December 19, 2016
By: Anna Sayre, Legal Content Writer, SanctionsAlert.com
Companies, individuals, and financial institutions may receive monetary penalties under civil law when breaching financial sanctions under a new proposal by the UK government that could shape the future of financial sanctions enforcement.
Calling for responses to a consultation document by January 26, 2017, the UK Office of Financial Sanctions Implementation (OFSI) has said the planned changes will allow “more flexible, effective and proportionate set of enforcement measures”.
A New Legal Framework
During the first week of December, the newly appointed OFSI published its Monetary Sanctions Consultation paper, outlining the current proposals found within the Policing and Crime Bill 2017 (the 2017 Act) relating to monetary penalties. The 2017 Act, which is in its final stages of Parliamentary review, will change the legal framework for enforcing UK financial sanctions regulations by introducing, not only changes to the monetary penalty regime, but also increased criminal penalties, deferred prosecution agreements (DPAs), and serious crime prevention orders (SCPOs). For the full consultation paper, click here.
The proposed provisions of the 2017 Act, though not yet technically in force, provide insight into how the 2017 Act could potentially shape the enforcement of UK financial sanctions, the penalty regime that will be imposed, as well as how far the long-arm of UK sanctions regulations could reach in the future.
UK Sanctions Explained
Like all EU countries, the UK derives sanctions policy from three places: the United Nations resolutions, EU directives, or its own national laws. Most financial sanctions are made through EU law, which has direct effect under UK law. The UK drafts statutory instruments to provide for the penalties in the event of a breach of sanctions. It should be noted that, as a result of ‘Brexit’, the manner in which the UK creates and administers sanctions could substantially change within two years’ time.
The OFSI, a part of Her Majesty (HM)’s Treasury Department of the UK government, is the competent authority for the implementation of financial sanctions in the UK. The OFSI is a newly created office within HM Treasury launched by the UK on March 31, 2016. This agency will replace the Asset Freezing Unit of HM Treasury, which originally took over from the Financial Sanctions Unit of the Bank of England in October 2007. The new OFSI is expected to have a much broader scope.
Not unlike The US Department of Treasury’s Office of Foreign Assets Control (OFAC), the OFSI 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”. For the full list, click here.
Last UK Enforcement Action in 2010
At the moment, when a person violates UK financial sanctions regulations, the enforcement options for regulators are limited to pursuing a formal criminal prosecution or sending a warning letter.
Unlike US’ OFAC, UK prosecutors are currently unable to impose civil penalties or reach out-of-court settlements for sanctions violations. This may explain why the last major fine imposed by the UK government for financial sanctions violations was in 2010 when it fined Royal Bank of Scotland £5.6 million for failing to have adequate systems and controls.
Stark Contrast with US Enforcement
The lack of enforcement cases for sanctions violations by UK companies is in stark contract with the enforcement regime in the US, which shows eight OFAC enforcement actions since 2010 on UK companies alone, including financial institutions, an airline, and an IT company. These cases were all settled, with penalty amounts ranging from $38,930 to $375 million.
[embeddoc url=”http://sanctionsalert.com/wp-content/uploads/2016/12/OFACenforcementchart-1.xlsx” height=”300px” download=”all” viewer=”microsoft”]
Source of the data: OFAC. Compiled and analyzed by SanctionsAlert.com
The 2017 Act proposes a new monetary penalties regime as an alternative to criminal proceedings for parties suspected of breaching financial sanctions. It is not entirely clear how the OFSI proposes to implement these new rules as, at the moment, it does not itself have any investigative powers and will have to rely on cooperation with other UK law enforcement agencies, e.g. Financial Conduct Authority (FCA), Serious Fraud Office (SFO).
Nevertheless, the proposals within the 2017 Act certainly suggest a stricter stance towards sanctions enforcement, and will bring the UK sanctions enforcement regime much closer to the US model.
Less Stringent Standard of Proof
According to the proposed provisions of the 2017 Act, the circumstances in which the OFSI will have powers to impose a monetary penalty under civil law are found under section 131(1), which states:
131 Power to impose monetary penalties
(1) The Treasury may impose a monetary penalty on a person if it is satisfied, on the balance of probabilities, that—
(a) the person has breached a prohibition, or failed to comply with an obligation, that is imposed by or under financial sanctions legislation, and
(b) the person 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.
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 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.
In contrast, 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. This encapsulates most sanctions violations, save for merely the theoretical possibility that an event might have happened.
If it is concluded that the person did not know they were in breach, or did not have reasonable cause to suspect they were in breach, no monetary penalty will be imposed, however, the OFSI may take other action short of a penalty that would “respond effectively to the matter” (e.g. asset freezing).
Maximum Penalty Set at £1 Million, or 50% of Total value of Breach
The civil penalty amount that the OFSI would have power to impose for breach of sanctions regulations if the 2017 Act receives ‘Royal Assent’, is delineated in sections 131(2-4), which state:
(2) The amount of the penalty is to be such amount as the Treasury may determine but it may not exceed the permitted maximum.
(3) In a case where the breach or failure relates to particular funds or economic resources and it is possible to estimate the value of the funds or economic resources, the permitted maximum is the greater of—
(a) £1,000,000, and
(b) 50% of the estimated value of the funds or resources.
(4) In any other case, the permitted maximum is £1,000,000.
In other words, the maximum penalty would be set at £1 million, or 50% of the total value of the breach, whichever is greater. The OFSI will take several factors into account that could serve to aggravate or mitigate the imposed penalty.
Mitigating and Aggravating Factors
Mitigating factors include:
- Swift action to remedy the cause of the breach;
- Breach as a result of error/failure to take reasonable care/legal misinterpretation; and/or
- Voluntary disclosure of the violation and good faith.
Aggravating factors include:
- Direct provision of funds or economic resources to a ‘designated person’;
- Circumvention of sanctions, such as deliberately arranging/structuring affairs to avoid triggering financial sanctions, alerts, or seeming to comply while deliberately not complying;
- Severity of the breach, which is normally assessed by weighing the GBP value and the risk of harm done against the sanction regime’s statutory objectives;
- Failure to stay up to date with the knowledge and compliance standards in the sector. Professionals are expected by the OFSI to meet regulatory and professional standards; ignorance of the law is no defense;
- Deliberate or intentional breach;
- Failure to apply for a license/breach of license terms;
- Repeated, persistent or extended breaches by the same person or company;
- Failure to provide information on financial sanctions breaches;
- Timeliness of disclosure; and/or
- Public interest, strategic priority and future compliance effect
The decision to impose a penalty always rests within the discretion of the OFSI. The 2017 Act enables any decision by the OFSI to be reviewed, first by a Minister of the Crown and then by appeal (for any reason) to the Upper Tribunal.
A Broad Reaching “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:
- a UK company working overseas;
- an international transaction clearing or transiting through the UK;
- an action by a local subsidiary of a UK parent company; or
- purchase/sale of financial products or insurance on UK markets, even if held or used overseas.
Seeing as the UK is still considered one of the world’s largest financial hubs for all types of transactions and banking, these new stricter rules set to be imposed by the UK government should not be ignored.