Date: April 5, 2016
After earlier referenced in the Summer Budget 2015, on March 31, 2016, the UK has launched the new Office of Financial Sanctions Implementation (or OFSI). 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 former was created in order to specifically combat terrorist financing. The new OFSI, however, is expected to have a broader scope. Although no formal mandate has been laid out for OFSI to date, it is expected to have a dual function of awareness-raising around sanctions, as well as facilitating enforcement. In the Summer Budget, the role of OFSI was described as “working closely with law enforcement” to ensure sanctions were “properly enforced”. In a statement by the UK Chancellor, George Osborne, OFSI will raise “awareness and [provide] clear guidance to promote compliance with financial sanctions… and [work] closely with other parts of government to ensure that sanctions breaches are rapidly detected and effectively addressed.”
But what does this really mean?
Sanctions have become an important tool of modern foreign policy. In the past decade alone, sanctions designated by the EU have doubled to about 950 and 1,450 against companies and individuals respectively. Sanctions have been used to halt the ability of terrorist groups to access funding, to limit adverse consequences of the Arab Spring, to put pressure on Russia and Syria, and are crucial in negotiations with Iran. However, as sanctions increase, so does their complexity and reach. The cross-border nature of financial markets can give rise to a web of sanctions regimes, concerning EU designated sanctions, as well as individual nations.As such, regulators seek innovative and robust solutions to tackle sanctions enforcement and harmonized interpretation.
It is in response to this growing need for “meatier” measures and clearer compliance that the UK has created the OFSI.
Does the UK intend to create an OFAC-like enforcer?
To date, many feel that the UK has been lacking in both guidance and enforcement when it comes to financial sanctions. The UK Parliament has given regulators quite limited powers as compared to other regulators around the world, most notably the U.S. Office of Foreign Asset Controls (or OFAC). Unlike OFAC, which has been given the power to issue administrative subpoenas, impose civil penalties, and, to agree out-of-court settlements (i.e. deferred prosecution agreements), the HM Treasury has only been granted the power to initiate criminal proceedings and impose punitive fines on that basis. As a result, fewer cases concerning corporates reach the threshold for enforcement, and often fail to meet the high criminal standard of proof to result in penalties.
There has been no suggestion that other UK regulators with powers to enforce financial sanctions, such as the Serious Fraud Office (SFO) and Financial Conduct Authority (FCA), will relegate responsibilities to the OFSI. The FCA has traditionally been responsible for issuing guidance on market conduct, including in the area of sanctions. It has the power to issue penalties in respect of systems and controls breaches which may include sanctions compliance. Further, unlike OFSI, these regulators have statutory authority to enforce financial sanctions and OFSI may have lesser powers than the free-standing OFAC to avoid regulatory overlap. As a result, the new OFSI might face an identity crisis.
Another difference between the UK and US agencies on sanctions has been the scale of the fines. The largest fine imposed by the FCA, then the Financial Services Authority (FSA), was in 2010 when it fined RBS £5.6 million (roughly $8 million). This is in sharp contrast to OFAC whose largest fine was imposed, in conjunction with other US agencies, against BNP Paribas in 2014 for $9.8 billion. But this discrepancy in fines could very well change with the implementation of the new OFSI, which is anticipated by some to mirror OFAC’s harsh “bite”.
There has been some suggestion recently that the UK intends to follow in OFAC’s footsteps. Express reference were made in the announcement to OFSI that it will ““take into account lessons from structures in other countries, including the US Treasury Office of Foreign Assets Control”. However, despite these recent suggestions as well as strong media coverage that OFSI could be the new ‘UK OFAC’, it is unlikely that OFSI will have the same enforcement powers. Firstly, this is mainly because OFSI will still be acting under strict oversight and judicial review by both EU and UK courts. Thus the final interpretation of rules emanating from the EU decisions will still not be a function of OFSI. This is very different from OFAC, which operates with limited judicial oversight and issues definite pronouncements about its own rules
Nevertheless, the UK has clarified that it intends to adopt legislation that is set “to increase the penalties for non-compliance for financial sanctions”. If nothing else, it would be prudent for companies to regard this as a serious warning to review their sanctions compliance procedures.
A better set of guidelines for compliance
The large increase in complex EU sanctions has not only demanded better enforcement, but also the need for clearer, better-structured guidelines for companies regarding compliance. This is because EU legislation implementing sanctions is often drafted to be wide reaching so as to create a broader means of enforcement for member states. Also, the fact that the EU is made up of 28 countries, most with their own unique language, only adds to the potential for inconsistency in interpretation.
As such, one of the stated aims of the OFSI is to make companies “better aware” of the sanctions rules with which they are being asked to comply and to provide a “high quality service” to the private sector as a whole.
In this regard, the OFSI could play a useful role in clarifying and issuing practical guidelines for compliance with the every- growing list of EU sanctions. Compliance officers and advisors to companies should see the OFSI as a tool for navigating EU sanctions regulation, and should start to take it into account when designing and implementing the most accurate, appropriate, and up-to-date due diligence services to their clients.
“It will be interesting to monitor the developing role of the OFSI. If it emerges as an authority for clarifying the complex web of sanctions to ease the process and improve efficiency of compliance, then this would be a welcome contribution,” says Juliya Arbisman of Amsterdam & Partners, LLP. “If it angles towards an enforcement role, then it may have to overcome an identity crisis as other agencies in the UK have so far achieved relatively modest results as compared with the US OFAC. Time will tell whether the OFSI is a modern institution of financial sanctions control.”
To access the new OFSI website and for additional information, please use the following link: https://www.gov.uk/government/organisations/office-of-financial-sanctions-implementation