UK sanctions

A new enforcement body and proposed enforcement tools

On 31 March 2016, the UK Government established the Office of Financial Sanctions Implementation (OFSI). The new body, which sits within HM Treasury, is responsible for ensuring that financial sanctions are "properly understood, implemented and enforced".¹

While firms may welcome the arrival of a new body whose purpose is to provide guidance on sanctions legislation, the suggestion of increased enforcement is likely to focus corporates on the need to ensure compliance with financial sanctions.

A UK OFAC?

It is understood that a principal motivation behind the establishment of OFSI is to address the perceived difference in approach to the enforcement of financial sanctions by the UK and US Governments.

In March 2015, when the UK Government first announced its intention to review the structures of financial sanctions implementation and enforcement, it said: "This review will take into account lessons from structures in other countries, including the US Treasury Office of Foreign Assets Control"² (OFAC). Then, in July 2015, when OFSI was first announced, the Government also pledged to legislate to increase the penalties for non-compliance with financial sanctions.³

The reference to OFAC should not be taken lightly. In recent years, the US enforcement body has imposed record fines on companies found to have breached US financial and trade sanctions. This has included companies headquartered in the EU.

By contrast, the UK's enforcement of financial sanctions has been relatively restrained. The UK Financial Conduct Authority has fined banks for inadequate systems and controls, but there has been little known enforcement against corporates for sanctions violations. Across the EU, the story is much the same, with authorities in member states having engaged in minimal enforcement activity. All of this has not gone unnoticed by the US, which, it is understood, has applied pressure on the EU to clamp down on breaches.

This background, coupled with the announcement in July 2015 of tougher enforcement legislation (see further below), suggests that OFSI may seek to follow the lead of OFAC, placing the UK at the forefront of financial sanctions enforcement within the EU. Some have suggested that, where the UK leads, other EU members states may follow.

Tougher enforcement tools

Under current UK financial sanctions enforcement legislation, violations can only be addressed by the initiation of criminal prosecution. Unlike OFAC, UK prosecutors are currently unable to impose civil penalties or reach out-of-court settlements. However, new legislation proposed in February 2016 will, if passed, bring the UK enforcement regime much closer to the US model.

The proposals, contained in the Policing and Crime Bill, include the following:

1. Increased criminal penalties: The maximum prison term applicable for a breach of financial sanctions will be raised from two years to seven years on conviction on indictment.
2. Deferred prosecution agreements (DPAs): DPAs are court-approved agreements under which proceedings against an organisation (including a company) are suspended, provided the organisation meets certain conditions (usually a combination of: paying a financial penalty, disgorging any profits made from the illegal activity, co-operating with investigators and implementing or improving a compliance programme). They will be available to prosecutors in England and Wales where there is sufficient evidence to prove beyond reasonable doubt that a criminal offence under sanctions legislation has been committed by an organisation.
3. Serious crime prevention orders (SCPOs): SCPOs are civil orders imposed by a court which do not levy financial penalties but which may contain targeted prohibitions, restrictions or requirements designed to prevent further involvement in serious crime. They are imposed on the civil standard of proof (balance of probabilities). Unlike DPAs, they can be used in respect of individuals, not just organisations. They can last for a maximum of five years and breach of an SCPO is a criminal offence carrying a maximum penalty of five years' imprisonment.
4. Monetary penalties: Crucially, OFSI will, following initial law enforcement enquiries, have the power to impose on individuals and organisations monetary penalties of up to £1m or 50 per cent of the estimated value of the funds or resources involved in a prohibited transaction, whichever is greater. OFSI will need to be satisfied on the balance of probabilities that: (i) a breach of financial sanctions has been committed; and (ii) the individual or organisation knew or had reasonable cause to suspect that their actions were in breach. OFSI is expected to exercise this power in cases where it is not in the public interest to pursue a criminal prosecution, DPA or SCPO. The individual or organisation will have the right to make representations and the right to request that any penalty be reviewed by a minister and, subsequently, by way of judicial review. Any penalties imposed will be published by OFSI as a way to deter against non-compliance.
5. Temporary implementation of UN sanctions: Although not strictly an enforcement tool, the draft legislation also gives HM Treasury the power immediately to give effect to UN financial sanctions, without having to wait, as it currently does, for the EU to adopt the necessary implementing legislation. The temporary implementation will last initially for 30 days but will be capable of extension to 60 days, and will lapse and be replaced by the EU legislation as soon as it is passed. This measure has been proposed to address the socalled "asset flight" risk, whereby assets are removed from the UK during the delay between the enactment of UN sanctions and their subsequent implementation by EU regulations (a process which, in 2015, took on average 4.2 weeks, according to an explanatory note published alongside the draft bill⁴).

The process which led to the lifting of sanctions against Iran on 16 January 2016 under the Joint Comprehensive Plan of Action has shown that sanctions can be a powerful geopolitical tool. The promise of relief from sanctions was key to negotiations with Iran concerning its nuclear programme, while the threat of their reintroduction (so-called "snap back") keeps the pressure on Iran to ensure its ongoing compliance. The establishment of OFSI and the proposals for tougher enforcement suggests an appetite in the UK to ensure that sanctions are seen to be effectively enforced, so that they have sufficient deterrent effect on firms and, accordingly, are regarded as a credible threat by the countries against which they are imposed.

What guidance can be expected from OFSI?

Before OFSI, HM Treasury had had a financial sanctions unit for some years. The press release announcing the establishment of OFSI states that the new body will offer "a professional service to the public and industry on financial sanctions issues".

Although little detail has been provided so far, and although the effectiveness of OFSI in practice will depend largely on funding and resources, it is understood that its creation signals a commitment by the UK Government to provide a high-quality service to the private sector in terms of giving guidance on the application and interpretation of sanctions.

It is widely recognised that some EU sanctions can be imprecise in scope and lacking in clear definitions, and it is anticipated that OSFI will be proactive in providing interpretive briefings and guidance notes to ensure that firms are better aware of their compliance obligations and that financial sanctions are "properly understood".

However, OFSI would ultimately be issuing nonbinding guidance on the interpretation of EU sanctions, the ultimate determination of which lies with the courts.

Practical implications for firms

As the UK steps up its enforcement capability in relation to financial sanctions breaches, firms falling within the jurisdiction of UK sanctions should consider reviewing their sanctions compliance programmes, ensuring that they are comprehensive, adequate and remain fit for purpose in view of the evolving sanctions environment.

This should include ensuring that due diligence and sanctions screening procedures against counterparties and end users (and those that own or control them) are adequate and that relevant members of staff receive refresher training on sanctions and the role that they play in ensuring compliance.

_Notes

<sub>1. https://www.gov.uk/government/news/new-body-to-supportfinancial-sanctions-implementation-launched.
2. HM Treasury, Budget 2015, 18 March 2015, p.33 (accessible here https://www.gov.uk/government/publications/budget-2015-documents ).</sub>
^{3. HM Treasury, Summer Budget 2015, 8 July 2015, p.96 (accessible here: https://www.gov.uk/government/publications/summerbudget-2015 ).
_{4. https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/499310/Factsheet_Financial_sanctions.pdf}}