[co-author: Ellie Rees]

Executive Summary

The Policing and Crime Act 2017 (the “2017 Act“) came into effect on 1 April 2017, and introduced a number of changes, including new powers for the Office of Financial Sanctions Implementation (“OFSI“) to impose increased monetary penalties. Those penalties are the greater of £1 million or 50% of the value of the breach for breaches of financial sanctions.

OFSI has recently published guidance on how it will apply these powers. OFSI can only impose a monetary penalty if the person who has breached the prohibition knew, or had reasonable cause to suspect, that the person was in breach of the prohibition (which is an objective test). If this test is satisfied, OFSI will review the seriousness of the breach to determine the level of monetary penalty to impose which is informed by taking into consideration aggravating and mitigating factors of the particular case. There are reductions available if there has been voluntary disclosure of the breach.

Companies should now work with their compliance teams to ensure that they have in place adequate systems and controls to identify and mitigate any sanctions risks and report breaches. The new guidance, along with the use of deferred prosecution agreements suggests that OFSI will actively pursue breaches of sanctions in light of the large maximum penalties available to it.

Detail

Following the introduction of the 2017 Act which came into effect on 1 April 2017, OFSI has published guidance on the new powers granted to HM Treasury to impose monetary penalties for breaches of financial sanctions. This blog contains a summary of the guidance issued by OFSI and suggestions for next steps for businesses.

Under the 2017 Act, HM Treasury can impose monetary penalties where, on the balance of probabilities, “(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 “Section 146 Test“). OFSI states that “reasonable cause to suspect” will require an objective test to be used to assess whether facts existed from which “an honest and reasonable person should have inferred knowledge or formed the suspicion that the conduct amounted to a breach of sanctions“. If this test is not passed, OFSI cannot impose a monetary penalty but other enforcement actions may be taken by OFSI.

Section 148(1) of the 2017 Act makes it possible for separate penalties to be imposed on the legal entity and also officers of the entity (which includes directors, managers and secretaries) if it is found that on the balance of probabilities the breach or failure took place with the consent or connivance of the officer or was attributable to any neglect on the part of the officer.

The maximum sentence for criminal prosecutions has also increased from 2 to 7 years’ imprisonment.

Enforcement Powers

Where a breach of financial sanctions has occurred OFSI may:

1. Issue correspondence requiring details of how the breaching party will improve compliance practices;
2. Refer regulated professionals/bodies to their relevant regulatory body;
3. Impose a monetary penalty; or
4. Refer the case to law enforcement agencies for criminal investigation/prosecution.

OFSI may act in the case of a breach of financial sanctions as long as there is a UK nexus. This means that there must be a link to the UK, an example OFSI gives of this is insurance bought on a UK market but held or used overseas. OFSI states that it may also use its information-sharing powers to pass details to relevant authorities where breaches of financial sanctions in other jurisdictions are discovered.

When will a monetary penalty be imposed?

The guidance issued by OFSI suggests that the following approach will be taken in deciding whether a monetary penalty will be imposed:

What will the level of the monetary penalty be?

If a breach meets the penalty threshold illustrated above, OFSI will then decide a penalty recommendation using the following method:

1. The value of the breach is determined;
2. The maximum penalty is determined (the statutory maximum penalty is the greater of £1 million or 50% of the value of the breach);
3. The seriousness of the case will be determined. OFSI states that every case that meets the meets the criteria for a monetary penalty is by definition serious. Factors which will be viewed more seriously by OFSI include:
   • direct provision of funds/economic resources to a designated person;
   • intentional circumvention of sanctions prohibitions (or action which enables/facilitates the same);
   • a high-value breach is generally more likely to result in enforcement action;
   • the greater the harm done to the specific sanction regimes’ objectives;
   • breaches by businesses with more in-depth knowledge of sanctions or by regulated professionals;
   • deliberate or negligent behaviour as opposed to simply making a mistake; and
   • repeated, persistent or extended breaches by the same person.
4. The baseline penalty will be determined by assessing what the reasonable and proportionate level of penalty should be based on the seriousness of the case;
5. It will be determined whether a reduction applies:
   • a reduction will apply where voluntary disclosure has taken place – where the case is marked ‘serious’ the baseline penalty will be reduced by 50%, where the case is marked ‘most serious’ the baseline penalty will be reduced by up to 30%;
   • In order to be able to access the reductions, a person must affirm that their voluntary disclosure is materially complete;
   • Where more than one party is involved in the breach, each party should voluntarily disclose the breach as soon as possible in order to take advantage of this mitigation;
   • OFSI states that it is reasonable for some time to be taken in order to assess the nature and extent of the breach as well as take legal advice but an effective response to the breach should be taken as soon as possible. Early disclosure with partial information followed by a further disclosure shortly will be supported by OFSI.

OFSI reserves the right not to impose a penalty in certain circumstances, including where imposing the penalty would have no meaningful effect, it would be perverse or it is not in the public interest to do so.

Following the calculation of the penalty recommendation, the person on whom the penalty is to be imposed has the right to make written representations to OFSI within 28 calendar days from the date of the initial letter. Representations may be made on matters of law, facts, OFSI’s interpretation of the facts, how OFSI has followed its processes, whether the penalty is fair and proportionate and the effect that publication of the imposition of the penalty would have on the person/entity.

Review process

Once the final decision has been communicated, the person will usually have 28 calendar days to inform the Treasury that they would like a ministerial review of the case. This review will be carried out, normally, by the Economic Secretary to the Treasury and the review will be aimed to be concluded within 28 calendar days. The minister is able to (i) uphold the decision to impose the penalty and its amount, (ii) uphold the decision to impose the penalty but change the amount, or (iii) cancel the decision to impose the penalty. The final right of appeal is to the upper tribunal.

OFSI will publish details of monetary penalties it imposes as a summary of the case.

Next steps

With the publication of the guidance, companies should work with their compliance teams to ensure that adequate systems and controls are in place to identify and mitigate any sanctions risks and report breaches. OFSI has previously stated in its guidance that insurance companies should satisfy themselves that any third party’s systems and controls (such as agents, brokers and introducers) are sufficient to mitigate UK sanctions risks. The new powers to impose penalties now available to HM Treasury as well as the increased potential criminal ramifications should act as a warning to companies regarding future enforcement actions that may be taken by OFSI for breaches of financial sanctions.

The emphasis placed on voluntary disclosure by OFSI for potential breaches as well as the obligations placed on most businesses under the EU regulations to provide information to OFSI which would facilitate compliance with the financial sanctions regime should be communicated to key individuals within companies so that if there is a potential sanctions breach, this can be dealt with in a timely and effective manner.