13 Apr 2017

New monetary penalties for breaches of financial sanctions

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When the Office of Financial Sanctions Implementation ("OFSI") was established on 31 March 2016, the Former Chancellor of the Exchequer, George Osborne, signalled the UK Government's intention to introduce civil penalties for breaches of financial sanctions. That vision has now been realised by the coming into force, on 1 April 2017, of Part 8 of the Policing and Crime Act 2017 (the "Act"). The Act creates powers for HM Treasury to impose monetary penalties for breaches of financial sanctions. OFSI is the part of the Treasury which applies these powers.

In conjunction with Part 8 of the Act coming into force, OFSI has issued guidance to explain its new powers, how they will be applied, how any monetary penalty will be calculated, the enforcement process and the relevant rights of review and appeal.

The new civil penalties

Previously, sanctions breaches could only be punished by criminal proceedings which were subject to the criminal standard of proof – namely that of proof beyond reasonable doubt. This is clearly a high standard and there were consequently few, if any, prosecutions.

With effect from 1 April 2017, OFSI has the power to impose a financial 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.

A "person" in this context means both natural and legal persons and therefore includes individuals and corporate bodies and entities.

The OFSI guidance confirms that "balance of probabilities" is the civil standard of proof and means that it is more likely than not that something has happened. "Reasonable cause to suspect" (the second element set out in (b) above) is an objective test that asks whether there were factual circumstances from which an honest and reasonable person should have inferred knowledge or formed the suspicion that the conduct amounted to a breach of sanctions.

OFSI will exercise its powers to assess potential sanctions breaches wherever there is a "UK nexus". This is not a legally defined term and OFSI has said that it is a concept it uses to describe a connection to the UK. The examples given in the guidance include a UK company working overseas, transactions using clearing services in the UK, actions by a local subsidiary of a UK company, action taking place overseas but directed from within the UK or financial products or insurance bought on UK markets but held or used overseas. Although OFSI states that it will not artificially bring something within UK authority that does not clearly and naturally come within it, the examples provided by OFSI are potentially contentious. For instance, EU (and UK) financial sanctions do not generally extend to subsidiaries of UK companies. It is not clear if OFSI expects a UK parent company to use its rights as a shareholder to procure overseas subsidiaries to comply with UK financial sanctions, or if it is only concerned with a UK parent 'actively' participating in transactions by a subsidiary that are contrary to UK financial sanctions. OFSI's response to the consultation states that it will seek to work out what happened, which parties were involved and aware of the breach, and what connection there is or has been with the UK.

OFSI's reference to transactions using clearing services in the UK is also notable. A number of non-US banks have been on the receiving end of action from the Office of Foreign Asset Control ("OFAC") in the US and as defendants in US litigation in relation to transactions in US$, with the only connection with the US territorial jurisdiction being that payments are said to have been cleared in the US. It may be that OFSI wishes to take a similar stance in the UK. The consultation response states that the clearing of payment is necessary to settle transactions and that, when parties use central clearing services in the UK, even if the parties themselves never set foot in the UK, doing so is sufficient to create a UK nexus that engages UK financial sanctions authority. However, it is unclear in what circumstances OFSI would consider that a foreign entity that did not know its payment was being cleared in the UK should have had a reasonable cause to suspect that was the case.

Where OFSI has made a decision to impose a penalty on a corporate entity, it may also impose a penalty on an officer of the corporate entity where it is satisfied that the breach took place with the consent or connivance of the officer or was attributable to their neglect. Dealing with the latter point, senior officers may well be advised to undertake a review of their corporate entity's existing sanctions, CDD and compliance policies and procedures to ensure that they at least meet the prevailing market standard, if not exceed it. The guidance also states that OFSI may take action other than the imposition of a monetary penalty to respond effectively to a case in which a person did not know or have reasonable cause to suspect they were in breach of financial sanctions, such as requesting information on how the person intends to improve compliance in the future. The basis for OFSI taking such action is not clear as it is not dealt with in Part 8 of the Act.

