial penalties for infringements of UK, EU or UN financial sanctions.
The enforcement regime
OFSI's enforcement regime is broad in scope. It covers individuals, UK companies, and any foreign company with a 'UK connection'. This is widely defined and includes UK companies working overseas, international transactions clearing or transiting via the UK, actions by a local subsidiary of a UK company, or financial products or insurance bought on UK markets but held or used overseas.
The new enforcement model seeks to take a holistic approach to compliance, rather than just dealing with breaches. The key aims are to:
- Promote compliance by publishing details of penalties imposed.
- Enable compliance with an easier and more cost-effective system.
- Respond by intervening to prevent attempted breaches and tackling actual breaches consistently, proportionately, transparently and effectively.
- Change behaviour to prevent future non-compliance.
OFSI will consider a wide range of factors in its enforcement decisions. These include the seriousness of the breach, in particular whether the breach was deliberate, its value and risk of harm to the sanction regime’s objectives, any repeated or continuing breaches, or prompt voluntary reporting.
The new civil penalty powers
Previously, only criminal penalties were available in respect of breaches of financial sanctions. This meant that a fine could only be imposed if it was proven to the criminal standard of proof, i.e. beyond reasonable doubt, that a breach had occurred. OFSI is now able to impose penalties directly, rather than bringing a prosecution through the courts. In doing so, it need only meet the lower civil standard of proof i.e. satisfaction that, on the balance of probabilities, a breach has occurred.
Penalties under the new regime look likely to be quite substantial. The statutory maximum penalty is the greater of £1 million, or 50% of the value of the breach. The penalty imposed will be any amount up to this maximum, depending on what is 'reasonable and proportionate' to the situation, taking into account the seriousness of the breach. The final penalty figure can also be discounted by up to 50% following voluntary disclosure of breaches.
OFSI will only impose a penalty if it is satisfied 'on the balance of probabilities' both that a breach has occurred, and also that the person committing it knew or had reasonable cause to suspect that they were committing a breach. OFSI must also believe that a monetary penalty is 'appropriate and proportionate'. This will automatically be the case in any situation involving funds being made available directly to a designated person, arrangements deliberately intended to circumvent the law, or non-compliance with a requirement to provide information.
If OFSI chooses not to impose a fine, it could instead issue correspondence requiring better compliance practices, refer the breach to the relevant professional body or regulator, or refer the case for criminal investigation.
Changes to criminal penalties
In addition to the new civil penalty regime, the maximum penalty for criminal sentences for sanctions violations has been increased from 3 to 12 months on summary conviction, and from 2 to 7 years on indictment.
UN sanctions listings
All new financial sanctions listings made by UN sanctions committees will now have direct effect in the UK as soon as they are made. To support this change, OFSI will add these listings to the consolidated list within one working day. The aim of this is to allow the UK to implement its UN obligations more quickly, and to reduce the risk of asset flight.
Deferred Prosecution Agreements and Serious Crime Prevention Orders
Financial Sanctions have for the first time been brought into the scope of Deferred Prosecution Agreements (DPAs) and Serious Crime Prevention Orders (SCPOs).
A DPA is an agreement which can be entered into between businesses and prosecutors regarding potential violations. DPAs provide for a suspension of enforcement by the CPS and/or the SFO in exchange for certain conditions, such as paying compensation or co-operating with future investigation and/or prosecutions.
A SCPO is a civil injunction issued by a court that restrains a person's involvement in "serious crime", which for these purposes now includes sanctions breaches.
What does this mean for businesses?
These changes, in particular the lower burden of proof, are expected to result in an overall increase in enforcement action taken and penalties issued.
Although these changes do not alter the substance of the sanctions regimes companies already have to comply with, we recommend that companies review their compliance procedures and risk assessments and consider whether these can be made more robust. Having systems in place to ensure prompt, voluntary reporting of any breaches is vital.
To avoid breaching financial sanctions we recommend that you:
- Monitor the list maintained by OFSI of all ‘designated persons’ to whom financial sanctions apply.
- Carry out thorough due diligence on any partners, joint venture parties or acquisition targets, particularly to ensure you know exactly who is the beneficial owner of any asset.
- Be aware of the groups and regimes currently being targeted by OFSI so that any potential links to these raise red flags for extra due diligence.
- Look out for any warning signs that directors or corporate entities may be 'fronts' for persons on the sanctions list.
- Respond promptly to any request for information from OFSI