On 31 March 2016, the British Government announced the creation of the Office of Financial Sanctions Implementation (the “OFSI”), a new body within HM Treasury. The OFSI is described as 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.”
Historically in the UK, enforcement of sanctions legislation has been very limited. Prosecutions have been very rare indeed, and when they have taken place and were successful, penalties have been very light compared to in the U.S. This position contrasts drastically with the U.S., where prosecutions and plea bargains for breaches of sanctions legislation are a regular occurrence, and penalties are substantially greater than in the UK. The level of penalties seen in the U.S. clearly operate to have a deterrent effect. In the UK, the combination of very few prosecutions and low penalties means that while statute allows for significant penalties, in practice these are rarely enforced. While the final decision on prosecution of breaches of financial sanctions rests with theCPS and the Attorney General, OFSI will be responsible for monitoring compliance and receiving notifications of suspected breaches or circumvention of sanctions.
The creation of the OFSI could perhaps be seen as a recognition that the UK has lagged behind the U.S. on enforcement of sanctions for a long time. Indeed, some of the highest profile prosecutions in the U.S. have been of European banks in relation to activity which has taken place in London. Often this is because differences between European and U.S. sanctions legislation has meant that breaches of U.S. sanctions have taken place where there is no corresponding breach of EU sanctions legislation, but there is also a perception that the U.S. devotes significantly more resource to detection and investigation of sanctions breaches.
One of the first steps that the OFSI has taken is the publication of its Financial Sanctions: Guidance document. This sets out how sanctions operate, a guide to the prohibitions and the licensing regime and a section on compliance. The most important section here for our clients will be section 9 in Part B – Compliance for Business. This section contains useful guidance on managing sanctions compliance risk in relation to designated persons, and deals with a number of the more common issues which may come up for businesses as to what they can and cannot do in relation to designated persons.
However, despite recent criticism by the government of banks and their failure to facilitate business with Iran following the lifting of substantial parts of the EU sanctions regime against that country, there is little guidance aimed at banks in this area, or for businesses which are experiencing difficulty with the mechanics of conducting business with Iranian entities. It could be said that this falls outside the scope of the guidance document, but it is perhaps surprising that the OFSI did not take this opportunity to provide some clarity, for the benefit of both businesses and banks. One can only hope that this is high on the list of the OFSI’s priorities in terms of their next publications.
It remains to be seen whether the OFSI will manage to improve the UK’s relatively poor record on sanctions enforcement. To do so is likely to require a significant increase in resource and a shift in emphasis to focus on identifying and investigating sanctions breaches, and so far there is little evidence that this will happen. However, the OFSI is only a month old, with little information published to date, so it is difficult to predict whether its creation will mark a sea change in the way sanctions are enforced in the UK.