OFSI’s New Monetary Penalties Signal a Broader and Extraterritorial Approach to U.K. Sanctions Enforcement

April 10, 2017
By: Anna Sayre, Legal Content Writer, SanctionsAlert.com

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

Though monetary penalties have been widely used in the U.S. for over a decade, they are a new way of responding to offences in the U.K., where regulators are currently 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 taken by the U.K. in order to strengthen the government’s response to sanctions breaches and adopt a hard line and extraterritorial approach to sanctions enforcement.

U.K. Sanctions, in Brief

Like all EU countries, the U.K. 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 currently has direct effect under U.K. law. Now that the U.K. has formally triggered the process of exiting the EU, the future effect of EU laws involving sanctions is unknown. However, while the U.K. conducts ‘Brexit’ negotiations during the next two years, the manner in which the U.K. creates and administers sanctions will remain the same.

The OFSI, a part of Her Majesty (HM)’s Treasury Department of the U.K. government, is the authority for the implementation of financial sanctions in the U.K. The OFSI is a newly created office within HM Treasury, launched by the U.K. on March 31, 2016. This agency takes over from 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.

New Powers of the OFSI

The OFSI’s monetary penalty regime regarding enforcement of financial sanctions occurred following commencement of Part 8 of the U.K.Policing and Crime Act 2017 (‘2017 Act’), effective on 1 April 2017.

The 2017 Act, originally given ‘Royal Assent’ on January 31, 2017,introduces a range of changes relating to financial sanctions, including an increase of the maximum sentence for criminal offenses from two to seven years.

Harsher Fines

The amount of monetary penalty under civil law that the OFSI has power to impose for breach of sanctions regulations has been markedley increased.

The maximum penalty is set at £1 million, or 50% of the total value of the breach, whichever is greater. The OFSI will also take certain factors into account that could serve to aggravate or mitigate the imposed penalty.

Mr Karim Bouali, Partner at CCG Legal in London, reiterates that, “the new regime provides strong incentives for full and early disclosure, with penalty discounts of up to 50%. Businesses need to be aware of the threat of £1m plus fines from a regulator looking to test their new civil penalty powers.”Mr Bouali adds that, “Firms should evaluate how they gather and consider material at an early stage when flags are raised, and potentially bring in external advisers sooner, so they can benefit from the incentives in place.”

An Easier Standard of Proof

According to the provisions of the 2017 Act, the circumstances in which the OFSI will have increased powers to impose monetary penalties, due to 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 closerto “preponderance of evidence,” which is the standard required in most civil cases in the U.S.

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.

Deferred Prosecution Agreements

The new Act also brings financial sanctions into the scope of Deferred Prosecution Agreements (DPAs) and Serious Crime Prevention Orders,

DPAs, which are quickly gaining popularity as a means of resolving financial crime cases, are basically court-supervised settlement agreements where the regulator agrees to suspend prosecution provided an organization meets certain obligations defined in the agreement.

DPAs were introduced only recently in the U.K for offences under the Fraud Act 2006, the Proceeds of Crime Act 2002 and the Bribery Act 2010 as well as other economic crimes. Typically, the indictment will be delayed and, subject to compliance with the requirements of the DPA, such as implementation of enhanced compliance procedures and payment of a financial penalty, the case will eventually be discontinued. DPAs are only available for corporates, not individuals.

In a statement from HM Treasury, Economic Secretary Simon Kirby, said: “We’ll continue to place more emphasis on compliance and we will take tough action against those who deliberately flout the law.”

Instant Effect of UN Sanctions

The new Act also gives direct, instant effect into U.K. law of all new UN financial sanctions listings made by UN sanctions committees. This is in order to allow the U.K. to “swiftly implement its UN obligations” as,up until now, the U.K. had to wait an average of four weeks for the 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 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.

“It is vital that ‘legal issues’ do not delay the ability for law enforcement and intelligence agencies to take action against those identified as undertaking or providing support to terrorist activities,” says Andy McDonald, Former Head of SO15 Counter Terrorist Command.

For the full 2017 Act, click here.

A “U.K. nexus”

To fall within the OFSI’s enforcement of sanctions, there has to be a U.K. connection to the breach, or so-called “U.K. nexus”. As the breach does not have to occur within U.K. borders, such a nexus is not a difficult one to create. The following situations are just some examples of what can create a U.K. nexus:

  • a U.K. company working overseas;
  • an international transaction clearing or transiting through the U.K.;
  • an action by a local subsidiary of a U.K. parent company; or
  • purchase/sale of financial products or insurance on U.K. 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 U.K may be caught by U.K. sanctions requirements and could be liable for violations committed against U.K. 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 U.K. government should not only be taken into account by British professionals, but also by the international compliance community at large.

Other Compliance Considerations

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

Mr Bouali reminds us that, “the OFSI will be keen to flex its new muscles as it builds internal expertise towards a new ‘OFAC’ style of enforcement in the U.K. GC’s and In house counsel, financial crime, risk and compliance teams need to be aware of the OFSI’s new powers, and be prepared to engage with them in the near future. This means ensuring risk assessments and sanctions compliance programs are upgraded to reflect the new civil penalties, cognizant of the lower civil burden of proof.”

The Policing and Crime Act 2017 is an important piece of legislation. It further enables both the UK alone and also the UK working with EU and global partners to tackle those who engage in, or support terrorist activity. It also provides a route to prosecute individuals and corporate entities from the regulated sector that fail to report terrorists using their firms for nefarious purposes,” adds Mr. McDonal

For the new guidance on financial sanctions issued by the OFSI, click here.

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