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Global | Publication | June 2016
Following the establishment of the Office for Financial Sanctions Implementation (OFSI) in March this year (see our previous briefing), the UK Government has taken another step towards tougher enforcement of financial sanctions in the UK. In addition to OFSI, the new authority responsible for the enforcement of UK financial sanctions, the UK Government has submitted a number of proposed changes to the UK sanctions regime to Parliament under the Policing and Crime Bill (Bill). The proposed changes will give the OFSI real teeth by providing a range of new powers and penalties for breaches of financial sanctions as well as strengthening existing laws.
If passed by Parliament, the Bill is intended to make good on the UK Government’s promise to “increase the penalties for non-compliance with financial sanctions”, and is likely to lead to the creation of an enforcement regime more similar, in terms of effectiveness and consequences, to the current U.S. system. This briefing examines the key changes which the Bill aims to implement and the potential impact.
The maximum prison sentence for breaches of financial sanctions will be increased from two years to seven years. While a seemingly large shift, the change would simply bring the maximum sentence into line with that available for breaches of terrorist asset freezing sanctions but keep it below the maximum for breaches of trade sanctions (10 years). Publicly, the UK Government has stated that the OFSI will not seek to use monetary penalties as an alternative to criminal prosecution, although it remains to be seen whether the new civil sanctions outlined below will have a more immediate effect than the threat of longer criminal sentences.
Deferred Prosecution Agreements (DPAs) are a relatively new concept in English law (the first such agreement was utilised by the UK Serious Fraud Office in December 2015), and the Bill seeks to enable the use of DPAs in relation to breaches of financial sanctions. Rena Lalgie, the Head of OFSI, has already stated publicly that the agency will work to implement new penalties, including DPAs, if the Bill is passed.
DPAs are agreements, approved by a Court, between a prosecutor and a company that essentially enable the company to avoid criminal (but not civil) liability in return for compliance with certain conditions. The types of conditions may include a public statement relating to the wrongdoing, financial penalties, disgorgement of profits resulting from the alleged offence, and the implementation of compliance programmes. If all conditions are complied with for the duration of the DPA, the matter is normally concluded without prosecution.
As another alternative to criminal prosecution, the Bill provides for a civil monetary penalties regime, which would give the OFSI the power to impose fines in cases where it is satisfied, on the balance of probabilities, that a breach of financial sanctions has occurred. The person committing the breach must have known, or had reasonable cause to suspect, that he/she/it was acting in breach of sanctions. The maximum penalty proposed is £1m or 50% of the total value of the underlying funds or resources involved, whichever is the greater. The details of any such penalty must also be published, ensuring that the reputational damage associated with the breach is concurrent with the actual sum paid. This is perhaps the most significant departure from the existing regime as it seeks to impose a civil (lower standard of proof) penalty for breaches of sanctions.
The Bill also seeks to extend the use of Serious Crime Prevention Orders (SCPOs) to breaches of financial sanctions. At present, SCPOs are only available in England, Wales and Northern Ireland; however, their use will soon be extended to Scotland.
SCPOs are intended to prevent individuals or companies from (further) engagement in serious crime, by imposing targeted prohibitions, restrictions and requirements. An SCPO may contain any condition which the Court believes is necessary for the achievement of the aims of the order, for example, restrictions on financial dealings. Importantly, a Court may grant an SCPO on the civil standard of proof (i.e. on the balance of probabilities), rather than the more onerous criminal standard. Breaching an SCPO is a criminal offence, which provides a major incentive for on-going compliance.
It is likely that SCPOs will be used to impose conditions requiring the implementation of, and adherence to, sanctions compliance policies. As such, they may well be used in a supervisory manner, in much the same way as the UK Financial Conduct Authority already acts in relation to the companies which it regulates.
As a result of the nature of the EU legislative process, the implementation of UN sanctions is often delayed, leading to an increased risk of capital flight before sanctions come into effect. In order to address this risk, the Bill seeks to enable the imposition of UN sanctions directly for a temporary period of up to 60 days, during which time the EU legislative process occurs. Upon the publication of the relevant EU regulation, any temporary direct measures will be replaced.
The proposed changes outlined in the Bill mark a further shift in the UK enforcement regime towards a system that is more flexible for enforcement authorities and more onerous for individuals and companies subject to UK sanctions laws. HM Treasury currently has limited enforcement options available to it with the two extremes of criminal prosecution and public warnings; and no power to enter into settlements with UK companies identified as having breached UK sanctions legislation. While the Bill does not affect the underlying sanctions restrictions currently in force in the UK, the proposed changes would significantly increase the likelihood of enforcement for breaches of sanctions. The OFSI has stated that if the Bill is passed, it will consult on how it uses the new enforcement powers and will publish details of its approach before the powers are first used. While it is clear from public statements that the OFSI is keen to work with companies to make the UK sanctions regime more effective, it has also stated that the agency will be robust when facts warrant it to take action for criminal prosecutions or civil penalties.
As outlined in our previous briefings, 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 re-evaluate their sanctions compliance programmes and adequately assess their sanctions risk.
Nina Varumo is a freelance portrait and documentary photographer based in Stockholm. A recent project of hers Kvinnor till sjöss (‘Women at sea’) is on ongoing photo series highlighting the working life of female seafarers in order to change the stereotypical image of what and who is a seafarer.
Companies have been publicly reporting on their financial performance for over a hundred years. However, they are increasingly having to make public non-financial disclosures relating to sustainability and environmental, social and governance (ESG) matters as a result of rules, laws and regulations issued by stock exchanges, governments and regulators worldwide.
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