On 8 July 2015, the UK Government further announced its plan to establish a new office to take on the role of sanctions enforcement, the Office of Financial Sanctions Implementation (“OFSI”).1 While OFSI is set to be established already by April 2016, much remains to be seen. The UK has pledged to increase enforcement actions and penalties in the area of financial sanctions, also by taking into account lessons from the US Treasury Office of Foreign Assets Control (“OFAC”).2 Against the backdrop of the current UK enforcement of financial sanctions (I.) this note considers the new role OFSI is set to fullfil to possibly become a “UK-OFAC” (II.). We will then outline the likely impact on companies trading in the UK (III.). I. A History of UK Sanctions Enforcement Sanctions in the EU and the UK are mainly based on decisions by the EU Council (either by way of an autonomous decision or to implement UN Security Council resolutions) with individual member states tasked with enforcement. The purpose of financial sanctions by way of asset freezes and prohibitions to make economic resources available to sanctioned persons is to prohibit commercial dealings with specific individuals and entities. Over the past eight years, the number of entities designated under EU sanctions has almost doubled to around 950 companies on top of approximately 1,450 designated individuals. This reflects the increased focus on sanctions enforcement in the EU and the UK driven by the Arab Spring and, more recently, the conflicts in Ukraine (Crimea) and Syria. In the UK, the role of sanctions enforcement began as the responsibility of the Financial Sanctions Unit of the Bank of England. It was transferred in 2007 to the then newly created Asset Freezing Unit of HM Treasury. The focus of the Asset Freezing Unit was on the prevention of the financing of terrorism and terrorist acts. The Asset Freezing Unit was designed to have “increased expertise and operational focus” 3 in relation to sanctions enforcement. However, the surge in financial sanctions was not matched by any noticable uptake in enforcement in the UK or, indeed, elsewhere in the EU4 . By contrast to a (slightly) more active enforcement of trade 1 HM Treasury, The Summer Budget 2015, 8 July 2015, available at https://www.gov.uk/government/uploads/system/uploads/attachment_data/ file/443232/50325_Summer_Budget_15_Web_Accessible.pdf. 2 HM Treasury, The Summer Budget 2015, 8 July 2015, page 33. 3 http://www.fca.org.uk/static/fca/documents/fsa-sanctions-final-report.pdf. 4 Germany fundamentally reformed its export control laws in 2013, in particular to modernize the penalties regime. However, this reform did not bring any meaningful institutional changes, and to date has not led to any noticiable update in enforcment. For further information, see “2013 Reform of Germany’s Export Control Act,” available at http://www.friedfrank.com/index.cfm?pageID=25&itemID=6727. Fried Frank International Trade and Investment Alert™ No. 15/09/08 09/08/15 2 sanctions5 , the most recent enforcement action of note in the area of financial sanctions in the UK dates back to August 2010, when the precursor to the Financial Conduct Authority (i.e., the Financial Services Authority (“FSA”)) fined Royal Bank of Scotland Group £5.6 million for having failed to have adequate systems and controls in place to prevent breaches of UK financial sanctions. 6 Indeed, one could argue that compliance with financial sanctions in the EU and the UK has largely been the realm of foreign (i.e., US) or “private” (i.e., through the financial sector) enforcement. UK financial institutions mainly had to fear to date the long enforcement arm of OFAC, as the US watchdog did not shy away from prosecuting foreign banks (and indeed levied record fines on EU and UK banks, as outlined below). As a result, the financial sector enhanced its trade compliance efforts substantially over recent years. This gradually created a knock-on effect for other UK industry sectors as banks frequently require representations by their creditors and counterparties that they equally comply with financial sanctions. II. The New Financial Sanctions Enforcement Body in the UK OFSI is set to be established by April 2016.7 This institutional change, coupled with anticipated legislative amendments at the heart of UK financial sanctions enforcement, will likely kick-start more heavy-handed UK sanctions enforcement. To date, UK fines are imposed by the Courts for breach of individual sanctions regulations. Existing legislation allows the UK Courts to impose prison sentences of up to two years and/or unlimited fines for breaches of financial sanctions. If an offence is “committed with the consent or connivance” of any director, manager, or other officer at a company8 , that individual may also face a prison sentence or a director