Stronger OFAC style sanctions enforcement comes to the UK

August 2017 | PROFESSIONAL INSIGHT | RISK MANAGEMENT

Financier Worldwide Magazine

August 2017 Issue

As of 1 April 2017, the UK’s new sanctions watchdog, the Office of Financial Sanctions Implementation (OFSI) is now able to impose monetary penalties for breaches of financial sanctions. These fines can be up to £1m or 50 percent of the breach, whichever is greater.

Though monetary penalties have been widely used in the US for over a decade, they are a new way of responding to offences in the UK, where regulators were previously limited to either a formal criminal prosecution or warning letter for financial sanctions breaches.

This new power, which only applies to financial sanctions, and not trade sanctions, is one of a series of measures adopted in the UK, aimed at strengthening the government’s response to sanctions breaches. These measures represent the adoption of a harder line and a more extraterritorial approach to sanctions enforcement.

UK sanctions, in brief

Like all EU countries, the UK derives sanctions policy from three places: (i) United Nations resolutions; (ii) EU directives; and (iii) its own national laws.

Most financial sanctions are made through EU law, which currently has direct effect under UK law. Now that the UK has formally triggered the process of exiting the EU, the future effect of EU laws involving sanctions is unknown. However, while the UK conducts ‘Brexit’ negotiations over the next two years, the manner in which the UK creates and administers sanctions will remain the same.

The OFSI sits within the Treasury Department and is the authority for the implementation of financial sanctions in the UK. The new regulator was launched on 31 March 2016, replacing the asset freezing unit of HM Treasury, which itself succeeded the financial sanctions unit of the Bank of England in October 2007. The new OFSI is clearly modelled on the US system, the US Department of Treasury’s Office of Foreign Assets Control (OFAC).

The OFSI, like OFAC, keeps a list of ‘designated persons’, or ‘targets’. A designated person means anyone, whether an individual, company or country, that is subject to financial sanctions and appears on the OFSI’s ‘consolidated list of targets’.

Financial sanctions themselves come in many different guises, and can apply to individuals, companies and other entities. Sanctions most commonly arise in the form of asset freezing, directions to cease business of a specified type, or restriction on the use of a variety of financial markets and services.

New powers of the OFSI

The OFSI’s monetary penalty regime regarding enforcement of financial sanctions was empowered following the commencement of Part 8 of the UK Policing and Crime Act 2017 (2017 Act), which came into effect on 1 April 2017.

The 2017 Act introduces a range of changes relating to financial sanctions, including an increase of the maximum sentence for criminal offences from two to seven years.

The OFSI can now also impose a civil financial penalty on a ‘person’ (or legal entity), if it is satisfied, on the balance of probabilities that a person has breached a financial sanction, and that they knew, or had reasonable cause to suspect, that they were committing a breach. Where a corporate entity is concerned, both the entity and any culpable or negligent officers that connived in the breach can be separately fined.

Harsher fines

The quantum of monetary penalty under civil law that the OFSI now has the power to impose for breach of sanctions regulations has been significantly increased. The OFSI will also take certain factors into account that could serve to aggravate or mitigate the imposed penalty.

This new regime provides strong incentives for full and early disclosure, with penalty discounts of up to 50 percent. Businesses need to be aware of the threat of £1m plus fines from a regulator looking to test their new civil penalty powers. Firms should evaluate how they gather and consider material at an early stage when flags are raised, and potentially seek external advice sooner, so they can benefit from the incentives in place.

An easier standard of proof

The OFSI considers a ‘balance of probabilities’ to be the civil standard of proof, which means it is ‘more likely than not’ that an event has happened. This is similar to the ‘preponderance of evidence’, which is the standard required in most civil cases in the US.

This can be contrasted with a criminal case in which the facts are held to the much higher standard of ‘beyond reasonable doubt’. Here, the OFSI will simply make a judgment on whether it is more likely than not that there has been a breach.

Further, the OFSI considers a ‘reasonable cause to suspect’ to cover a broad amount of situations, including such cases where a person does not have clear confirmation of an event, but they are still aware of something that can prompt them to think it may have happened.

OFSI guidance

The OFSI has indicated that it will adopt a fact-focused approach to assessing whether a breach warrants a financial penalty. A broad range of factors will be considered, including the value of the breach, number of breaches, knowledge of sanctions and compliance systems, whether the person has self-reported, and the measure of harm inflicted upon the OFSI’s sanctions regime objectives.

The penalty threshold will likely be met: where the breach involves direct provision of funds to a designated person; where arrangements have been made to deliberately circumvent the law; where there is non-compliance with an information request made by the OFSI; or where the OFSI considers it appropriate and proportionate.

Instant effect of UN sanctions

The 2017 Act also gives direct, instant effect into UK law of all new UN financial sanctions listings made by UN sanctions committees. This is in order to allow the UK to “swiftly implement its UN obligations”. Until now, the UK has had to wait an average of four weeks for the updated EU regulation to adopt sanctions regulations implementing UN asset freezes.

The instant effect of UN sanctions will also reduce the risk of money or other assets from the targeted entity or person being removed from the UK, before sanctions can be imposed.

The ‘persons designated’ for the purposes of a UN financial sanctions resolution, will be treated for a period of 30 days as if the person were included in the EU list (as well as being designated by the UN). The temporary implementation only relates to freezing funds or other economic resources, or to preventing funds or economic resources being made available to, or for the benefit of, persons designated by the UN sanctions regime.

A ‘UK nexus’

To fall within the OFSI’s enforcement of sanctions, there has to be a UK connection to the breach, or so-called ‘UK nexus’. As the breach does not have to occur within UK borders, such a nexus is not a difficult one to create. The following situations are just some examples of what can create a UK nexus: (i) a UK company working overseas; (ii) an international transaction clearing or transiting through the UK; (iii) an action by a local subsidiary of a UK parent company; or (iv) purchase/sale of financial products or insurance on UK markets, even if held or used overseas.

This means that a UK company with only one overseas subsidiary or a company clearing just one international transaction through the UK may be caught by UK sanctions requirements and could be liable for violations committed against UK financial sanctions. The previous mantra that European sanctions do not extend to foreign subsidiaries or non-EU persons is no longer true.

In consideration of its far-reaching scope, this new power to impose monetary penalties by the UK government should not only be taken into account by British professionals, but also by the international compliance community at large.

Conclusions

The proposals within the 2017 Act certainly suggest a stricter stance toward sanctions enforcement, and will bring the UK sanctions enforcement regime closer to the US model.

The OFSI will be keen to flex its new muscles as it builds internal expertise toward a new ‘OFAC’ style of enforcement in the UK. General counsel and in-house counsel, financial crime, as well as risk and compliance teams need to be aware of the OFSI’s new powers, and must be prepared to engage with them in the near future. This means ensuring risk assessments and sanctions compliance programmes are upgraded to reflect the new civil penalties, cognisant of the lower civil burden of proof.

Companies will need to more carefully monitor with whom they transact and who transacts on their behalf. The OFSI’s new powers herald a trend toward increasing regulatory pressure upon business conduct. This will place a premium on companies to bolster their compliance and risk based policies and procedures to meet this challenge.

Karim Bouali is a partner at CCG Legal. He can be contacted on +44 (0)207 760 7590 or by email: karim.bouali@ccg-legal.com. Anna Sayre is a content writer at SanctionsAlert.com.

Karim Bouali

CCG Legal