UK introduces new million pound penalties for breach of sanctions
On 31 January 2017, the UK introduced legislation imposing new monetary penalties for serious breaches of financial sanctions. The relevant part of the Policing and Crime Act 2017 has not yet come into force but is expected to do so in April 2017 and, once it does, it will give power to the Office of Financial Sanctions Implementation (OFSI) to impose monetary penalties up to a significant permitted maximum for breaches of the regulations.
OFSI has already completed a consultation process on its proposed approach to implementation, the results and conclusions of which will in due course be published. However, in the draft guidance contained in the consultation document OFSI states its intention to ensure compliance, rather than wait until the law is broken and then respond to the breach. Among other things, OFSI has indicated that it will intervene to end breaches, tackle breaches effectively and try to change behaviour to prevent future non-compliance.
In broad terms, the permitted maximum for the amount of any penalty will be the greater of (a) £1 million, and (b) 50% of the estimated value of the funds or resources. Clearly therefore, under the new regime OFSI will have a wide discretion to impose huge fines. Companies need to be aware of these new penalties and take action to ensure compliance in their organization.
Furthermore, until now, breach of sanctions in the UK only gave rise to the risk of criminal penalties. These could only be imposed if the criminal standard of proof was met, in other words it has to be demonstrated “beyond reasonable doubt” that an offence has occurred. Under the new regime, OFSI need only establish the civil burden of proof. As such, it will have the power to impose penalties “on the balance of probabilities”. This lower burden of proof increases the risk of exposure to being penalized by OFSI for a suspected breach.
A breach does not have to occur within UK borders. OFSI’s guidance states that the UK’s financial sanctions regulations may be enforced against anyone in the UK; against companies and entities present in or dealing with other countries; against foreign nationals dealing with UK persons, companies or entities from their home country; and in situations where there is a connection to the UK (a “UK nexus”). A “UK nexus” could be created by such things as a UK company working overseas, an international transaction clearing or transiting through the UK, action by a local subsidiary of a UK parent company, or financial products or insurance bought on UK markets but held or used overseas.
A penalty may be imposed on either a legal person (a body) or an individual. OFSI may also impose a penalty on an officer of a body if the breach took place with the consent or connivance of that officer, or was attributable to any neglect on the part of the officer. Therefore, those in positions of responsibility within companies will need to ensure that they pay close attention to developments in sanctions legislation; ensure that compliance policies are in place; and, more importantly, ensure that they are followed. In addition, appropriate and thorough due diligence on counterparties remains vitally important.
In determining how to treat a breach, OFSI will take a number of factors into account. These include mitigating factors, such as voluntary disclosure, that might reduce a penalty or lead OFSI not to take enforcement action. Additionally, OFSI will consider aggravating factors, such as direct provision of funds to a designated person, circumvention of sanctions and deliberate acts, where the more they see the more likely that they will regard it as a serious case and impose a monetary penalty.
Importantly, as these are penalties intended to encourage compliance, details of them will be published. There is, therefore, the potential for significant adverse media coverage and possibly referral to regulators, which could give rise to additional fines. It, therefore, remains more important than ever to conduct thorough due diligence and understand sanctions regimes.