On 1 April 2017, the UK’s Office of Financial Sanctions Implementation (“OFSI”) will acquire for the first time direct fining powers to impose substantial penalties for breaches of financial sanctions. These powers have been granted under the new Policing and Crime Act 2017 (the “Act”). 1 Unlike under prior UK sanctions enforcement, OFSI will have the power to issue monetary fines itself. OFSI also needs only to satisfy the civil standard of proof to levy fines. Further, draft fining guidelines published by OFSI2 for the first time offer a 50% fine discount for voluntary self-disclosure of potential infringements – actively encouraging companies to come forward. This note summarises the new fining powers of OFSI and the maximum fine levels. It also outlines the new administrative procedure and the factors relevant for OFSI’s future fining approach, as envisaged under the draft guidance. Overall, OFSI’s new powers mark a substantial shift in the current enforcement regime in the UK. As a result, we expect from 1 April 2017 to see a tougher era of financial sanctions policing and enforcement in the UK. While OFSI has been described as the UK OFAC, 3 the maximum fine level is likely to be lower than OFAC’s, thereby avoiding the US fining excesses, which are in the multibillion pounds range. Further, while it can be expected that the new authority will want to make use of their new powers, it remains to be seen if in the current Brexit-climate enforcement will be tackled aggressively, or in a more nuanced and selective manner. Enforcement history OFSI, the new “UK OFAC”, was formed only one year ago on 31 March 2016. 4 Previously the role of sanctions enforcement had been carried out by the Asset Freezing Unit of HM Treasury, whose focus was on preventing financing of terrorism and terrorist acts. However, the enforcement history of financial sanctions in the UK has so far been patchy. In a rather exceptional case in 2010, the UK’s Financial 1 The Act is available here. The Act left it to the Treasury to determine when the relevant Part 8 (Financial Sanctions) of the Act is to come into force, under s.183(3). By way of The Policing and Crime Act 2017 (Commencement No. 2) Regulations 2017 (SI 2017/482) adopted on 28 March 2017, HM Treasury set the date to 1 April 2017. 2 The OFSI’s draft guidance, “The process for imposing monetary penalties for breaches of financial sanctions: consultation” (the “Draft Guidance”), is available here. OFSI has not yet issued the final guidance. 3 OFAC is the US Office of Foreign Assets Control. 4 For more information, see our client note UK launches Office of Financial Sanctions Implementation, here. Fried Frank International Trade and Investment Alert™ No. 17/03/31 03/31/17 2 Services Authority (now the Financial Conduct Authority) 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.5 This is dwarfed by the $8.9bn (£7.1bn) settlement OFAC reached with French bank BNP Paribas for its apparent sanctions violations.6 Since its inception in March, OFSI seems to have been primarily focussed on transitioning the role of the Asset Freezing Unit, focussing on releasing publications of financial sanctions updates, including an updated HM Treasury guidance document on financial sanctions generally (available here). Now, the new powers OFSI has been granted will allow OFSI to transition to being a more active enforcer of these rules too. As Simon Kirby MP, the Minister in charge of financial sanctions, said of OFSI’s new powers: “These new cash penalties will incentivise everyone to comply with the rules, keeping our country safe and strong”. 7 Fining level and standard of proof OFSI will have the power to impose significant financial penalties for sanctions breaches, which may be up to 50% of the value of the breaching transaction, or £1m, whichever is the greater. 8 This compares to OFAC, where the maximum statutory penalty is the greater of $289,238 or twice the value of the transaction. While OFSI has opted for a higher specified numeric value (at £1m), its powers will be limited to just a quarter of OFAC’s when it comes to basing a fine on the transaction size. Importantly, OFSI can impose these fines directly, via an administrative rather than a criminal process. Given the complexity of financial sanctions – which includes assets freezes and prohibitions on making economic resources available and also restrictions on financial markets - a prosecution via the criminal procedure may have been difficult and a reason for the limited number of convictions. The new power brings OFSI more into line with current powers of the UK’s competition authority, the Competition and Markets Authority, which has the power to impose and set the level of fines itself. Moreover, the standard of proof OFSI will need to demonstrate for imposing fines will be the civil standard, i.e. on the “balance of probabilities”, rather than the criminal standard “beyond reasonable doubt”. This eases the way for OFSI to impose more, and larger, penalties. When will a fine be imposed? Under s.146 of the Act, OFSI will have the power to impose a penalty where it is satisfied, on the balance of probabilities, that: a person/body has breached a prohibition, or failed to comply with an obligation, that is imposed by or under financial sanctions legislation, and the person/body knew, or had reasonable cause to suspect, that the person was in breach of the prohibition or (as the case may be) had failed to comply with the obligation. These tests are cumulative, so if a person is not aware of the breach or does not have a reasonable cause to suspect the breach, then OFSI will not be able impose a monetary penalty. The Draft Guidance 5 See link here. 6 See link here. 7 Simon Kirby MP, Economic Secretary to the Treasury, 1 December 2016. 