disqualification order9 , in addition to unlimited fines. Further, the company in question may face unlimited fines, reputational damage, clouded relations with the authorities, and adverse consequences on its ability to obtain credit from its banks. At present, little guidance has been put forward outlining how OFSI will operate in detail. To date, there are no specific fining guidelines providing clarity in relation to how any trade fines imposed are calculated. If the UK government is serious about upping the ante on enforcment of financial sanctions, one would expect that OFSI will be given powers not only to investigate, but also to prosecute and penalize corporate infringments, e.g., comparable to the Competition and Markets Authority (“CMA”). Yet, the Government’s plan is seemingly to establish OFSI as a regulator that will be “working closely with law enforcement to help ensure that financial sanctions are properly understood, implemented and enforced” 10. This would suggest that OFSI will not be granted enforcement powers. In any event, the Government has already clarified that it intends to adopt legislation that is set “to increase the penalties for non-compliance for financial sanctions” 11 . In terms of fine levels, UK companies 5 A recent enforcement example is that of UK businessman Gary Summerskill, who was jailed for two and a half years (http://www.mynewsdesk.com/uk/hmrevenue-customs-hmrc/pressreleases/illegal-exporter-ordered-to-repay-criminal-profit-1087729) in March 2014 for having exported £3 million worth of alloy valves that were subject to an export ban to Iran. Mr. Summerskill had been aware of the final destination of the equipment, but proceeded with three shipments to Iran via Hong Kong and Azerbaijan (in an attempt to conceal the final destination). Mr. Summerskill’s company, Delta Pacific Manufacturing, was also fined £1.14 million. 6 FSA fines Royal Bank of Scotland Group £5.6m for UK sanctions controls failings, available at http://www.fsa.gov.uk/library/communication/pr/ 2010/130.shtml. 7 HM Treasury, The Summer Budget 2015, 8 July 2015, page 33. 8 See, e.g., section 20(1)(a), The Iran (European Union Financial Sanctions) Regulations 2012, available at http://www.legislation.gov.uk/uksi /2012/925/contents/made. 9 See e.g. section 13 Company Directors Disqualification Act 1986, available at http://www.legislation.gov.uk/ukpga/1986/46/contents. 10 See https://www.gov.uk/government/publications/summer-budget-2015/summer-budget-2015 (emphasis added). 11 Ibid (emphasis added). Fried Frank International Trade and Investment Alert™ No. 15/09/08 09/08/15 3 should consider the Government’s reference to OFAC’s enforcement history12 as a stark warning. In recent years, OFAC has been setting records for fines imposed on companies found to have breached US sanctions rules. Many of those fines were levied against EU/UK-headquartered corporate entities, in particular banks. The largest such fine to date was imposed by the US authorities on Frenchheadquartered BNP Paribas, amounting to a staggering $9.8 billion fine.13 Other noteworthy fines imposed by the US on EU-based companies are set out in the table below. COMPANY REASON TOTAL FINES (million US$) Credit Suisse14 Processing thousands of transactions over a 20-year period that concealed the involvement of sanctioned parties 1,070 Lloyds15 Deleting or manipulating information about US sanctioned parties from wire transfers since the mid 1990’s 567 Standard Chartered16 Deleting or omitting references to US sanctioned locations or entities from payment messages 359 Barclays17 Deleting or omitting references to US sanctioned locations or entities from payment messages 474 ING18 Deleting or omitting references to US sanctioned locations or entities from payment messages, in particular Cuba 1,230 HSBC19 Routing funds through US banks for or on behalf of sanctioned parties 750 There are also areas where one would expect the UK government to take a slightly different approach compared to OFAC’s framework. E.g., OFSI will likely be acting under stricter oversight and judicial review by both EU and UK courts. The former would be competent to review the validity of any designations under EU sanctions, while the latter would adjudicate on the legality of the penalties. This would contrast to the US system, where OFAC operates with more limited judicial oversight. III. The Impact of the Changes to UK Sanctions Enforcement In its Summer Budget in July 2015, the UK Government confirmed that it “has reviewed the structures within HM Treasury for the implementation of financial sanctions and its work with the law enforcement 12 HM Treasury, Budget 2015, 18 March 2015 availabe at https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/416330/ 47881_Budget_2015_Web_Accessible.pdf and The Summer Budget 2015, 8 July 2015. 