The UK Government has announced the establishment of a new Office for Financial Sanctions Implementation (OFSI), which will enforce UK financial sanctions. The creation of OFSI is seen as a move towards tougher enforcement of sanctions, as suggested by the Treasury’s announcement in March that it aims to “take into account lessons from structures in other countries, including the US Treasury Office of Foreign Assets Control” (OFAC) which has levied hefty fines both in the US and internationally.
As a separate point, the Treasury has also stated that the government plans to legislate “to increase the penalties for non-compliance with financial sanctions”, bringing UK penalties closer to the US model. Past UK regulatory enforcement actions pale by comparison to US cases: the UK Financial Services Authority’s record fine to date is £5.6 million, imposed on the Royal Bank of Scotland Group in 2010, whereas the current high watermark in the US is OFAC’s $9.8 billion settlement with BNP Paribas in 2014. Forthcoming legislative changes could shift the balance somewhat.
Part of the reason for the discrepancy in the figures is the difference in the powers of the regulators when it comes to the enforcement of sanctions. Under the UK regime, the Treasury has no power to enter into settlements with UK companies identified as having breached UK sanctions legislation. By contrast, OFAC can impose civil penalties, as well as negotiate out-of-court settlements in relation to sanctions breaches. OFSI’s ‘bite’ will likely depend on the range of powers given to it by the UK government. Recent empowerment of the Serious Fraud Office to reach deferred prosecution agreements with companies accused of violating the Bribery Act could be a model in OFSI’s future.
Taking lessons from OFAC will naturally involve broadening focus beyond financial institutions, which in the UK have been predominantly monitored under the eye of the Financial Conduct Authority, to other sectors. For financial institutions there may now be another active regulator to manage.
A step towards the US model on enforcement in the UK is also likely to spark concerns about compliance with EU sanctions, which are vague as to their scope and their application. To address these concerns, OFSI is tasked with ensuring sanctions are “properly understood, implemented and enforced”. It is anticipated that OFSI will produce practical guidance for corporates.
Given the serious financial and reputational damage caused by enforcement actions and the new agency’s mandate in that regard, companies with UK exposure should consider this an opportunity to revaluate their sanctions compliance programmes.
The Government’s target is for OFSI to be operational by April 2016. In the meantime, the takeaway is to expect sanctions to play a more significant role in the Government’s enforcement portfolio in the future.