8 s146 of the Act. Fried Frank International Trade and Investment Alert™ No. 17/03/31 03/31/17 3 expands on this by adding that a reasonable cause to suspect would cover a situation where a person “does not have clear confirmation of an event, but they are aware of something that can prompt them to think it may have happened”. 9 The Draft Guidance goes on to explain that reasonable cause “does not cover merely the theoretical possibility that an event might have happened”.10 This would suggest that, provided a company has adequate screening and compliance measures in place, this should offer a degree of protection should a breach nevertheless occur. Companies should be aware that OFSI can fine not only the person who breached the prohibition, as above,11 but can also fine individual officers of the company where OFSI is satisfied, on the balance of probabilities, that the breach of the sanctions occurred with the officer’s consent, connivance or as a result of the officer’s neglect.12 The Act sets out who may be considered an “officer” in this latter context: in relation to a body corporate, a “director, manager, secretary or other similar officer of the body or a person purporting to act in any such capacity”; in relation to a partnership, a “partner or a person purporting to act as a partner”; and in relation to an unincorporated body, a “person who is concerned in the management or control of the body”. 13 Aside from imposing monetary fines, OFSI may also take the following steps in response to a breach: Refer the case to the National Crime Agency (NCA) for criminal investigation and potential prosecution (The Act more than triples the maximum custodial sentence from two years to seven years, 14 which brings the maximum sentence into line with UK domestic and EU terrorist asset freezing regimes, and increases the maximum fine for summary convictions to one year15 . Summary convictions can be imposed (e.g. if a person provides false information to OFSI or fails to provide information requested by OFSI without a reasonably excuse).); 16 Issue a requirement for better compliance practices;17 and Refer regulated professionals/bodies to the relevant regulator.18 One point that has not yet been addressed in the Draft Guidance is the prospective interplay between OFSI and the FCA in the regulated sector. It is not yet clear from the guidance whether we will see companies pursued by both entities and potentially incurring fines from both OFSI and at the same time from the FCA, or whether there will be co-ordination between the two entities to reflect the overall culpability. It is possible that OFSI will address this when it publishes its final guidance. 9 Draft Guidance, paragraph 2.7.2. 10 Draft Guidance, paragraph 2.7.2. 11 s146 of the Act. 12 s148 of the Act. 13 s148 of the Act. 14 s144(3) of the Act. 15 s145(2) of the Act (except for Northern Ireland, which is still six months). 16 Cf. Schedule 3 to the Anti-terrorism, Crime and Security Act 2001, paragraph 7, sub-paragraph 4. 17 Draft Guidance, paragraph 2.6.1. 18 Draft Guidance, paragraph 2.6.1. Fried Frank International Trade and Investment Alert™ No. 17/03/31 03/31/17 4 Assessment factors The Draft Guidance sets out a (non-exhaustive) list of factors19 that OFSI will consider as aggravating and mitigating of the breach. OFSI will consider this to determine whether to impose a fine in the first place, and also the subsequent level of the fine. Selected examples include: The direct provision of funds or economic resources to a designated person: OFSI points out that it publically publishes the consolidated list of designated individuals here, so providing funds to one of these individuals will normally result in a fine (OFSI also refers to the possibility of criminal sanctions). Circumvention of sanctions: deliberately “structuring affairs to avoid triggering financial sanctions” or “seeming to comply while deliberately not complying” 20 will be taken very seriously – OFSI will normally refer the case to criminal prosecution. If it does not, then it will usually impose a fine. Severity: generally, the higher the GBP value of the breach, the more severe OFSI will consider the breach. Knowledge and compliance in the sector: OFSI will expect regulated professionals to meet regulatory and professional standards; failure to do may be an aggravating factor. If a company has acted swiftly to remedy the breach, this may be a mitigating factor. OFSI will not seek to punish companies if falling below a high standard is the only distinguishing factor in a case. Repetition: It is not surprising that OFSI states that repeated, persistent or extended