UK Financial Sanctions Enforcement – New Powers and Tougher Sentences

The UK Government put a package of proposals to Parliament in February to increase both the type and the potential severity of consequences for persons and companies who breach EU financial sanctions. If approved, these changes will be powerful new tools in the hands of the Treasury’s new Office of Financial Sanctions Implementation (OFSI) (see the Dechert update last year on the establishment of OFSI), which can be expected to lead to tougher and more proactive sanctions enforcement in the UK. 

The proposed introduction of these new powers, together with the establishment of OFSI as a dedicated financial sanctions office within HM Treasury, signals a clear intent by the Government to take sanctions enforcement more seriously. We take a look at the key elements of the new proposals.

• Increased maximum jail sentence: The proposal which has grabbed the headlines is the proposed increase in the maximum prison sentence from two years to seven years for individuals convicted of a breach of financial sanctions. While notable, this merely brings the potential maximum sentence in line with the maximum available for breach of a domestic asset freeze, and it remains lower than the 10 year maximum available for a breach of the trade sanctions. Ultimately the maximum sentence is relevant only on conviction; the Treasury has not pursued convictions in recent years. 

• Deferred Prosecution Agreement (DPA): The Government proposes to make DPAs available in cases of breaches of financial sanctions. A DPA is a judicially monitored process for resolving certain specified types of criminal cases. It is a relatively new concept in English law; the first ever DPA in the UK was entered into in December 2015. It allows a company to acknowledge its misconduct whilst avoiding a criminal conviction. In return for avoiding a conviction, the company agrees to a public statement of facts related to its wrongdoing, and agree to other conditions, which can include payment of a fine and/or compensation, disgorgement of profits, and even a requirement to have an independent compliance monitor observe and report on the company’s compliance policies and procedures. A DPA is available only to a company which has self-reported its offending at an early stage and adopted a genuinely pro-active approach to putting matters right for the future. 

Although sanctions actions in the United States are commonly resolved by way of a DPA, it seems unlikely that DPAs as they currently operate in the UK will prove similarly popular (see the Dechert update “What Price a DPA? Navigating Unchartered Waters” from last year). Our expectation is that the civil sanctions tool outlined below will prove to be the more valuable tool for OFSI in practice. 

• Serious Crime Prevention Order (SCPO): A SCPO is a court-imposed civil order (therefore applying the balance of probabilities test) that can be made against a person or entity involved in, or convicted of, a serious offence. The Government proposes to add a breach of financial sanctions to the list of ‘serious offences’ for which a SCPO can be made. Typically a SCPO might contain targeted prohibitions that the court thinks appropriate to restrict the person or company from further involvement in crime. A SCPO may also contain conditions, potentially including a requirement to ensure robust compliance with financial sanctions in the future (ie to develop or improve one’s sanctions compliance policy). The power to require a company to adopt a sanctions compliance policy is something that is missing at present, save in certain sectors where sectoral regulators may impose such a requirement (as the FCA does). 

• Civil Sanctions: The Government proposes that OFSI should have the power, as an alternative to pursuing any of the criminal routes referred to above, to impose a monetary penalty. OFSI will have to be satisfied on the balance of probabilities that the person breached a sanctions restriction and that he/she/it knew or had reasonable cause to suspect that their actions were a breach. The proposed establishment of a civil enforcement regime means it would be easier to fine companies for breaching sanctions. The fines that OFSI would be able to impose are also potentially large: the current proposal is for fines up to the greater of £1m or 50% of the estimated value of the funds or resources at stake. By way of comparison, recent US settlements have involved fines closer to 25% of the funds at stake. Not only could fines be levelled against companies under the UK proposal; if the company’s breach is attributable to the negligence of an individual person, then OFSI would be able to impose a monetary penalty on that person too.
  

HM Treasury will conduct a public consultation as to the use of this power, and will publish greater details of the approach to be taken prior to using the power. 

• Prompt implementation of UN sanctions: Noting that the EU can take several weeks to adopt a regulation giving effect to UN sanctions changes (thereby increasing the risk of asset flight when asset freezes are imposed), the Government proposes that HM Treasury may adopt temporary measures to give effect to UN Security Council Regulations, with such measures to cease once the relevant EU legal act is adopted. 

What do firms need to do and how can Dechert assist? 

None of these proposed measures would change the substantive sanctions restrictions with which firms are currently required to comply. However they would increase the likelihood of consequences for breach. It remains to be seen whether these proposals will be supported in Parliament, and how extensively the new powers, if approved, will be used. But the indications are that HM Treasury intends for OFSI to have teeth, and that the threat of consequences for breach of sanctions – especially large fines - would become more real. 

Firms with robust compliance policies already in place do not need to do anything except to continue to comply with sanctions measures. Firms which do not have a sanctions compliance policy, or who feel that their policy may be inadequate, might take this opportunity to strengthen their compliance procedures before these new powers start to bite. Firms may also want to review their contractual and other arrangements to ensure that they understand, and are comfortable with, the level of sanctions exposure which falls on them through their existing contractual arrangements (as to which see this Dechert update). Firms that have concerns as to past or on-going breaches may want to consider, with their legal advisers, how best to minimise their potential exposure in view of the potentially increased risk of enforcement. 

Dechert’s International Trade practice, based in London and Washington, D.C., advises on all aspects of financial and trade sanctions both in the EU and in the US, including the interpretation of sanctions obligations, engagement with regulators, contractual provision, drafting compliance policies and conducting investigation if concerns are discovered.