The UK's financial sanctions enforcement next month undergoes a number of reforms which will align sanctions breaches with notoriously heavy US penalties. Part 8 of the Policing and Crime Act 2017 is due to come into force in April, introducing major reforms to the enforcement of UK financial sanctions.
The Act increases the criminal penalties for individuals prosecuted for sanctions breaches and introduces deferred prosecution agreements for corporate offenders. But the most significant change is the introduction of severe civil monetary penalties for those found to be in breach of sanctions.
The civil monetary penalties will form part of the arsenal of the Office of Financial Sanctions Implementation (OFSI) and are modelled on its US equivalent the notoriously heavy handed Office of Foreign Asset Control (OFAC).
Businesses must now redouble their efforts to prevent sanctions breaches or risk very damaging civil penalties. Draft guidelines on how the penalties will be used, and released by the Treasury in December 2016, offer an invaluable insight into what is to be expected.
The starting point for a civil monetary penalty is that the OFSI will need to satisfy itself, on the balance of probabilities only, that an individual or organisation has failed to comply with the UK's financial sanctions regime either knowingly or with reasonable cause to suspect they were committing a breach. There are then four further conditions of which only one must be met. These conditions include evidence of intentional circumvention of the law and a failure to provide information relating to a sanctions breach.
Whilst a civil monetary penalty is a better outcome for the recipient than criminal prosecution, it also introduces a significant compliance risk. Penalties could reach 50% of the value of the funds estimated to have been involved, and a public shaming of those responsible. This has a distinctly retributive quality and should prompt a robust defensive strategy.
Predictable aggravating and mitigating factors will inform both whether a monetary penalty is appropriate and, if it is, how much it should be. Knowledge and compliance standards in the relevant sector will be relevant to determining the size of any penalty and professional enablers will be treated more severely.
The OFSI have said they will reward anyone coming forward to confess with a significant reduction in any penalty. This will not be available where the sanctions breached include a requirement to notify HMRC, and failure to make a materially complete voluntary disclosure is an offence in its own right.
The Act creates a right of ministerial review and, if necessary, a final appeal (for any reason) to the Upper Tribunal. The amounts of money and reputational damage at stake, and the lower (civil) standard of proof, suggest that early attempts to use this power will be dragged through this appeals process.
These new powers were promoted by George Osborne and are being carried through by the current Conservative government in step with their corporate accountability agenda. However, if the reforms are indeed modelled on the American system the OFSI may soon have to contend with political pressure of a different kind. In 2012, the OFAC set out to impose substantial financial penalties on HSBC for sanctions breaches but the process was cut short after Osborne made his famous "too big to fail" case to the US Department of Justice and a settlement of $375m was offered to HSBC.
In the uncertain financial climate following the Brexit decision, the OFSI may well find itself subject to similar political pressures so let's see how these new muscles are flexed.