Financial sanctions have featured once again in the headlines over recent weeks in connection with the "Panama Papers". Although much of the media reporting has, to date, focused on tax avoidance, authorities are likely to be similarly focused on potential sanction breaches. The establishment of The Office of Financial Sanctions Implementation (OFSI), a new enforcement body within HM Treasury (HMT), which began operating at the end of March, is then appropriately timed.
Monitoring Compliance with Financial Sanctions
The creation of OFSI was first mentioned in the government's Summer Budget 2015 and on 31 March 2016, HMT announced that OFSI has now been officially established to provide a "high-quality service to the private sector, working closely with law enforcement to help ensure that financial sanctions are properly understood, implemented and enforced".
George Osborne, Chancellor of the Exchequer, underlined the importance of financial sanctions to foreign policy and national security and said that: "OFSI will be a centre of excellence for financial sanctions, raising awareness and providing clear guidance to promote compliance with financial sanctions, providing a professional service to the public and industry, and working closely with other parts of government to ensure that sanctions breaches are rapidly detected and effectively addressed."
The prospect of better guidance to entities in complying with financial sanctions, most of which derive from EU law and have in the past carried with them interpretational uncertainty, will be welcomed by businesses. In its latest guidance note of 5 April 2016 (https://www.gov.uk/ government/uploads/system/uploads/attachment_
data/file/513838/OFSI_Financial_Sanctions_- _Guidance_-_April_2016_Final.pdf), OFSI noted that it will "work closely with the EU Commission and other member states in implementing sanctions and developing EU guidance in this area." The guidance note itself provides a roadmap on the approach OFSI will take to issuing licences and considering compliance, breaking down the sanctions framework in Part A and, in Part B, providing practical examples.
Enforcement actions for breaches of Financial Sanctions
Changes are also afoot to expand the tools available to HMT to address breaches of financial sanctions, namely by the proposed Policing and Crime Bill, currently at committee stage ("the Bill"). The Bill is to include an expanded range of penalties, which is thought to draw on the powers of the US Office of Foreign Assets Control (OFAC) within the US Department of Treasury, as foreshadowed in last year's pre-election Budget, in which the government said that it planned to take lessons from other structures, such as OFAC.
In addition to harmonising existing criminal penalties by increasing the maximum criminal penalty from two to seven years' imprisonment, the Bill will introduce civil sanctions where criminal prosecution is not considered to be in the public interest. The civil burden of proof will apply, with OFSI having only to be satisfied that, on the balance of probabilities, a breach has been committed or that a person knew or had reasonable cause to suspect that they were in breach. The Bill provides for monetary penalties up to whichever is the greater of £1 million or 50% of the estimated value of the funds or resources. The details of penalties imposed will be published by OFSI as and when it considers appropriate. The offences for which a Serious Crime Prevention Order may be made (currently outlined in the Serious Crime Act 2007) will also be expanded to include financial sanctions breaches.
The Deferred Prosecution Regime contained within the Crime and Courts Act 2013 will also be extended to include financial sanctions offences. However, Deferred Prosecution Agreements are not yet available to HMT under the current provisions of Schedule 17 of the Crime and Courts Act 2013 (although the door remains open for wider deployment should the Secretary of State make such an order). With the availability of monetary penalties, however, it is possible that civil actions will be the favoured alternative in any case.
Financial sanctions regulation is likely to be policed in a more aggressive fashion, with the establishment of OFSI and the remedies available to it, making the risks of getting it wrong far greater than before. Entities may consider taking time now to review their procedures against OFSI's latest guidance.