On June 15, 2022, the United Kingdom will introduce a strict civil liability standard for violations of UK financial sanctions committed after that date. In anticipation of this important change to the enforcement powers of HM Treasury’s Office of Financial Sanctions Implementation (OFSI), the OFSI enforcement and monetary penalties for breaches of financial sanctions guidance (Monetary Penalties Guidance) has been updated and will take effect from June 15. OFSI Director, Giles Thomson, also has outlined OFSI’s enforcement approach in light of these imminent changes in a blog post.
OFSI’s New Sanctions Enforcement Powers
The Economic Crime (Transparency and Enforcement) Act 2022 received Royal Assent on March 15, 2022, after an expedited passage through the UK parliament following Russia’s invasion of Ukraine. The new legislation includes important changes to OFSI’s enforcement powers that will come into effect on June 15. While these changes were an immediate product of the UK’s sanctions response to the situation in Ukraine, the new powers will apply with respect to all of the UK’s geographic and thematic financial sanctions regimes.
In pertinent part, the new legislation will permit OFSI to impose civil monetary penalties for breaches of UK financial sanctions committed after June 15 on a “strict liability” basis by removing the requirement for OFSI to prove that a person had knowledge or reasonable cause to suspect that they were in breach of UK financial sanctions. OFSI will still be required to prove that a breach of financial sanctions has occurred on the balance of probabilities (i.e., that a breach is more likely than not). No equivalent change will be made to the criminal liability standard for financial sanctions violations.
OFSI’s Director has stated that these changes “will strengthen OFSI’s ability to take appropriate enforcement action against persons (including both natural and legal persons) that fail to ensure they are not dealing with sanctioned entities or adhere to their financial sanctions obligations.” He also has stressed, however, that OFSI will not necessarily impose a civil monetary penalty in every case where it finds a breach of financial sanctions and will seek to use these powers when it is “appropriate, proportionate and in the public interest to do so.”
This change brings the UK system more into line with the US model of financial sanctions enforcement and represents a point of divergence with the approach adopted by the European Union, which continues to impose the knowledge/reasonable cause to suspect standard.
The new legislation also gives OFSI the power to “name and shame” by publishing details of financial sanctions breaches committed after June 15 when a civil monetary penalty has not been imposed for whatever reason. This power will only apply when there is found to be a breach of financial sanctions. OFSI has stated that the decision whether to publish case details will be taken on a case-by-case basis and take into consideration whether a particular case involves important compliance lessons of broader application to industry.
The details to be publicized may include:
- who performed the breach;
- a case summary, including details as to the type of breach, sanctions regime implicated, regulation that was broken and whether there was voluntary disclosure;
- the aggregated value (in GBP) of the transaction in breach of financial sanctions;
- compliance lessons OFSI wishes to highlight in the case to assist others in avoiding similar breaches in future; and
- any other information required to give a true understanding of the case and OFSI’s consideration of it.
OFSI will provide notice to persons found in breach 28 days prior to publication to provide an opportunity for representations to be made concerning the finding of a breach and decision to publish a case summary. OFSI also will share the written case summary in advance of publication. OFSI hopes that this new power will “help to raise awareness of financial sanctions, how OFSI approaches and implements them, and to deter future non-compliance.”
OFSI’s Updated Monetary Penalties Guidance and Enforcement Approach
OFSI has updated its Monetary Penalties Guidance to reflect these changes to its enforcement powers.
OFSI has stated that the revised guidance “does not represent a change to OFSI’s overall enforcement approach” and the updated Monetary Penalties Guidance provides that OFSI “will continue to take a fair and proportionate approach to assessments and consider each breach on a case-by-case basis.” OFSI has indicated its intention to continue emphasizing the importance of self-disclosure as a potential mitigating factor when assessing financial sanctions breaches. OFSI also intends to continue assessing cases holistically, including considering the overall severity of breaches as well as the conduct of the persons involved.
In particular, OFSI will consider whether the person committing the breach knew or suspected that their conduct amounted to a breach of financial sanctions as well as the person’s expected knowledge of – and exposure to – financial sanctions risks. Consideration also will be given to efforts to prevent breaches of financial sanctions, including due diligence, when deciding on the nature of enforcement action to be taken. However, OFSI has not sought to provide guidance on the type and extent of due diligence that should be undertaken.
Finally, OFSI has revised the review process for civil monetary penalties by dispensing with the requirement for ministerial review. Reviews requested after June 15, may also be undertaken by a senior official who was not involved in the original case assessment. No change has been made to the ability to further challenge civil monetary penalties imposed by OFSI at the Upper Tribunal.
What Does This Mean for Companies?
The changes to OFSI’s financial sanctions enforcement powers that will be introduced next week are designed to make the civil enforcement of UK financial sanctions breaches easier. This development is likely to result in increased enforcement action by OFSI. It is therefore crucial that companies focus on identifying and managing potential sanction risks.
Companies should assess the sanctions-related risk level of their business activities in light of the strict civil liability standard considering, among other things, whether any revisions need to be made to their sanctions compliance programs.
Given that OFSI will take into account the preventative efforts undertaken by companies when determining how to resolve identified breaches of financial sanctions, companies that can show they have implemented robust compliance procedures to prevent inadvertent breaches of financial sanctions, to the extent possible, likely are best positioned to mitigate the increased legal and reputational risks associated with these changes to OFSI’s enforcement powers.
In particular, as the UK financial sanctions regime extends to entities owned or controlled by designated persons, it will be particularly important for companies to have robust due diligence processes in place that provide a detailed understanding of the ownership and control structure of their customers, business partners and others they transact with.