London remains a preeminent international financial and business hub. UK enforcement has the potential to expand the reach of UK/EU economic sanctions, just as the importance of the U.S. dollar and New York financial hub helps expand the reach of U.S. sanctions.
Formation of the OFSI
Established on 31 March 2016, the OFSI sits within UK HM Treasury (HMT) and works closely with law enforcement to help ensure that financial sanctions are properly understood, implemented and enforced.
New Civil Enforcement and Standard of Proof
Earlier this year, the UK government provided for civil enforcement options under the Policing and Crime Act 2017 (PCA). This added to existing authorities under which breaches of financial sanctions are criminal offences in the UK, and also increased the maximum criminal penalty from two years to seven years in prison. In either case, a breach does not have to occur within UK borders and enforcement can be based on a UK nexus (such as involvement of a UK company or individual acting in another country).
Under the new PCA rules, the OFSI may impose monetary penalties on legal persons, including individuals or companies, where it is satisfied, on the balance of probabilities, that:
A person has breached a prohibition, or failed to comply with an obligation, that is imposed by or under financial sanctions legislation; and
The person knew, or had reasonable cause to suspect, that the person was in breach of the prohibition or (as the case may be) had failed to comply with the obligation.
A key difference is that the PCA introduces the civil standard of proof, i.e., “on the balance of probabilities”, rather than the higher criminal standard of proof, i.e., “beyond reasonable doubt”. This follows the approach of U.S. enforcement practices with civil enforcement (although U.S. sanctions rules frequently are strict liability and may not require knowledge).
Penalties and Enforcement
Under the PCA, the civil penalty for a breach can be the greater of £1 million or 50 percent of the value of the breach (known as the “Permitted Maximum”), and is determined by the OFSI. This is similar to U.S. civil penalty approach, although the maximum of £1 million is higher.
The OFSI will determine whether enforcement is appropriate and if the penalty should be adjusted, and has provided Guidance on its approach.
Enforcement. The OFSI will consider several factors when determining whether to enforce. This includes the seriousness of the breach as indicated by the value of the breach, knowledge of sanctions and compliance systems, the number of breaches, whether the breaches have been self-reported and harm or risk of harm to the sanction regime’s objectives. OFSI guidance states that the “penalty threshold” will be reached where:
the breach involves direct provision of funds to designated person;
arrangements have been made to deliberately circumvent the law;
a person has not complied with an information request made by OFSI; or
a monetary penalty is deemed to be appropriate and proportionate.
Penalty Amount. When enforcing, the OFSI will decide what level of penalty is reasonable and proportionate, based on its view of the seriousness of the case. This could be any amount between the Permitted Maximum and no fine. The OFSI will consider aggravating and mitigating factors and determine whether any reductions can be made.
The OFSI will consider voluntary disclosures as an important mitigating factor in determining its enforcement approach. Where OFSI enforcement is active and effective, this can create an incentive for companies to consider voluntarily disclosing violations to OFSI.
Where breaches have implications for U.S. as well as UK/EU sanctions rules, companies may need to consider OFSI voluntary disclosure simultaneous with OFAC disclosure.
The creation of the OFSI and its ability to impose civil fines signals that the UK intends to strictly enforce its financial sanctions regime. The high number of ongoing investigations only supports this view.
Just as companies around the world have taken compliance steps to manage risk of OFAC enforcement, it will increasingly be important to consider UK/EU rules and OFSI enforcement. A large number of companies have a presence in or conduct banking through London. If a problem does arise, OFSI guidance indicates that early internal investigation and, where appropriate, voluntary disclosure to engage with UK authorities may help mitigate the risk of monetary penalties as well as criminal enforcement.