UK: OFSI: The New OFAC? (Part 2)

Last Updated: 13 April 2017
Article by Henrietta Wells, Chris Hill, Nigel Brook and Mike Roderick
Most Read Contributor in UK, October 2017

Following the enactment of the Policing and Crime Act 2017 (the Act) on 1 April 2017, the provisions of the Policing and Crime Bill reported in our previous article, OFSI: the new OFAC, have now entered into force.

In this article, we outline the changes to guidance from HM Treasury's Office of Financial Sanctions (OFSI) on the new regime for imposition of monetary penalties, made in light of the previous consultation on the draft of this guidance, and the major changes that have occurred with the Act's entry into force.

  1. OFSI's power to impose monetary penalties

    As outlined in more detail in our previous article, these provisions represent a step change in the penalties that can be imposed on UK entities and individuals for breaches of trade and financial sanctions. These include allowing OFSI to impose civil monetary penalties for breaches of sanctions of up to £1 million, or 50% of the estimated value of the funds or resources the subject of the breach, whichever is the greater.
  2. Publication of formal OFSI's guidance

    OFSI has also published formal guidance on the new regime for impositions of monetary penalties. This guidance was shaped by the response to OFSI's consultation on the draft of this guidance, which ran from November 2016 to January 2017. Changes to the guidance in light of the consultation include:

    • Clarification on the concepts of 'serious' and 'most serious' cases, which OFSI has confirmed are administrative rather than legally defined terms. They have advised that the nature of some cases, such as those involving "very high-value or blatant flouting of the law, or severe or lasting damage to the purposes of sanctions regimes" would result in their being considered 'most serious'. Additionally, OFSI will consider aggravating and mitigating factors when determining whether a case is 'serious' or 'most serious';
    • More context on the interaction of the 'reasonable cause to suspect' and 'balance of probabilities' tests in respect of the burden of proof for the new civil penalties. A revised definition confirms that the test is objective: whether a 'reasonable and honest' person should have inferred knowledge or formed the suspicion that the conduct in question amounted to a breach of sanctions;
    • Additional detail on the concept of a 'UK nexus'. Where an international subsidiary of a UK company is involved in activities targeted by UK sanctions, it is possible that the governance or ownership structure of the subsidiary may result in the parent company becoming subject to UK financial sanctions. Further, the clearing of payments through the UK will be sufficient to create a UK nexus and thus engage UK financial sanctions authority;
    • Further guidance on the 'voluntary disclosure' incentive, which confirms that the reduction in a penalty for such voluntary disclosures applies where there is a genuinely voluntary disclosure. OFSI has also confirmed that they will not seek to penalise somebody for making a genuine and voluntary disclosure within a reasonable amount of time simply because another party has done so sooner;
    • Confirmation that what would be considered 'reasonable compliance procedures' will vary between companies, and will depend on the size, sophistication and complexity of a company;
    • Revisions to the penalty process to remove the automatic 15% reduction for 'serious' cases (as opposed to 'most serious' cases), which was originally allowed regardless of whether voluntary disclosure was made. OFSI removed the reduction as they considered it sent the wrong message to allow a standard reduction where there was no voluntary disclosure; and
    • Clarification that, where OFSI intends to publish details of monetary penalties, representations may be made as to the effect that the publication of the penalty details may have.
  3. Changes to criminal offences and penalties

    Further changes to the sanctions enforcement regime made by the Act include an increase in the maximum prison sentence for a breach of sanctions, from 2 years to 7 years. This brings the custodial penalties that may be imposed under financial sanctions into line with those that exist under current counter-terrorism legislation. Two further legislative changes allow for deferred prosecution agreements to be entered into in respect of financial sanctions and counter-terrorism-related offences, and for the making of serious crime prevention orders. While the UK authorities have not been previously able to enter into deferred prosecution agreements in respect of financial sanctions offences, these are a feature of financial crime enforcement actions in other jurisdictions, such as the United States. These provisions will allow for more flexibility in the imposition of penalties, and may form part of OFSI's "promote, enable, respond and change" approach to ensuring compliance with the sanctions regime.
  4. Implementation of United Nations sanctions

    The Act also includes provisions to help the UK implement its obligations under UN sanctions more quickly than previously. This gives direct effect in the UK to financial sanctions listings made by the UN Sanctions Committee, with the intention of reducing the risk of asset flight and allowing a more effective asset freezing regime. This has been achieved by the publication of The United Nations and European Financial Sanctions (Linking) Regulations 2017 (SI 2017 No. 478). OFSI will in future update its Consolidated List of Asset Freeze Targets to include these new designations within one working day of the individual or entity being listed by the UN. The listings will remain live for 30 days, or until the EU adds the new listing to an existing sanctions regulation.
  5. Comment

    As noted in our previous article, the approach that OFSI will take to enforcement under these new powers remains to be seen. However, the revised OFSI guidance gives some indication that their approach to financial sanctions compliance and enforcement is likely to more closely follow that taken by OFAC.

OFSI: The New OFAC? (Part 2)

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Henrietta Wells
Nigel Brook
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