HM Treasury has significantly expanded the obligation on businesses to report sanctions breaches. From 8 August 2017, a wide range of professionals and businesses will be required to notify OFSI1, the UK sanctions authority, of suspected sanctions breaches by their clients or customers, or if they suspect that a person is subject to an asset freeze. The Treasury’s new Regulations2effective from 8 August 2017, will treat any failure to notify OFSI as required as a criminal offence. Businesses need to be aware of the obligations on them and their staff, and to adjust their procedures to ensure compliance.
Already, regulated financial services firms are required to notify OFSI if they know, or have reasonable cause to suspect, either a breach of sanctions, or that a person is subject to an asset freeze. These new Regulations expand the same obligation to other “relevant businesses and professions”, which includes:
- dealers in precious metals or stones;
- estate agents;
- external accountants;
- law firms and legal professionals;
- tax advisers; and
- trust or company services providers operating in the UK.
The effect is that sanction notification obligations apply to essentially the same categories of businesses and persons who are “relevant persons” under the Money Laundering Regulations3.
This expanded domestic law requirement to notify, and OFSI’s corresponding ability to penalise and/or initiate prosecutions for failure to do so, puts increased pressure on the businesses and professionals in question to ensure that their sanctions compliance policies are adequate.
Reasonable Cause to Suspect – Procedure Needed
Where a person in a relevant business or profession knows of a sanctions breach, or knows that a customer is subject to an asset freeze, compliance with the notification requirement is straightforward. However the obligation applies also where a relevant businesses or professional has reasonable cause to suspect a breach or to suspect that a person is subject to an asset freeze.
The categories of business and profession affected by the new Regulations should have anti-money-laundering (AML) compliance policies and procedures already in place. They must now complement these with additional procedures to ensure that they can comply with this new sanctions notification requirement as well. In particular:
- KYC (know your client) processes will need to be adjusted to gather information on ownership andcontrol (at present, many firms’ processes focus only on ownership);
- policies will need to identify the red flags which may suggest possible sanctions breaches;
- staff will need to be trained to spot fact patterns that should put them on enquiry as to sanctions breaches; and
- a Sanctions Reporting Officer (who may be the existing MLRO) will need to be appointed and their duties established.
Notification must be made “as soon as practicable”. However OFSI has recognised in the context of self-disclosure that “it is reasonable … to take some time to assess the nature and extent [of a possible breach], or seek legal advice”. Dechert can advise on balancing the obligation to report as soon as practicable with the need to review and verify the information on which any suspicion is based before moving to file a report.
Privilege, Investigations and Due Diligence
The notification requirement in UK sanctions regulations contains a privilege carve-out: it does not require a legal professional to disclose privileged information in his/her possession. Generally, while documents created for the purpose of obtaining legal advice or conducting litigation may be privileged, underlying documents seen by a lawyer but initially created for another purpose may not be. Therefore documents seen by lawyers during due diligence as part of a corporate or commercial transaction, or during fact-gathering exercises that form part of litigation or a regulatory investigation may not be covered by privilege. Indications in such documentation of sanctions breaches could fall within the sanctions notification obligation (subject to limitation).