OFSI's application of its new powers

The OFSI guidance also sets out several factors which it will take into account that will aggravate or mitigate when determining the facts and how seriously OFSI views a case. These include:

  • Direct provision of funds or economic resources to a designated person
    OFSI will view a case that directly and openly involves a designated person more seriously than one which is a breach of financial sanctions but does not involve making funds or economic resources available (presumably, directly and openly) to a designated person.
  • Circumvention of sanctions
    OFSI takes circumvention very seriously and has stated that it will impose a monetary penalty if the case is not prosecuted criminally. "Circumvention" is not defined in the UK financial sanctions regulations or the Act. OFSI has said that it should have its ordinary meaning, which is "to go around or bypass, to avoid". The Court of Justice of the European Union has provided some guidance, to the extent that it requires an element of knowledge and an element of intent and that those two cumulative requirements are met where a person deliberately seeks the object or the effect, direct or indirect, of circumvention of the financial sanctions. They are also met where the person in question is aware that their participation in such an activity can have that object or effect and they accept that possibility.
  • Value of the breach
    A high-value breach is more likely to result in enforcement action.
  • Harm or risk of harm to the sanction regime's objectives
    The greater the risk of harm to the regime's objectives, the more seriously OFSI is likely to regard a case.
  • Knowledge of sanctions and compliance systems
    The existing sanctions regimes generally require regulated professionals to have more in-depth knowledge of sanctions and better-developed compliance systems and processes than others. OFSI has stated that the failure of regulated professionals to meet regulatory and professional standards will be considered to be an aggravating factor.
  • Behaviour
    OFSI will take into account: whether the alleged breach in question was deliberate; whether it was negligent; whether there has been a systems and control failure; whether the person is unaware of their responsibilities; or whether there has been a mistake.
  • Failure to apply for a licence and/or comply with its terms It is prohibited to do things that require a licence without one. Monetary penalties are also likely to apply to breaches of licence conditions.
  • Professional facilitation
    In a move which will cause concern to professional advisers, OFSI has expressly stated that individuals who act on behalf of or provide advice to others as part of their job may be considered professional facilitators if such action or advice enables or facilitates a breach of financial sanctions. Although not stated directly, it is clear that professional facilitation would therefore be an aggravating factor.
  • Repeated, persistent or extended breaches
    Repeated, persistent or extended breaches by the same person will tend to result in OFSI taking more serious action even if the individual breaches themselves are of low value or low relative seriousness.
  • Reporting of breaches to OFSI
    OFSI requires all breaches of financial sanctions to be reported to it. It is unclear, however, whether there is any legal obligation to do so - save in relation to certain regulated sectors, such as financial services. Of particular note, OFSI states in the section dealing with professional facilitation (see above) that potential breaches should be reported to OFSI – no reference is made to the professional duties applying to such advisers. However, OFSI has stated that a materially complete voluntary disclosure of a relevant breach by a person who has committed such breach will be viewed as a mitigating factor.

Determination of the penalty

The limits on the level of penalty are contained in section 146 of the Act. This makes clear that in cases where the breach or failure relates to funds or economic resources and their value can be estimated, the permitted maximum is the greater of £1,000,000 or 50% of the (estimated) value of the funds or economic resources in question. In other cases, the maximum penalty is £1,000,000.

OFSI's penalty decision making process is set out in the guidance as follows:

  1. Penalty threshold
    This requires a determination that, on the balance of probabilities, there has been a breach and the person committing it knew or had reasonable cause to suspect they were committing a breach and one or more of the following factors:
    - the breach has involved funds or economic resources being made available to a designated person;
    - there is evidence of circumvention;
    - without the above factors being present. OFSI believes that a monetary penalty is appropriate and proportionate; and/or
    - a person has not complied with a requirement to provide information.
  2. Baseline penalty matrix
    OFSI then calculates the statutory maximum penalty it could impose. Within this maximum, OFSI will decide what level of penalty is reasonable and proportionate, based on its view of the seriousness of the case. This could be any amount between the permitted maximum and zero. In respect of "serious" cases (i.e. all cases that meet the penalty threshold other than the "most serious" cases), OFSI will make "up to" a 50% reduction in the final penalty amount to a person who has given prompt and complete voluntary disclosure. If OFSI assesses a case as being within the "most serious" of cases, the reduction for prompt and complete voluntary disclosure is limited to a maximum of 30%. No guidance is provided in either case as to the circumstances in which OFSI may or may not apply a reduction of less than 50% or 30% (as the case may be) following a voluntary disclosure that qualifies for the reduction.
  3. Penalty recommendation
    The application of 1 and 2 above results in the penalty recommendation.

