The UK financial sanctions enforcer, the Office of Financial Sanctions Implementation (OFSI), announced on 28 October a fine of a UK subsidiary of an international tier 1 telecoms carrier (the Company) for indirectly facilitating international telephone calls to SyriaTel, a designated entity under EU financial sanctions on Syria, implemented by the Syria (European Union Financial Sanctions) Regulations 2012.
OFSI’s announcement does not contain much detailed information to provide context to the decision to impose a penalty. However it is clear that OFSI found that:
- indirectly facilitating the calls meant that that the Company was “repeatedly making … economic resources available indirectly to the designated entity over an extended period of time”;
- the Company had knowledge or reasonable cause to suspect it was breaching the sanctions; and
- the Company had not self-reported the breach.
The Company was fined just over £146,000 (reduced on appeal from £300,000).
Very broad definition of economic resources
The OFSI Report of Penalty states that economic resources include many tangible and intangible assets and can be provided directly or indirectly. They can, as this penalty makes clear, include indirectly facilitating international calls to a designated entity.
The broad definition of economic resources should be of interest to all communications service providers. Although the facts published by the OFSI are brief, telecom carriers may not have considered facilitating calls to be the focus of the UK’s sanctions regime, nor to fall within the definition of “making economic resources available”. It highlights the importance of companies having strong sanctions screening policies and procedures in place to ensure that they do not do any unlawful business with or for persons targeted by sanctions.
When will a breach lead to a fine?
The permitted maximum penalty that OFSI can impose is £1,000,000 or 50% of the estimated value of the funds or economic resources, whichever is greater. OFSI guidance indicates that it adopts a fact-specific approach to assessing whether a breach warrants the imposition of a penalty. It will look at a broad range of factors to determine the seriousness of the breach, including the value of the breach, knowledge of sanctions and compliance systems, the number of breaches, whether the breaches have been self-reported and harm or risk of harm to the sanction regime’s objectives. OFSI will also consider the conduct of individuals involved. The guidance suggests that the “penalty threshold” will be reached where:
the breach involves direct provision of funds to a designated person;
arrangements have been made to deliberately circumvent the law;
a person has not complied with an information request made by OFSI; or
a monetary penalty is deemed to be appropriate and proportionate.
This is only the third penalty imposed by OFSI, albeit the largest. The first was on a bank (£5000), and the second on a foreign exchange provider (£10,000).
Self-reporting / proceeds of crime disclosures
The OFSI guidance suggests there will be incentives for a party in breach of sanctions to self-report to OFSI. In “serious” cases this could result in a reduction of 50% of the baseline penalty. In the “most serious” cases the reduction could be 30%. This is in line with a legislative policy of encouraging companies to self-report (eg as with the UK’s regime for deferred prosecution agreements). Neither the Company nor the aforementioned foreign exchange provider self-reported their sanctions breaches. The bank did self-report, and received a 50% discount on the fine for disclosure and cooperation.
A carrier that learns of a potential sanctions breach will need to consider whether to self-report and if so, who to. This will mean considering which sanctions regimes are involved (eg US, EU or UK) and also whether there are any reporting requirements under proceeds of crime legislation. For example, the money earned from a contract that breaches financial sanctions may be proceeds of crime, with potential money laundering liability for the carrier. See here for more information on the UK anti-money laundering regime for companies outside the financial services sector.
UK and non-UK companies in the frame
Breaches with a “UK nexus” would fall within OFSI’s enforcement regime, so both UK and non-UK companies may be caught. In this case, it was the UK operating subsidiary of a global telecoms carrier. OFSI’s guidance provides some examples of what would amount to a UK nexus: a UK company working overseas, transactions using clearing services in the UK, action by a local subsidiary of a UK company (depending on governance) and action taking place overseas but directed from within the UK.
Challenging a penalty
The subject of a penalty can make written representations (or, in rare cases, oral representations) within 28 days from the date of an OFSI letter giving notice of the penalty. There is a right of appeal to the Economic Secretary to the Treasury, and a final right of appeal to the Upper Tribunal. This most recent fine is the first time an OFSI penalty has been appealed to the Minister, the Economic Secretary to the Treasury, who reduced it from £300,000 to around £146,000, on the basis of new evidence provided by the carrier on the value of the breaches. This was despite OFSI guidance stating that new evidence will not normally be considered.
OFSI - background
OFSI was created in 2016, as part of HM Treasury, to oversee the implementation and enforcement of domestic and international financial sanctions in the UK. The Policing and Crime Act 2017 (the Act) provides HMT with enforcement powers to punish breaches of financial sanctions, including the power to impose a monetary penalty. OFSI maintains a consolidated list of financial sanctions targets.
The creation of OFSI, and the powers in the Act, suggested that the historically low level of financial sanctions enforcement in the UK was likely to change. It has not been a quick change, with only three penalties, all being imposed this year, and at a relatively low level. The US government (through the Office of Foreign Assets Control (OFAC)) has a much more active sanctions enforcement regime. However, companies cannot be complacent. To avoid problems arising, companies need to have risk-based policies and procedures in place, which are properly implemented and reviewed, and consider the less-obvious ways their business may “make economic resources available” in doing business with sanctioned entities. If a problem does arise, the effect can sometimes be mitigated by early investigation (taking legal privilege issues into account), engagement with the authorities and remediation.
On Brexit, depending on the terms of the UK’s departure, those advising on sanctions compliance may need to be able to navigate around UN sanctions, EU sanctions laws on-shored and amended under the European Union (Withdrawal) Act 2018 and new UK sanctions made using the powers in the Sanctions and Anti-Money Laundering Act 2018. A significant number of new pieces of legislation related to the UK’s financial sanctions regimes post-Brexit have already been laid before the UK’s Parliament. The 19 October Political Declaration envisages that the UK and EU should, whilst pursuing independent sanctions regimes driven by their respective foreign policies, consult and cooperate, with the possibility of adopting sanctions that are “mutually reinforcing”.