UK likely only to pursue financial sanctions civil fines where due diligence inadequate

Stacy Keen said: “It is good news that enforcement action will not be taken in relation to every breach, but companies doing business with people or organisations with connections to those who are sanctioned will, if there is a breach, need to justify the steps taken to assess ownership and control and demonstrate that the due diligence and assessments undertaken were risk based and supported by a decision-making process.”

UK sanctions watchdog the Office of Financial Sanctions Implementation (OFSI) has updated its guidance on enforcement and monetary penalties for breaches of financial sanctions (29-page / 718KB PDF).

OFSI’s confirmed approach is that it “will consider appropriate due diligence conducted on the ownership and control of an entity to be a mitigating factor where the ownership and control determination reached was made in good faith and was a reasonable conclusion to draw from such due diligence,” the guidance said. “OFSI may also consider a failure to carry out appropriate due diligence on the ownership and control of an entity, or the carrying out of any such due diligence in bad faith, as an aggravating factor. The weight to be attributed to the mitigating or aggravating factor (as applicable) will be assessed on a case by case basis.”

“OFSI would expect to see evidence of a decision-making process that took account of the sanctions risk and considered what would be an appropriate level of due diligence in light of that risk. OFSI would usually expect these decisions to be made by reference to an internal framework or policy, but recognises that there is no ‘one size fits all’ approach,” it said.

Keen said that companies should be aware not only of the quality of their investigations when initially doing business, but of their processes for reviewing the position over time. “The updated guidance is explicit that ownership and control is not static and OFSI expects assessments to be reviewed and refreshed at appropriate intervals,” she said.

“OFSI expects scrutiny of information obtained as part of any ownership and control assessments, particularly where efforts appear to have been made by sanctions targets to avoid the relevant ownership and control thresholds. Any prior ownership or ostensive control by sanctions targets should be identified and the validity of divestments scrutinised,” said Keen.

Forensic intelligence specialist Thorne Godinho of Pinsent Masons described what an OFSI-compliant process might look like.

“OFSI has confirmed the need for a risk-based due diligence approach to be applied when screening ownership and control. Merely applying simple screening processes, without any reasonable and evidence rationale, may fall short of this expectation. So it is important that sanctions assessments are led by intelligence and evidence,” he said.

“A well-considered due diligence process may need to involve various elements, such as open-source investigation of public records and media sources, as well as iterative and bespoke questionnaires for counterparties,” said Godinho.