The Policing and Crime Bill (the Bill), currently making its way through Parliament, includes provisions that will represent, once the Bill is enacted, a step change in the penalties that can be imposed on UK entities and individuals for breaches of trade and financial sanctions.
Ahead of the Bill's entry into force as an Act of Parliament (the Act), expected in 2017, HM Treasury's Office of Financial Sanctions Implementation (OFSI) has published a consultation paper (the Consultation Paper) setting out draft guidance on the revisions to the legal framework for the enforcement of financial sanctions measures. Among other provisions, the Act will create a civil penalty regime for financial sanctions breaches, to be administered by OFSI. The Consultation Paper also sets out the consequent changes to OFSI's approach to compliance and enforcement.
This article outlines the main changes to OFSI's powers, its approach to compliance, and the proposed penalty scheme that would be adopted following the entry into force of the Act.
Revisions to OFSI's Powers
OFSI have confirmed that any 'UK connection' will bring a matter into its enforcement remit. A 'UK connection' includes: UK companies working overseas; UK based subsidiaries of UK companies; the transfer of funds through a UK bank or the UK banking system; and/or financial products or insurance bought on UK markets but held or used overseas.
Currently, only criminal penalties are possible, and so a penalty will only be imposed if the criminal standard of proof is met: it has to be demonstrated "beyond reasonable doubt" that an offence had occurred.
OFSI's revised powers will allow it to impose civil penalties, so the lower civil burden of proof will apply: OFSI will be allowed to impose a penalty where it is satisfied "on the balance of probabilities" that an offence has occurred. This is an easier hurdle for OFSI to overcome.
Revisions to OFSI's Approach to Compliance
OFSI have stated that they will take "a holistic approach to ensuring compliance with the regime", rather than simply responding to breaches. This approach will centre on the following key factors:
- Promote – promote compliance by increased communications that reach the 'right audience';
- Enable – make it easier to comply by providing guidance on compliance expectations/approaches;
- Respond – intervene to disrupt attempted breaches and tackle breaches effectively on a consistent, proportionate, transparent and effective basis;
- Change – the above approach should have the effect of changing behaviour and preventing non-compliance.
This approach will also be followed when assessing breaches and determining monetary penalties.
Penalties and Investigations
Mitigating and Aggravating Factors in a Case
OFSI have stated that they will not "rigidly follow process for its own sake", but will view all factors to achieve a proportionate/appropriate response. The Consultation Paper details a number of factors that will be considered mitigating or aggravating, including:
Mitigating Factors: The speed with which the cause of the breach is remedied; particular circumstances of the breach, such as mistake; prompt, accurate, voluntary and materially complete disclosure of the breach; and breaches by firms/individuals operating in unsophisticated sectors, who may not have as developed compliance systems as more regulated sectors.
Aggravating Factors: Deliberately arranging/structuring affairs to circumvent sanctions and/or to appear as compliant, whilst deliberately not complying; deliberate breaches; high value transactions; significant harm done to the sanction regime's objectives; breaches where the sanctions issue could have been easily uncovered through common due diligence and know "you’re your customer" procedures; breaches by regulated professionals; repeat behaviour; failures to comply with licencing conditions; dealing with OFSI in bad faith in any investigation; and failure to voluntarily disclose the breach.
In respect of voluntary disclosures, the Consultation Paper indicates that OFSI would expect all parties involved to make their own disclosure of the matter.
The revised penalty determination process has three parts: has the case met the penalty threshold; establishment of the baseline penalty; and OFSI's penalty recommendation.
To meet the penalty threshold, OFSI must be satisfied "on the balance of probabilities" that an offence has occurred, and that one of four further factors applies:
- Funds/economic resources have been made available directly to a designated person;
- There is evidence of circumvention;
- OFSI considers the case to be "serious" using the previous case factors; or
- A person has not complied with requirements to provide information.
The baseline penalty will be calculated by applying a statutory maximum penalty (£1m, or 50% of the value of the transaction, whichever is the greater) and making deductions on the basis of what the relevant OFSI case handler considers to be reasonable and proportionate.
The guidance does not reveal whether OFSI will penalise each individual "transaction" (in common with the US Department of the Treasury's Office of Foreign Assets Control (OFAC)), or whether OFSI will aggregate multiple related "transactions" and penalise them as a single offence.
A penalty 'matrix' will then be applied and further deductions will be made for voluntary disclosures and the adequacy and promptness of such disclosures.
Where a monetary penalty not is the appropriate recourse (or in addition to a monetary penalty), OFSI may also:
- Issue enforcement correspondence, requesting better compliance practices;
- Refer regulated individuals/entities to their regulator; and
- Refer the case for criminal investigation/prosecution.
Comment & Responding to the Consultation
The revisions proposed in the Consultation Paper suggest that OFSI is seeking to adopt a more transparent and effective monetary penalty regime. Much of the proposed guidance suggests that OFSI intends to adopt a similar approach to that taken by OFAC. It remains to be seen whether this new approach will result in penalties on a similar scale as those imposed for sanctions violations in the US.
The text of the Consultation Paper as published is drafted as if the Bill were enacted. HM Treasury has requested responses to various questions posed throughout the guidance, as well as practical examples of how the guidance may "help or hinder" the enforcement of financial sanctions. A response to any submissions received will be published ahead of any final guidance. The consultation period is open to midnight on 26 January 2017.