breaches by the same person/entity will be treated more seriously. Small but multiple breaches over an extended period of time will also be considered as more serious in total. Disclosures to OFSI: breaches of sanctions must be voluntarily reported to OFSI. Failure to do so will be seen as an aggravating factor. Where there are multiple parties to a breach it is not enough that one party reports it; all parties involved must report the breach to OFSI (or submit a joint report). Disclosures should be materially complete - as one would expect, bad faith on the part of the party disclosing the breach will also likely incur a fine. OFSI observes that failing to provide information can in itself be a criminal offence. Where OFSI does impose a fine, it states that a prompt and complete disclosure can result in up to a 50% reduction in the fine it eventually issues. Public interest: OFSI will also consider whether to impose or not impose a penalty depending on whether it is in the public interest to do so. Penalty calculation As mentioned above, the largest fine to date in the UK for breaches of financial sanctions was £5.6 million. However, the new fining powers and the Draft Guidance on the matter suggests that fines may be a more common occurrence now. The Draft Guidance gives some insight into how fines will be calculated. Provided that the legal test in s146 is satisfied, and OFSI is of the view that there are sufficient aggravating factors in a case to impose 19 Draft Guidance, paragraph 2.8. 20 Draft Guidance, paragraph 2.8. Fried Frank International Trade and Investment Alert™ No. 17/03/31 03/31/17 5 a penalty, OFSI will calculate the maximum it could impose (i.e. £1million or 50% of the value of the breach, whichever is the greater), and then within that cap seek to impose a penalty that is “reasonable and proportionate” to the level of the breach. OFSI refers to this as the “baseline penalty”. The actual penalty will then be adjusted depending on whether the party breaching sanctions voluntarily disclosed the fact, and how serious OFSI considers the breach. The Draft Guidance certainly suggests that OFSI has given detailed thought to the issue of how it will go about using its new fining powers, and we can therefore expect a departure from what has to date been a somewhat reluctant approach to imposing fines for breaches of financial sanctions. Process and appeal Prior to imposing a penalty, OFSI has to provide detailed information to the relevant party about its intention to do so.21 Once OFSI has decided the breach merits a fine, it will then write to the party being penalised informing it of this fact. The party then has 28 calendar days to make written representations to OFSI, and OFSI has a further 28 calendar days to reply (although this can be extended).22 If OFSI still decides to proceed with a fine, then the party has a further right to review by the Minister. It is the Minister himself who must review the appeal, and this function cannot be delegated to a subordinate.23 The function will normally be carried out by the Economic Secretary to the Treasury, currently Simon Kirby MP, being the Minister currently in charge of financial sanctions. The appealing party will have 28 calendar days from the date of receipt of OFSI’s final decision to inform OFSI that it wishes to seek review by the Minister, and the Minister will then have a further 28 calendar days to conclude his review, although this can be extended without notice if required.24 Should a party then wish to appeal the Minister’s decision, they can do so to the Upper Tribunal,25 again within 28 calendar days of receiving the Minister’s decision. It is curious that it should be the Minister himself reviewing every contested fine – a sign that OFSI will take using its fining powers very seriously, or perhaps that they do not anticipate many fines to be contested in the first place. Publication Companies should be aware that OFSI has stated that it will usually publish details of all the fines it imposes. This is to ensure that the “monetary penalties act as a deterrent against poor compliance by individuals and organisations operating in the UK, and promote increased awareness of good practice”.26 Publication will be in summary form, but will reveal the identities of the parties the fines have been imposed on. OFSI will also publish the summary facts of the case, including breach type; sanctions regime involved; the regulation broken; whether there was voluntary disclosure; the GBP value of the breach, and why OFSI imposed the monetary penalty; the level of fine imposed on each person; and compliance lessons OFSI wishes to highlight in this case. 21 s147(1) of the Act. 22 Draft Guidance, paragraphs 2.12.17 – 2.12.25. 23 S147(5) of the Act. 24 Draft Guidance, paragraphs 2.12.17 – 2.12.25. 