The Economic Crime (Transparency and Enforcement) Act 2022 (‘ECA 2022’) received Royal Assent on 15 March 2022 after being fast-tracked through Parliament in response to the Russian invasion of Ukraine. The ECA 2022 includes changes to the powers granted to the UK’s Office of Financial Sanctions Implementation (‘OFSI’) to enable it to respond and enforce against breaches of financial sanctions, the importance of which has been highlighted in the recent Russia/Ukraine war.
Accordingly, OFSI released updated guidance in relation to the issuance of monetary penalties for the breach of financial sanctions to reflect the amendments made to the Policing and Crime Act 2017 (‘PCA 2017’) by the ECA 2022.
The statutory instrument which brings these sections into force on 15 June 2022 can be found here: Economic Crime (Transparency and Enforcement) Act 2022 (Commencement No.2 and Saving Provision) Regulations 2022 (SI 2022/638 (C.34))
The OFSI guidance
The new updated OFSI guidance will come into force on the same date (15 June) and covers how cases are assessed, the procedure for imposing a monetary penalty and how a penalty may be calculated.
The full guidance can be found here: Guidance on monetary penalties for breaches of financial sanctions - GOV.UK
Most notably, the ECA 2022 provides for the following changes:
A new strict civil liability test for monetary penalties
The key development introduced by the ECA 2022 is the introduction of a new strict liability standard for civil enforcement in respect of UK sanctions breaches.
Under the current regime, section 146 of the PCA 2017 grants HM Treasury the right to impose a monetary penalty on a person if it is satisfied, on the balance of probabilities that (a) the person has breached a prohibition, or failed to comply with an obligation, that is imposed by or under financial sanctions legislation, and (b) the person “knew or had reasonable cause to suspect, that the person was in breach of the prohibition” or (as the case may be) had “failed to comply with an obligation”.
However, for breaches of financial sanctions committed after 15 June 2022, section 54 of the ECA 2022 amends section 146 of the PCA 2017 to delete condition (b). Accordingly, OFSI’s power to impose monetary penalties for breaches of financial sanctions shall be subject to strict liability with respect to civil enforcement. This amendment represents a significant departure from the previous position whereby, pursuant to section 146 of the PCA 2017,OFSI was required to provide that a person had knowledge or reasonable cause to suspect that they were in breach of financial sanctions.
However, OFSI still bears the burden of proving that a breach occurred to the civil standard of proof (e.g., “on a balance of probabilities”). All breaches committed before 15 June 2022 will still be assessed in accordance with the previous test. These amendments do not apply to criminal enforcement of UK sanctions.
In an accompanying blog, Giles Thomson (Director of OFSI) sought to reassure that monetary penalties will still only be imposed “where it is appropriate, proportionate and in the public interest to do so”. In particular, OFSI will continue to take into account the severity of the alleged breach and the conduct of the person involved, including whether self-disclosure occurred. In addition, OFSI will consider measures put in place to prevent such breaches when deciding on any enforcement action.
Publication of breaches
Pursuant to amendments made to section 149 of the PCA 2017 introduced by section 56 of the ECA 2022, OFSI will now have the ability to publish details of financial sanctions breaches where a monetary penalty has not been imposed by OFSI. Publication will be considered on a case-by-case basis for breaches committed after 15 June 2022. The publication of such breaches will include a summary of the case along with the OFSI enforcement toolkit to help raise awareness of financial sanctions and OFSI’s approach to enforcement in an effort to encourage compliance. This is a significant power that may cause some consternation. However, OFSI emphasises that publication will always be considered on a case-by-case basis and the persons involved will be notified before any publication.
The review process
It is also worth noting that further changes have been made to widen OFSI’s powers and grant it greater flexibility through the introduction of section 55 of the ECA 2022. After 15 June 2022, any reviews requested in relation to a fine will no longer have to be undertaken by a minister. Instead, a senior official can also review the case. This change will allow HM Treasury to effectively manage resourcing issues.
The ECA 2022 significantly expands OFSI’s ability to enforce against breaches of financial sanctions and the introduction of the strict civil liability test for civil monetary penalties will bring UK financial sanctions legislation more in line with the model used for US financial sanctions as enforced by OFAC . The introduction of this test means that even a breach arising from a genuine mistake would now meet the legal standard for a financial penalty – in other words, all breaches, regardless of knowledge, may be subject to a financial penalty.
While OFSI does not indicate what types of measures or due diligence should be undertaken to prevent potential breaches, OFSI will take any such measures into account when assessing potential enforcement action.
In addition, OFSI’s new power to publish details of breaches even where a monetary penalty has not been imposed presents the potential for reputational harm. While affected firms may make representations about the effect that a publication may have on its business this will be balanced against OFSI’s published aim of giving details of cases where there are “valuable compliance lessons for industry”.
As the shifting landscape of sanctions is liable to rapid and significant changes, it is important to keep up to date with developments such as this. Our comprehensive Sanctions Navigator collates sanctions regimes from the European Union, France, the United Kingdom, United Nations, and United States in one place, to help our clients answer any questions or address any sanctions-related issues they may have. Explore the Sanctions Navigator here.
Authored by Aline Doussin, Jamie Rogers, Ellie Rees, Simi Malhi, and Harrison Gower.