The enforcement process

Before imposing a monetary policy on a person, OFSI must inform the person of its intention to do so (usually, in writing) and give them a period of 28 calendar days to make written representations. If no representations are made during this period, the penalty is finalised and becomes payable. I f representations are made, OFSI will consider them and review both its assessment of the case and the proposed penalty level.

OFSI will generally have a 28 calendar day period to respond to representations although this may be extended if it is necessary to do so. It will then issue its final assessment.

Subject to the review processes discussed below, OFSI has stated that it will normally publish a summary of any case in which it has imposed a monetary penalty. It is hoped that this will provide additional guidance to ensure compliance with financial sanctions.

Ministerial review and right of appeal to the Upper Tribunal

A person who is in receipt of a final assessment, has 28 calendar days from the date of the letter to inform OFSI in writing that it requires a review and the reasons for that decision. On receiving a review request, OFSI will prepare a report for the relevant Government Minister (currently the Economic Secretary to the Treasury) that will explain its decision and why it was reached. The report will be accompanied by all the material OFSI has about the breach, including any representations received from the person. OFSI will not recommend a course of action but the Minister may question OFSI about the case.

After reviewing the case, the Minister will make a decision which may uphold the decision to impose a penalty and the amount, uphold the decision to impose a penalty but impose a substituted amount or cancel the decision to impose a penalty. If the person remains dissatisfied with the decision following ministerial review, they are entitled to appeal to the Upper Tribunal where they will need to satisfy the tribunal on production of relevant evidence that a penalty should not have been imposed (or should have been a lesser amount).

Conclusions

The UK Government clearly intends that sanctions compliance, guidance and enforcement in the UK should be more closely aligned with the model adopted by OFAC in the US. A more proactive approach to sanctions compliance and enforcement in the UK is to be welcomed (as is the commitment to provide clear guidance to assist in financial sanctions implementation) but it remains to be seen how it will operate in practice. We note that OFSI plans to introduce sector-specific factsheets in addition to its existing guidance. OFSI will need to be generously and appropriately funded by Government if it is to hope to achieve all of the aims that it has been set.

There are a number of areas of the guidance which will cause disquiet amongst sanctions and compliance professionals, not least the concern, which has not been fully allayed following the draft guidance consultation period, that OFSI is effectively acting as prosecutor and judge in first determining that a financial penalty is appropriate and second, in determining the amount of the penalty to be levied. The purpose of the ministerial review process is also unclear and is likely to be viewed with some scepticism.

Additionally, the extent to which OFSI and the criminal investigatory and enforcement authorities will work together in practice is an issue. OFSI has stated that it does not anticipate making any determinations on civil monetary penalties whilst criminal investigations are ongoing but it remains unclear whether OFSI will be able to impose civil penalties following the conclusion of a criminal trial resulting in an acquittal. OFSI has stated in its response to the consultation that it will not seek to impose a monetary penalty on a person who has been convicted of a criminal offense for the same matter. The guidance itself states that OFSI will not "normally" impose a penalty on any person who has already been prosecuted but this statement implicitly reserves the position for OFSI to do so in an appropriate case.

Finally, the guidance makes clear that OFSI expects persons to voluntarily disclose breaches of financial sanctions and to provide further information on demand. However, questions remain over whether there is a legal obligation to do so in every case. OFSI's consultation response also states that OFSI has a discretionary power to disclose information to other competent authorities, regulatory bodies, and prosecution agencies, including such bodies in the UK, in the Crown Dependencies and British Overseas Territories, and in the EU. It is not clear if OFSI also considers that it has the power to disclose information to such bodies in other jurisdictions, such as OFAC in the US.

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