25 The procedural rules of the Upper Tribunal are available here. 26 Explanatory Notes to the Act, paragraph 1064. Fried Frank International Trade and Investment Alert™ No. 17/03/31 03/31/17 6 What the new powers mean for you The new fining powers that come into force on 1 April 2017 do not change the substance of the financial sanctions regimes in place with which companies are already required to comply. However, the power to impose fines directly, and to do so just on the civil standard of proof, suggests the beginning of a more active (and for non-compliant businesses, potentially costly) era of enforcing financial sanctions compliance. OFSI has got its teeth now, and no doubt will be keen to start showing them off quickly when the appropriate opportunity comes along. In the words of Rena Lalgie, Head of OFSI, “financial sanctions are also about maintaining the integrity of and confidence in the UK financial services sector. That is why we won’t hesitate to take robust action where a breach merits it. Our new powers will support our work – allowing us to deal with serious sanction breaches quickly and effectively”. 27 Companies should use this opportunity now to take stock of their current compliance policies and procedures to ensure that they are comfortable with the protection afforded by them against sanctions breaches, and that employees are aware of such policies and are actively implementing them in practice. Companies will no doubt be alerting their officers to the fact that they can personally be liable for a fine, as well as the company itself. Companies and their officers should also be aware of the reputational issues of the publication of a fine, given that OFSI has now stated that it will publish the identity of those parties fined. The long-term impact of Brexit The creation of OFSI was announced in the UK in the summer budget of 2015, almost a year before the Brexit referendum of June 2016 had taken place. Prior to this it was generally assumed that the UK’s membership in the EU would last, and that therefore a general uniformity between the sanctions imposed at the EU and UK levels would continue. With Brexit however, it remains to be seen what level of harmonisation will continue to exist between the EU’s and UK’s sanctions policies. Also, in the current Brexit climate, where the government is keen to emphasize that Britain is open for business, it remains to be seen if enforcement will be tackled aggressively, or in a more nuanced and selective manner. Conclusion OFSI will for the first time acquire direct fining powers to impose substantial penalties for breaches of financial sanctions. OFSI also needs only to satisfy the (lower) civil standard of proof to levy fines. Both measures will make it easier to penalise infringements of financial sanctions in the UK. As a result, enforcement is likely to increase, both in terms of the number and the size of fines (albeit hopefully avoiding the US fining excesses, which are in the multibillion pounds range). Companies are well-advised to carefully consider the newly available 50% fine discount for voluntary self-disclosure. Further, while it can be expected that the new authority will want to make use of their new powers, it remains to be seen if in the current Brexit climate enforcement will be tackled aggressively, or in a more nuanced and selective manner. * * * 27 Rena Lalgie, Head of OFSI, 1 December 2016. Fried Frank International Trade and Investment Alert™ No. 17/03/31 03/31/17 7 A Delaware Limited Liability Partnership Fried Frank International Trade and Investment Alert™ is published by the International Trade and Investment Practice Group of Fried, Frank, Harris, Shriver & Jacobson LLP. Fried Frank International Trade and Investment Alert™ is provided free of charge to subscribers. If you would like to subscribe to this E-mail service, please send an E-mail message to [email protected] and include your name, title, organization or company, mail address, telephone and fax numbers, and E-mail address. To unsubscribe from all Fried Frank E-mail Alerts and electronic mailings send a blank E-mail to [email protected] Authors: Tobias Caspary Neda Moussavi This alert is not intended to provide legal advice, and no legal or business decision should be based on its content. If you have any questions about the contents of this alert, please call your regular Fried Frank contact or the attorneys listed below: Contacts: Washington, D.C. Michael T. Gershberg +1.202.639.7085 [email protected] London Dr. Tobias Caspary +44.20.7972.9618 [email protected] James Kitching +44.20.7972.6295 [email protected] Fried Frank’s International Trade and Investment Group regularly represents clients in international mergers and acquisitions, joint ventures, principal investments, and sensitive corporate investigations, particularly in relation to matters that implicate the U.S. government's regulation of international business activities, such as the Committee on Foreign Investment in the United States (CFIUS), economic sanctions, export controls, and anti-corruption and anti-bribery. For decades, our international trade and investment practitioners have been consistently recognized for their legal and policy-based contributions. Today, our practice is unique among its kind: it draws upon the Firm’s long tradition of senior U.S. government and diplomatic service, combines policy insight with deep technical expertise and business judgment, is fully integrated with Fried Frank’s preeminent Corporate and Litigation Practices, and is international in its outlook, experience, network reach and reputation.