13 See http://www.treasury.gov/press-center/press-releases/Pages/jl2447.aspx . 14 See http://www.treasury.gov/press-center/press-releases/Pages/tg452.aspx. 15 See http://www.treasury.gov/press-center/press-releases/Pages/tg458.aspx. 16 See http://www.treasury.gov/press-center/press-releases/Pages/tg1792.aspx. 17 See http://www.treasury.gov/resource-center/sanctions/OFAC-Enforcement/Documents/barclays08182010.pdf. 18 See http://www.treasury.gov/resource-center/sanctions/CivPen/Documents/06122012_ing.pdf. 19 See http://www.treasury.gov/press-center/press-releases/Pages/tg1799.aspx. Fried Frank International Trade and Investment Alert™ No. 15/09/08 09/08/15 4 community, to ensure these sanctions are properly enforced […] The government will also legislate early in this Parliament to increase the penalties for non-compliance with financial sanctions.”20 The introduction of OFSI, coupled with the announcement to toughen up legislation penalizing infringements is expected to place the UK at the forefront of sanctions enforcement within the EU. OFSI will also be tasked with making companies “better aware”21 of sanctions rules, as well as providing a “high quality service”22 to the public sector. Companies with a low risk profile in relation to trade controls (i.e., sanctions and export controls) should be particularly aware of this change. The establishment of OFSI will not only impact upon the financial sector. In fact, it is more likely that companies in the financial sector and those that export sensitive products will already have the necessary screening procedures in place. This is in particular the case for banks and companies already subject to OFAC jurisdiction. Conversely, small and medium size companies with no US nexus that sell products internationally (for example, to Russia) are arguably more likely to be affected by the establishment of OFSI. At a minimum, any UK business should take note of the FSA guidance on how to comply with financial sanctions. 23 In particular, the FSA noted that small and medium-sized companies should check: [their] existing clients against HMT’s [Consolidated Sanctions] list; all new customers prior to providing any services or transactions; any updates to the HMT [Consolidated Sanctions] list; and any changes to [their] client’s details.”24 The FSA also recommended to “include directors, beneficial owners of corporate customer and any third party payees in” 25 any of the above screening checks. From a practical viewpoint, when conducting screenings, businesses may also find it important to consider how the parameters of the screening software should be set (e.g., how “fuzzy” the screening process should be), and how any restricted persons lists should be included for a business’ standard screening process at customer inception and throughout the process described in the FSA guidance. Furthermore, searches must include not only other persons included in the sanctions list, but any entity “owned or controlled” by such sanctioned person. A recent European court case has clarified in May 2015 the notion of “owned and controlled” for the purposes of financial sanctions. The case involved Petropars Iran Co and the Council of the European Union26 , and it was decided that “owned and controlled” would have a similar meaning to the meaning given under Competition law rules; namely, the ability to exercise decisive influence. 20 HM Treasury, Budget 2015, 18 March 2015, page 96. 21 Ibid. 22 Ibid. 23 See http://www.fca.org.uk/static/documents/fsa-factsheet-sanctions.pdf. 24 In February 2012, the FSA reviewed small firms’ approach to UK financial sanctions and concluded that “there are inadequacies in firms’ systems and controls to reduce the risk of a breach of UK financial sanctions”. 25 Ibid. 26 Case T-433/13 Petropars Iran Co, v Council of the European Union, Judgement of 5 May 2015 available at http://eur-lex.europa.eu/legalcontent/EN/TXT/HTML/?uri=CELEX:62013TJ0433&from=EN. Fried Frank International Trade and Investment Alert™ No. 15/09/08 09/08/15 5 To ensure ongoing compliance and to ensure that changes to a company’s business are accurately reflected in its policies, it is necessary for companies to regularly review (at least annually) and update their policies and procedures in response to changing risks and other stimuli (e.g., changes to applicable sanctions regimes). Companies should also undertake regular and frequent audits, including surveys, to test and monitor the ongoing effectiveness of their policies and to ensure that staff receive all of the necessary training on an on-going basis to ensure compliance. * * * Authors: Dr. Tobias Caspary Till Vere-Hodge This alert is not intended to provide legal advice, and no legal or business decision should be based on its content. 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