OFSI to get tougher on non-compliance with UK sanctions

The new guidance on monetary penalties for breaches of financial sanctions takes effect on 1 April and will replace the existing guidelines which will continue to apply up until that date.

Fiona Cameron of Pinsent Masons, the law firm behind Out-Law, said the new guidance contains important changes that will influence the approach the OFSI will take when considering issues of non-compliance, including how it will deal with voluntary disclosures of non-compliance by companies and whether or not it will impose fines on companies or directors in breach of financial sanctions rules.

"The changes signal a strengthening of determination on the part of OFSI to use its full powers to ensure compliance," Cameron said. "It also mirrors recent enforcement activity by other regulators keen to ensure that where leniency for cooperation is sought that that cooperation is real and reveals all the facts, not just those the reporter has considered relevant. Questions of materiality will be decided by the regulator."

Financial sanctions are UK regulations which prohibit or restrict the giving and receipt of funds and other resources to or from or for the benefit of a person or entity that is on the UK's sanctions list, usually subject to a licence. Sanctions may also take the form of financial market restrictions that prevent trade in particularly financial instruments issued by specific persons and entities.

The OFSI, which sits within the UK Treasury, gained the power to impose a civil penalty in respect of breaches of the sanctions regime on 1 April 2017. Under those powers, OFSI can impose a maximum penalty of the greater of £1 million or half the value of the breach for breaches of the sanctions rules. Penalty discounts are available for voluntary disclosures depending on the circumstances of the case.

In addition to the civil penalty regime, breaches of financial sanctions are criminal offences for which individuals can be sentenced to seven years' imprisonment.

One area in which the OFSI has updated its guidance is in relation to the potential responses open to it when it identifies cases of potential non-compliance.

Under the old guidance, one option included the OFSI "issuing correspondence requiring details of how a party proposes to improve their compliance practices". However, that option is no longer set out in the new guidance. Instead, the OFSI has replaced it with the option to "issue a warning".

Cameron said: "Quite what this means in practice remains to be seen but the linguistic change suggests a tougher stance. Moreover, the updated guidance confirms that the options are not mutually exclusive and that several can be taken at once."

The other options available to the OFSI include: referring regulated professionals or bodies to their relevant professional body or regulator in order to improve their compliance with financial sanctions; imposition of a monetary penalty, and/or; referring the case to law enforcement agencies for criminal investigation and potential prosecution.

According to the OFSI guidance, it is possible for the OFSI to impose a penalty on one person – a legal entity, or officer of the company – and for another to be criminally prosecuted. However, while the old guidance had said that the OFSI would not normally impose a penalty on any person who already had been prosecuted for a breach of financial sanctions, this wording has been removed from the new guidance.

Other changes concern the issues that the OFSI will consider aggravate or mitigate the seriousness of a breach. Previously it listed the direct provision of funds or economic resources to a designated person as an aggravating factor – this reference has been removed from the new guidance.

The level of actual and expected knowledge of financial sanctions held by a business or an individual officer is a further factor that the OFSI will weigh when considering a case. However, it has removed from its new guidance previous wording which suggested that a more lenient approach could be adopted if a person observing a high standard fell below that standard on a one-off basis and acted swiftly to remedy the cause of the breach.

The new guidance also contains changes in respect of the regulator's approach when voluntary disclosures of non-compliance are made to it. This includes a tightening of some language, with the new guidance now no longer providing scope for those self-reporting to make their own assessment of the materiality of the information to be disclosed, requiring disclosure of "all relevant material" instead of the previous expectation that disclosures be "materially complete".,

The new guidance in respect of voluntary disclosures also contains fresh wording relating to how the application of legal professional privilege to information impacts disclosure expectations of the OFSI.

Cameron said: "The old guidance stated that even where there was no explicit provision exempting communications subject to legal professional privilege, 'relying on legal professional privilege could amount to a reasonable excuse not to disclose a document'. That now reads 'such protections may apply even where not explicitly referenced'. LPP is an absolute right with derogations strictly construed by the courts. Unless explicitly referenced in statute, the tendency of the courts has been to apply LPP, not the other way around. This change in emphasis suggests a situation not uncommon amongst regulators now, where organisations are encouraged to waive their LPP as a signal of cooperation."

The OFSI has also changed its guidance on which cases will be classed as the "most serious". The definition is now arguably broader in scope, Cameron said, and applies to cases that "may involve a very high value, particularly poor, negligent or intentional conduct or severe or lasting damage to the purposes of the sanctions regime".

The circumstances in which the OFSI could issue a penalty have also been widened out under the new guidance. Previously the penalty threshold was reached where funds or economic resources were made available directly to a designated person. The guidance now provides that this may be met where such resources are made available indirectly.

Greater flexibility has also been written into the new guidance in relation to the level of penalty that the OFSI may impose. There is no longer a requirement for a clear relationship between the value of the proposed penalty, value of the breach and how seriously the breach undermined the pertinent sanctions regime. Instead, the OFSI will determine the level of penalty appropriate following "a holistic assessment of all the other factors present in the case". In addition, penalties are not required to "be either a specific percentage or multiple of the breach amount", according to the new guidance.

The OFSI's updated guidance provides no indication as to the amount of reduction to be expected to the level of penalty that may be imposed in cases where there has been voluntary disclosure of non-compliance.