The UK's Office of Financial Sanctions Implementation: a new sheriff in town?
A new UK anti-corruption authority looks set to wield an increased level of power, meaning compliance officers may have to review their strategies in the country, write Steven Farmer and Aaron Hutman.
In December 2017, the UK government published a new anti-corruption strategy. Its stated aim is to strengthen the integrity of the UK financial industry, with the Office of Financial Sanctions Implementation (OFSI) playing a key role by imposing monetary penalties for financial sanctions breaches.
The spotlight has never shone brighter on corruption: with the fall-out of the Panama and Paradise Papers, the intensification of anti-money laundering (AML) efforts to uncover beneficial owners, and the increasing reliance on economic sanctions to project power by the US, EU and allied countries.
On the other side of the Atlantic, the US authorities have wielded huge monetary fines and threats of secondary sanctions with sweeping global impact. Does the creation of OFSI and this new UK government strategy mean that London should expect a wave in enforcement actions? And, if so, what steps should executives in the financial sector take to be ready for these developments?
New civil enforcement
More than 100 investigations have been opened by the OFSI since its inception, most aimed at firms regulated by the Financial Conduct Authority or the Prudential Regulation Authority. Nevertheless, it is perhaps too early to say whether the UK is trying to emulate its US counterpart, the Office of Foreign Assets Control (OFAC), which has historically been far more willing to exercise its powers when compared with European authorities.
The legal underpinnings for expanded enforcement are now in place. In 2017, the UK government provided for civil enforcement options under the Policing and Crime Act 2017 (PCA). It added to existing authorities under which breaches of financial sanctions are criminal offences in the UK, and also increased the maximum criminal penalty from two years in jail to seven years. Jurisdictional reach was expanded to breaches outside the UK, and enforcement based on a UK nexus (such as involvement of a UK company or individual acting in another country).
Under the new PCA rules, the OFSI may impose monetary penalties on individuals or companies based on the civil standard of proof ('balance of probabilities') rather than the higher criminal standard of proof ('beyond reasonable doubt'). While not the “strict liability” of many US sanctions regulations, the UK civil standard of proof could help pave the path for OFAC-style enforcement in the UK.
Penalties and enforcement
Under the PCA, the civil penalty for a breach can be the greater of £1m or 50% of the value of the breach (known as the 'permitted maximum') and is determined by the OFSI. This is similar to US civil penalty approach. The OFSI will consider the seriousness of the violation by the value of the breach, knowledge of sanctions and compliance systems, number of breaches, whether breaches have been self reported, and the risk of harm to the sanction regime’s objectives, among other things.
The OFSI guidance also states that the 'penalty threshold' will be reached where:
- the breach involves direct provision of funds to designated persons;
- arrangements have been made to circumvent the law deliberately;
- a person has not complied with an information request made by OFSI; or
- a monetary penalty is deemed to be appropriate and proportionate.
The OFSI will decide what level of penalty is reasonable and proportionate, which could be an amount between no fine to the permitted maximum. The OFSI will consider aggravating and mitigating factors and determine whether any reductions can be made.
What does this mean for compliance?
The creation of the OFSI and its ability to impose civil fines signals that the UK intends to enforce its financial sanctions regime more strictly. The high number of ongoing investigations supports this view, but the new regulator will have to demonstrate its ability to finish cases, levy penalties and impose reputational consequences for compliance failures. The first enforcement actions are expected to be published in the first half of 2018.
Financial institutions have already learned to respect and allocate resources toward compliance with AML and sanctions rules. The creation of the OFSI should lead to greater focus on UK and EU regulatory requirements. It should be particularly impactful at the intersection of evolving EU standards on uncovering beneficial ownership and the demands of economic sanctions.
Should the OFSI succeed in demonstrating its ability to impose meaningful penalties, compliance officials may need to consider a more conservative approach to UK and EU regulatory breaches.
Steven Farmer and Aaron Hutman are both counsels at law firm Pillsbury Winthrop Shaw Pittman.
