The consequences of breaching sanctions in the UK are due to increase in April. Prominent among the new measures is the power for the Office of Financial Sanctions Implementation (OFSI) to impose a monetary penalty and to do so to a civil evidential standard. OFSI has published draft Guidance, indicating how it will use this power and is currently consulting on it.
The asset management industry is likely to be among the first to feel the effects of this new power. In particular, asset managers, insurers, and others who have come lower than banks in terms of regulatory attention until now, are likely to come under particular scrutiny from OFSI and should now take particular care to ensure that their sanctions compliance procedures are robust; it is to become easier for OFSI to impose monetary penalties, which may be as high as 50% of the offending transaction or £1m, whichever is higher.
OFSI, established early in 2016, will get a new sanctions enforcement tool under the Policing and Crime Bill which looks set to become law in spring 2017 (see our OnPoint of March 2016). OFSI will have the power to impose substantial monetary penalties for breaches of sanctions. Not only will OFSI be empowered to impose penalties directly (rather than having to bring a prosecution in court as currently required), it will only have to be satisfied of a breach of sanctions to the civil law standard of proof - the ‘balance of probabilities’ standard (rather than the more onerous criminal law standard of proof ‘beyond reasonable doubt’). This is a very significant change in sanctions enforcement, and is likely to see serious breaches of financial sanctions penalised (which has not happened to date in the UK). Businesses need to be aware of the change.
In advance of this new power, OFSI has released draft Guidance, setting out the factors that it will consider when deciding whether or not to impose a monetary penalty, and the size of any penalty. The draft Guidance, while not yet in final form, provides a useful insight into the approach OFSI intends to take towards the exercise of its new power.
The new monetary penalty power, and the draft Guidance on how it will be applied, do not affect what actions constitute a breach of sanctions. That is set out in relevant EU Regulations and UK Orders, and previous OFSI Guidance clarifies some potential uncertainties. The new power does, however, change the way that OFSI may react where it assesses that a breach has occurred, with implications for business who do not have robust sanctions compliance procedures in place.
What Will OFSI Do Where a Breach of Sanctions Is Identified?
The power to impose a monetary penalty arises where OFSI is satisfied on the balance of probabilities that:
(a) a person/entity has breached a sanctions prohibition; and(b) the person/entity knew, or had reasonable cause to suspect, that he/she was in breach of the prohibition.
Where a breach has occurred, but the mental element (knowledge or reasonable cause to suspect) is not made out, OFSI cannot issue a monetary penalty but may “take other action short of a penalty that would respond effectively to the matter” – although it is difficult to see what this would be beyond urging better compliance practices.
Where both the breach and the requisite mental element are, in OFSI’s view, established, the Guidance clarifies that with some serious breaches OFSI will always either impose a monetary penalty or refer the matter to the NCA for criminal investigation; while in most cases, OFSI will decide on a proportionate response (which may or may not be a monetary penalty). The Guidance gives some illustrations of both aggravating and mitigating “case factors”, which will play into the decision of whether to issue a monetary penalty.
Aggravating and Mitigating Case Factors
The Guidance identifies these case factors as relevant to its assessment of the severity of a breach (note that this list is illustrative, not exhaustive):
- Direct provision of funds or economic resources to a designated person: where funds or economic resources are made directly available to a person or entity named on the Consolidated List of sanctions targets, a monetary penalty is likely;
- Circumvention of sanctions: described in the draft Guidance as deliberately arranging or structuring affairs to avoid triggering alerts or seeming to comply while deliberately not complying3. Deliberate circumvention will normally be referred to the NCA for criminal prosecution – with a monetary penalty as a likely fallback if NCA does not seek criminal prosecution;
- Value of breach;
- Risk of harm done to the sanctions regime’s objectives: a breach which leads to or facilitates the very outcome the sanctions existed to prevent would be more serious than a more ancillary breach;
- Knowledge and compliance standards in the sector: OFSI recognises and expects that certain sectors have a more developed knowledge of compliance systems and processes than others. Breaches by regulated professionals or entities will be considered more severe than breaches by those less likely to be familiar with sanctions compliance requirements;
- Motivation: A deliberate breach of sanctions will be treated more seriously than a non-deliberate breach;
- Repeated, persistent or extended breaches: recurrence of breach will increase the likelihood of a monetary penalty;
- Reporting breaches to OFSI: OFSI values voluntary cooperation. Accordingly a voluntary disclosure of a sanctions breach, once discovered, is a significant mitigating factor (and conversely a failure to report is an aggravating factor), but the disclosure must be materially complete and timely.
- Public interest, strategic priority and future compliance effect: OFSI may, on grounds of government strategy or public interest, decide not to take action even where a breach of financial sanctions is identified, or may take more severe action where the value of the breach is modest, where an important point of principle is raised.
The draft Guidance indicates that OFSI will only issue a monetary penalty if:
- the statutory test is met authorising a monetary penalty; and
- the breach:
- the case is considered serious by reference to the presence of aggravating factors (note that any case which involves funds or resources being made available directly to a designated person/entity, or in which there is evidence of deliberate circumvention will be considered serious); or
- the person does not cooperate with a requirement to provide information.
Size of a Monetary Penalty
We are unlikely to see penalties issued by OFSI to rival those issued by OFAC (the US sanctions authority) in recent years.
However the monetary penalty may nonetheless be very substantial: the statutory maximum is the higher of £1m and 50% of the value of the breach. Subject to that limit, OFSI will seek to identify a penalty which is “reasonable and proportionate”. In doing so, it will be guided by the case factors above. In particular, the draft Guidance emphasises the seriousness of the case, the value of the breach and the extent of any voluntary disclosure.
The draft Guidance gives some indication as to the percentage reduction that will be made for voluntary disclosure of the sanctions breach (up to a potential 50% reduction from the “reasonable and proportionate” penalty).
Procedure for Imposing a Penalty
Once OFSI has reached a decision to impose a penalty and on the proposed amount, the person/entity is to be given 28 days to make representations to OFSI about either the decision to impose a penalty or the quantum, following which a final assessment will be issued.
A person/entity can request a Ministerial review of OFSI’s final assessment. The Minister must then review it, and may either uphold the OFSI decision, amend the amount or cancel the decision in whole. This review must be done by the Minister personally. The Minister’s decision can also be appealed to the court.
In all cases where a penalty is imposed, OFSI intends to publish a summary of the case, including the identity of the offending person/entity. OFSI also reserves the right to actively promote through media relations the imposition of a monetary penalty, at their discretion.
Actions for Firms
Firms which already have good compliances procedures do not need to take any action in response to these development, save to maintain these procedures. Firms which may not have good sanctions compliance procedures in place should take this as a prompt to review and strengthen those procedures now – the introduction of this new power significantly increases the (previously low) likelihood that OFSI would penalise sanctions breaches of which it became aware.
Responding to the Consultation
The consultation closes on 26 January 2017. It is open to firms to respond to this consultation directly.