Updates: OFSI: the new OFAC?

Revisions to OFSI's Powers and Approach to Compliance and Enforcement

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.

The Policing and Crime Bill (the Bill), currently making its way through Parliament, includes provisions that will represent, once the Bill is enacted, a step change in the penalties that can be imposed on UK entities and individuals for breaches of trade and financial sanctions.

Ahead of the Bill's entry into force as an Act of Parliament (the Act), expected in 2017, HM Treasury's Office of Financial Sanctions Implementation (OFSI) has published a consultation paper (the Consultation Paper) setting out draft guidance on the revisions to the legal framework for the enforcement of financial sanctions measures. Among other provisions, the Act will create a civil penalty regime for financial sanctions breaches, to be administered by OFSI. The Consultation Paper also sets out the consequent changes to OFSI's approach to compliance and enforcement.

This article outlines the main changes to OFSI's powers, its approach to compliance, and the proposed penalty scheme that would be adopted following the entry into force of the Act.

Revisions to OFSI's Powers

OFSI have confirmed that any 'UK connection' will bring a matter into its enforcement remit. A 'UK connection' includes: UK companies working overseas; UK based subsidiaries of UK companies; the transfer of funds through a UK bank or the UK banking system; and/or financial products or insurance bought on UK markets but held or used overseas.

Currently, only criminal penalties are possible, and so a penalty will only be imposed if the criminal standard of proof is met: it has to be demonstrated "beyond reasonable doubt" that an offence had occurred.

OFSI's revised powers will allow it to impose civil penalties, so the lower civil burden of proof will apply: OFSI will be allowed to impose a penalty where it is satisfied "on the balance of probabilities" that an offence has occurred. This is an easier hurdle for OFSI to overcome.

Revisions to OFSI's Approach to Compliance

OFSI have stated that they will take "a holistic approach to ensuring compliance with the regime", rather than simply responding to breaches. This approach will centre on the following key factors:

Promote – promote compliance by increased communications that reach the 'right audience';
Enable – make it easier to comply by providing guidance on compliance expectations/approaches;
Respond – intervene to disrupt attempted breaches and tackle breaches effectively on a consistent, proportionate, transparent and effective basis;
Change – the above approach should have the effect of changing behaviour and preventing non-compliance.

This approach will also be followed when assessing breaches and determining monetary penalties.

Penalties and Investigations

Mitigating and Aggravating Factors in a Case

OFSI have stated that they will not "rigidly follow process for its own sake", but will view all factors to achieve a proportionate/appropriate response. The Consultation Paper details a number of factors that will be considered mitigating or aggravating, including:

Mitigating Factors: The speed with which the cause of the breach is remedied; particular circumstances of the breach, such as mistake; prompt, accurate, voluntary and materially complete disclosure of the breach; and breaches by firms/individuals operating in unsophisticated sectors, who may not have as developed compliance systems as more regulated sectors.

Aggravating Factors: Deliberately arranging/structuring affairs to circumvent sanctions and/or to appear as compliant, whilst deliberately not complying; deliberate breaches; high value transactions; significant harm done to the sanction regime's objectives; breaches where the sanctions issue could have been easily uncovered through common due diligence and know "you’re your customer" procedures; breaches by regulated professionals; repeat behaviour; failures to comply with licencing conditions; dealing with OFSI in bad faith in any investigation; and failure to voluntarily disclose the breach.

In respect of voluntary disclosures, the Consultation Paper indicates that OFSI would expect all parties involved to make their own disclosure of the matter.

Penalties

The revised penalty determination process has three parts: has the case met the penalty threshold; establishment of the baseline penalty; and OFSI's penalty recommendation.

To meet the penalty threshold, OFSI must be satisfied "on the balance of probabilities" that an offence has occurred, and that one of four further factors applies:

Funds/economic resources have been made available directly to a designated person;
There is evidence of circumvention;
OFSI considers the case to be "serious" using the previous case factors; or
A person has not complied with requirements to provide information.

The baseline penalty will be calculated by applying a statutory maximum penalty (£1m, or 50% of the value of the transaction, whichever is the greater) and making deductions on the basis of what the relevant OFSI case handler considers to be reasonable and proportionate.

The guidance does not reveal whether OFSI will penalise each individual "transaction" (in common with the US Department of the Treasury's Office of Foreign Assets Control (OFAC)), or whether OFSI will aggregate multiple related "transactions" and penalise them as a single offence.

A penalty 'matrix' will then be applied and further deductions will be made for voluntary disclosures and the adequacy and promptness of such disclosures.

Where a monetary penalty not is the appropriate recourse (or in addition to a monetary penalty), OFSI may also:

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.
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.
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.
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.