New monetary penalties for breaches of financial sanctions
The Office of Financial Sanctions Implementation (OFSI) was established on 1 April 2016. Exactly a year later, Part 8 of the Policing and Crime Act 2017 came into force, which creates powers for HM Treasury to impose monetary penalties for breaches of financial sanctions. OFSI will apply these powers.
Previously, breaches of sanctions could only be punished by criminal proceedings, which were subject to the requisite criminal standard of proof. However, OFSI now has the power to impose financial sanctions, for which it only needs to satisfy the lower civil standard of proof. OFSI has published general guidance and monetary penalties guidance on how it will use these powers.
Companies should review their sanctions compliance policies and procedures to ensure they stand up to scrutiny in light of the new powers now available to the OFSI. For more information see here.
Modernisation of European dual-use export control regime
The European Commission has for several years been involved in an extensive consultation about the European dual-use export control system. On 28 September 2016, the Commission published a proposal to amend the legislation underpinning the current European dual-use export control regime, the EU Dual-Use Regulation. The proposed changes aim to harmonise, simplify and introduce a new ‘human security’ dimension to the existing European dual-use export control regime. You can find our overview of the changes here.
The proposals are currently being decided upon by the European Council and the European Parliament. The European Council’s Working Party on Dual-Use Goods is meeting on a monthly basis to discuss the changes – you can follow progress on those discussions here. The European Parliament has confirmed that it is also preparing a position on the proposal.
Brexit: Export controls on dual-use items
The UK has developed a robust dual-use export control regime, which is independent but inextricably tied to the EU’s export control framework. The UK is also, independent of its membership of the EU, a member of a number of international conventions on human rights or non-proliferation (for example, the Wassenaar Arrangement). For these reasons, in the short term, Brexit is unlikely to raise any barriers to the flow of dual-use goods between the UK and other EU Member States and the types of controlled items and technology are expected to remain broadly similar.
In the medium/longer term, while any major departures from existing dual-use practices remain highly unlikely, at least for as long as the UK’s strategic foreign policy and defensive interests remain broadly similar to those of EU Members States, some level of divergence could creep in over time. For example, if the amendments to the EU Dual Use Regulation summarised above are not implemented before the UK formally leaves the EU, they will not apply automatically to the UK. These distinctions could be perpetuated by the UK’s shifting foreign policy interests, such as its desire to use the UK defence industry to strengthen the UK economy in light of Brexit and its developing relationship with the US administration.
Directors, officers and employees of businesses involved in exporting dual-use items from the UK can incur extensive levels of personal liability under the UK dual-use export control regime. For example, under the Customs and Excise Management Act 1979 (CEMA), exporting dual-use goods with “intent to evade” a restriction or prohibition is chargeable with a fine or a criminal sentence of up to ten years. Related, albeit less serious offences may be brought against individuals in their personal capacity on a “strict liability” basis, meaning that a person could incur civil liability even if they were unaware of the relevant export control.
CEMA does not distinguish between individuals on grounds of role or seniority within a business. As a result, any individual operating for, or on behalf of, a business can be held personally liable, provided that they are “concerned” in the export (or attempted export) of items in breach of relevant restrictions. This has potentially wide-reaching implications for employees at all levels of a business, although in practice the UK authorities focus their attention on senior management.
Despite these wide-ranging enforcement tools, the number of published personal prosecutions for export breaches in the UK remains relatively low, particularly when compared to equivalent figures in the US. However, individuals still remain key targets of aggressive and robust enforcement from the UK authorities: the Export Control Organisation; HMRC; the UK Border Force; and the Criminal Prosecution Service. The ECO has been keen to stress that there have been three high-profile prosecutions for UK export control offences in as many years. For example, in 2014 the Managing Director of Delta Pacific Manufacturing Limited was jailed for two and a half years, and fined £68,000, for exporting specialised alloy valves to Iran in breach of UK dual-use export control laws – the alloy valves were routed through Hong Kong and Azerbaijan in order to conceal their final destination and avoid UK export controls, in breach of section 68 (2) CEMA.
Managing regulatory risk to individuals
The very nature of ‘strict liability’ offences means that such prosecutions will not be defended except in very limited circumstances. ‘Intent to evade’ cases, by contrast, remain highly fact-specific and typically turn on the subjective question of what the defendant, in fact, knew. Nevertheless, businesses can minimise the risks of breaching the dual-use export control regime, and the related personal liability of those acting on its behalf, through robust and effective internal export control compliance policies and procedures. The ECO would expect these policies to include:
- a firm commitment to export control compliance from a senior stakeholder;
- clear export control compliance procedures (such as checklists to ensure that the correct licences are obtained); and
- a mechanism for delivering comprehensive training and guidance to relevant staff. For example, businesses should develop awareness among employees about identifying suspicious orders/end-use considerations at an early stage in the sales process.
Effective export control breach management procedures, including the early adoption of the right tactical strategy following a breach, are also crucial for minimising personal liability. This is particularly true in light of the increasing use by HMRC of compound penalties: a fine by which HMRC can offer businesses or individuals the chance to settle cases that would otherwise justify being referred to the CPS (generally in a bid to avoid an expensive and protracted [tax-payer funded] criminal investigation).
Dates for the diary
June 2017 – The UK House of Lords EU External Affairs Sub-Committee is undertaking an inquiry into UK sanctions policy after Brexit. The inquiry heard evidence during June.
23 June 2017 – The Foreign & Commonwealth Office has published a white paper consulting on the legal powers it will need to be able to continue imposing and implementing sanctions once the UK leaves the EU. Its focus is on the legal powers necessary to operate UK sanctions and not on the shape of UK sanctions policy in the future or other policy issues. The consultation closed on 23 June 2017.
July 2017 – The UK Government will publish the UK Strategic Export Controls Annual Report 2016 in July 2017. This report will cover the UK’s export control policy and practice during the period January 2016 to December 2016.
Mid 2017 – High Court expected to hand down its judgment following its judicial review into the legality of the UK Government’s continued approval of new licences for the sale of arms to Saudi Arabia (see our commentary on that review here). If the Government’s position is not supported, this could have major implications for the UK’s legal and regulatory export control framework, so we expect swift action from the Government in the event of an unfavourable decision.
Throughout 2017 – EU looks set to continue expanding its sanctions on North Korea in relation to its apparent violations of UN resolutions and the threat it poses to international peace and security.