There will soon be a new regime in place in the UK for punishing individuals or businesses that breach financial sanctions. In March 2016 the Office of Financial Sanctions Implementation (OFSI) was formed, as part of the Treasury, to oversee the implementation and enforcement of domestic and international financial sanctions in the UK. Financial sanctions come in many forms and apply to a range of individuals, companies and entities. The most common include targeted asset freezes, directions to cease all business of a specified type and restrictions on a wide variety of financial markets and services. OFSI maintains a consolidated list of financial sanctions targets.
The Policing and Crime Act 2017 (the Act), which received Royal Assent on 31 January 2017, provides OFSI with enforcement powers to punish breaches of financial sanctions. Under the Act, OFSI has the power to impose a monetary penalty if it is satisfied on the balance of probabilities that a person (including a legal entity) has breached a financial sanction and that they knew or had reasonable cause to suspect that they were committing a breach. Part 8 of the Act (which deals with financial sanctions enforcement) is not yet in force as it requires a statutory instrument before commencement.
OFSI has published Draft guidance on the proposed new regime for monetary penalties. The draft provides an early insight into OFSI’s proposed priorities and methods.
What makes a breach serious enough for a monetary penalty?
The draft guidance indicates that OFSI intends to adopt a fact-specific approach to assessing whether a breach warrants the imposition of a penalty.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 severity of the conduct, knowledge and compliance standards in the sector, the number of breaches and whether the breaches have been self-reported. The guidance suggests that the ‘penalty threshold’ will be reached where:
- arrangements have been made to deliberately circumvent the law; or
- a person has not complied with an information request made by OFSI; or
- other factors make it a ‘serious case’.
The “permitted maximum” penalty is £1,000,000 or 50% of the estimated value of the funds or economic resources, whichever is greater. This cap is not fixed, the Treasury has the power to change it. OFSI intends to publish details of all monetary penalties in order to deter future non-compliance and promote increased awareness of good practice. OFSI has discretion not to impose a penalty including where it is not in the public interest or where “the offence arose from improper coercion or blackmail”.
The draft 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 ‘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 s7 Bribery Act 2010).
OFSI may also in certain circumstances impose a penalty for information breaches – ie a failure to provide information which has been specifically requested by OFSI.
Challenging a penalty
The subject of a penalty can make written representations (or, in some 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.
UK and non-UK companies in the frame
Although breaches with a “UK connection” would fall within OFSI’s enforcement regime, non-UK companies may also be caught. The consultation paper provides some examples of what would amount to a UK connection: a UK company working overseas, an international transaction clearing or transiting through the UK, action by a local subsidiary of a UK parent company, or financial products or insurance bought on UK markets but held or used overseas.
The creation of OFSI, and its new powers in the Act, suggest that the historically low level of financial sanctions enforcement in the UK is likely to change. The government has stated that OFSI will “work closely with law enforcement to help ensure that financial sanctions are properly understood, implemented and enforced”.
The OFSI regime will apply to conduct where action short of a criminal prosecution is appropriate. The Act also increases the maximum penalty for breaches of financial sanctions from two to seven years’ imprisonment and includes breaches of financial sanctions in the list of offences to which Deferred Prosecution Agreements and Serious Crime Prevention Orders apply.
Pressure is growing on companies to monitor ever more carefully who they do business with, and who does business on their behalf. The UK Criminal Finances Bill (which contains a new corporate criminal liability offence of failing to prevent the facilitation of tax evasion) and the UK government’s recent call for evidence on a new general corporate criminal offence of failing to prevent economic crime illustrate the trend towards the increasing regulation and criminalisation of business conduct.
To avoid problems arising companies need to have risk-based policies and procedures in place, and properly implemented and reviewed. If a problem does arise, the effect can sometimes be mitigated by early investigation (taking privilege issues into account), engagement with the authorities and remediation.