The future of UK sanctions enforcement: higher penalties, lower burden of proof

HM Treasury has published a consultation paper on how it plans to administer civil penalties for apparent violations of financial sanctions. The paper contains draft guidance (Guidance) relating to how the Office of Financial Sanctions Implementation (OFSI) – HM Treasury’s new sanctions body, created in 2016 – will determine whether a financial penalty is suitable; the value of the penalty; the process of imposing penalties, including rights of the penalised person; and under what circumstances OFSI will publish details of the penalties it imposes.

These new measures are wide-reaching and may be imposed against anyone in the UK, any foreign nationals dealing with UK persons and/or entities from their home country, and may also apply in transactions where there is a “UK nexus” which may include circumstances in which funds are cleared through the UK. In this briefing we focus on some of the key areas of the Guidance which are in open consultation until 26 January 2017.

Civil penalties for violations of financial sanctions is a feature of the Policing and Crime Bill (see our previous briefing), which is currently going through Parliament. The Bill grants a number of new powers to HM Treasury, including extended referral powers, such as to the National Crime Agency for criminal investigation. However it is predominantly OFSI’s proposed new civil financial penalties authority which is attracting the most attention as it is a further step towards an “OFAC-style” enforcement agency in the UK.

The specific authority grants OFSI the power to impose a monetary penalty, where the apparent violation relates to particular funds or economic resources, of up to the greater of £1,000,000 or 50 per cent of the estimated value at issue. Whether or not OFSI imposes a penalty is to depend on whether “it is satisfied, on the balance of probabilities” (i.e. the civil standard of proof) that a person (a) violated financial sanctions legislation, and (b) "knew, or had reasonable cause to suspect”, that the violation had occurred.

The Guidance lists a number of factors OFSI plans to take into consideration when determining whether a financial penalty is a suitable remedy. The “penalty threshold”, as the Guidance reads, is the statutory test (balance of probabilities that a violation occurred and at least reasonable cause to suspect the same) plus the presence of one or more of the following factors:

• The breach involves funds being made directly to a designated person.
• There is evidence of circumvention.
• If the above are not present, aggravating factors such as high monetary value, poor due diligence/KYC processes, deliberate behaviour, licence breaches, repeated or persistent breaches and detriment to public policy.
• Failure to comply with statutory demands for information.

OFSI proposes to base financial penalties on its view of the seriousness of the case and the monetary value of the violation. In practice, this will be based on calculation of the statutory maximum penalty, followed by an assessment by OFSI as to what a “reasonable and proportionate” penalty would be, within that maximum.  “Proportionate” is based on the relationship between the value of the violation and the penalty, as well as on the violation’s effect on the efficacy of the sanctions regime; “reasonable” is whether an “ordinary reasonable person” would regard the penalty as appropriate.

Using that figure, OFSI will apply a “penalty matrix”, which, significantly, applies reductions based mostly on whether the violation was voluntarily disclosed to OFSI. Reductions may apply of 50% (for “serious” cases) and 30% (for “most serious” cases).  What makes a case “serious” or “most serious” is not explained in the Guidance.  A reduction of 15% is available for serious cases, even where no voluntary disclosure is made. 

OFSI is required by the Bill to provide a pre-penalty notice to the person accused of violating the sanctions legislation. The notice will contain a summary of the case and the penalty OFSI intends to levy.

Thereafter, the person penalised will have 28 days to make written representations to OFSI, such as matters of law, relevant facts, OFSI’s interpretation of the facts and whether the penalty is fair and proportionate. OFSI will normally review the representations and respond in writing within 28 days of the final date for making representations.  Penalised persons may request ministerial review of OFSI’s decisions, a process for which OFSI provides a report but in which it has no further participation.  The Guidance does not make provision for meetings or oral hearings in either the OFSI process or the ministerial review.

Appeal of the ministerial review – for any reason - can be made to the Upper Tribunal by penalised persons within 28 days of the minister’s decision.

As a requirement of the Bill , HM Treasury, must at such intervals as it considers appropriate, publish reports about the imposition of monetary penalties. The Guidance states that OFSI will “normally” publish details of the monetary penalties it imposes, including the identity of the penalised person, the facts of the case, and the “compliance lessons OFSI wishes to highlight”.

OFSI’s creation and the authority granted to it by the Bill clearly signal the UK’s intention to enforce its financial sanctions regime with a rigour not previously seen. The Guidance will, in many respects, look familiar to those acquainted with OFAC’s procedures and guidance for civil enforcement of US sanctions.  OFSI’s proposed process of assessing aggravating and mitigating factors, as well the penalty matrix, bear striking similarities to the Appendix to 31 CFR Part 501.  Note also the warning that clearing transactions in the UK may create a UK nexus, raising the spectre that Sterling-denominated transactions will require the same warning label as US dollar transactions do today.

Much, however, still remains to be seen, particularly with respect to how soon will OFSI seek to use its powers when they come into effect and whether it has sufficient resource and expertise available in the near term to deliver on its mandate.

Whilst these questions remain unanswered, the wise message to corporates must certainly be to escalate financial sanctions to a more prominent position in their risk portfolios, and for financial institutions to prepare for additional engagement with OFSI. In the first half of 2017, significant new enforcement discretion will be entrusted to OFSI, employing a civil standard, with both financial penalties and public exposure on offer.  Testing of compliance processes and up-skilling of the legal and compliance teams who own them should be carefully considered to ensure sanctions risk assessments and compliance programmes remain adequate.