In the Summer Budget 2015 the UK government announced plans to reform the financial sanctions regime, including the creation of a new financial sanctions regulator, the Office of Financial Sanctions Implementation (“OFSI”). The rationale behind these proposals was to ensure that financial sanctions are properly enforced and to create better awareness and understanding by businesses of the rules they are required to follow. In practice, it would appear that the UK government is likely to have been influenced by the large fines that have been imposed in recent years by the Office of Foreign Assets Control (“OFAC”) of the US Department of the Treasury.
The government’s proposed reforms have now been set out as part of the Policing and Crime Bill (“the Bill”). This Bill is currently working its way through Parliament with the second reading having taken place on 7th March 2016.
Of significance is the creation of a new power for HM Treasury (“HMT) to impose a monetary penalty on a person in breach of financial sanctions with a maximum penalty of the greater of £1m or 50% of the value of the breach. This power, along with increased custodial sentences for individuals, the use of deferred prosecution agreements for financial sanctions breaches and other civil enforcement actions introduced under the Bill will give the regulator a wider arsenal of tools to go after financial sanctions breaches in a manner not hitherto encountered in the UK.
Measures in the Bill include:
- the establishment of a new sanctions regulator, known as the Office of Financial Sanctions Implementation;
- allowing HM Treasury to introduce temporary regulations for the speedy implementation of UN resolutions;
- an increase the maximum prison sentence for individuals for breaches of sanctions; and
- the introduction of alternative actions for breaches of sanctions including Serious Crime Prevention Orders, Deferred Prosecution Agreements, and monetary penalties.
Prompt implementation of UN Resolutions
As it currently stands UN Security Council Resolutions (“UNSCRs”) only take effect in the UK through directly applicable EU Regulations. It takes the EU on average four weeks to implement a UN resolution. This creates an opportunity for asset flight before sanctions are imposed.
The Bill allows HMT to implement UNSCRs in the UK through temporary regulations. These regulations would be valid for a specific time period (a maximum of 30 days which can be extended to 60 days) whilst the EU regulation makes its way through the legislative process. Once the EU Regulation is in place the temporary regulation would lapse.
Criminal penalties harmonised
The Bill increases the maximum criminal penalty for breach of financial sanctions from two to seven years’ imprisonment (for convictions on indictment). This aligns with the penalties for offences under the Terrorist Asset Freezing etc. Act 2010. The prison sentence for sanctions violation on summary conviction is increased from six to twelve months.
Alternative actions for breaches of financial sanctions
1. Serious Crime Prevention Orders (“SCPOs”)
The Bill amends the Serious Crime Act 2007 to include financial sanctions breaches in the list of offences for which a SCPO may be imposed.
SCPOs are civil orders made to prevent a person from engaging in serious crime through the imposition of targeted restrictions, prohibitions or requirements. There are no financial penalties. SCPOs have a maximum duration of five years and breach of a SCPO is a criminal offence with a maximum penalty of a five year custodial sentence. A breach can also lead to forfeiture of property or the closing down of a company.
2. Deferred Prosecution Agreements (“DPAs”)
The Bill amends the Crime and Courts Act 2013 to include financial sanctions breaches in the list of offences for which DPAs can be entered into.
DPAs are agreements between a prosecutor and an organisation to suspend proceedings (without admissions) pending certain conditions being fulfilled e.g. paying a financial penalty, cooperation with investigations relating to the alleged offence, implementing a compliance programme. If the conditions are not satisfied the prosecution can resume.
3. Monetary Penalties
The Bill creates a new power for monetary penalties to be imposed where a criminal prosecution for a financial sanctions breach is not in the public interest. The new sanctions regulator, the OFSI which sits within HM Treasury, will be responsible for administering monetary penalties.
It is worth noting that to impose a monetary penalty the OFSI will only need to be satisfied, on a balance of probabilities, that a breach has been committed and that the person knew, or had reasonable cause to suspect, that they were in breach. This is a civil standard of proof (rather than the full criminal standard of proof that would be deployed if the offences were to be prosecuted).
The maximum penalty is the greater of 50% of the value of the funds or resources involved (if quantifiable) or £1m. HM Treasury will be publishing later this year the processes for imposing penalties and the level of penalty imposed in a given situation. A monetary penalty which is levied will be made public in order for it to act as a deterrent.
In introducing these reforms the UK government has been influenced by the large fines that have been imposed in recent years by OFAC. It remains to be seen how civil and criminal actions will be enforced under these new proposals in the UK and in particular whether monetary penalties administered by the OFSI will become a major alternative to a criminal penalty, however the shift in the standards of proof required (for the imposition of administrative fines) and the potential use of DPAs are plainly intended to encourage enhanced enforcement activity.
It is intended that the new rarefied enforcement environment in the UK should be accompanied by OFSI having a higher profile in industry in providing guidance on the compliance with financial sanctions and in improving understanding and raising awareness of the rules to comply with and the means of achieving compliance. How these interactions between government and commerce will play out remain to be seen and further detail of the proposed channels of communication is likely to emerge as these proposals develop. One thing is clear, however, the advent of this new enforcement regime presents a useful opportunity for companies to review compliance protocols to ensure their exposures are appropriately managed.