HM Treasury’s consultation on imposing monetary penalties for breaches of financial sanctions

Posted: 13th December 2016

Background

On the 1st December 2016, the Office of Financial Sanctions Implementation (OFSI) launched its latest consultation on the imposition of monetary penalties for breaches of financial sanctions rules. OFSI (part of HM Treasury) is seeking views on its consultation paper, which sets out its proposed approach to financial sanction breaches.

OFSI was established on the 31st March 2016, with a view to supporting the UK’s foreign policy and national security goals and to help maintain the integrity and confidence in the UK financial services sector.

It is worth noting that since the implementation of OFSI, there has been very little activity in relation to enforcement of the UK’s sanction regime. Last year alone there were over 100 suspected breaches to financial sanctions, applicable in the UK.

Key points from the consultation

From April 2017 OFSI will be able to utilise new powers to impose penalties for serious financial sanction breaches of up to £1 million, or 50% of the value of the breach; whichever is greater. In 2016, the highest breach was around £15 million.

The powers stem from the new Policing and Crime Bill (The “Bill”), which is currently being considered in Parliament. Once this has passed into law, there will be a more flexible, effective and proportionate set of enforcement measures for sanctions breaches.

The Government is currently seeking views on the approach that OFSI will take when considering and calculating monetary penalties. They wish to ensure that:

• The decision-making process is transparent
• The Treasury can issue clear guidance about the approach prior to the power being used
• The approach is fit for purpose

The consultation paper, in connection with the Bill, will grant OFSI the ability to issue sanctions and penalties in a timely and efficient manner. OFSI will also be able to publish serious breaches in order to educate the industry on the importance of sanctions compliance.

OFSI will assess each case in a fair and proportionate manner, forming a view based on the evidence and determining the action required on a case-by-case basis. In general, more aggravating factors (things that indicate higher culpability) observed in an assessment (see: section 2.8 of the paper) will likely lead OFSI to view the case as serious.

Regulatory next Steps

The consultation is due to run from the 1st December 2016 to the 26th January 2017. OFSI will publish the final rules before the power to impose monetary penalties comes into effect in April 2017.

Considerations for firms

It can be argued that the steps taken by HM Treasury and OFSI can be compared to the US’s approach to enforcement.

In the past there have been occasions of multi-billion dollar settlements between Office of Foreign Assets Control (OFAC) and sanction violators.

Enforcement action can have major financial, reputational and commercial implications for firms, which emphasises the importance of an appropriate approach being taken in this area. Ahead of the rule changes, it is important for firms to consider the following:

• Does your firm have a clear sanctions policy – will it be compliant in a changing sanctions environment; what might need to change?
• Is it clear what data needs to be screened with regards to sanctions checks, and are you comfortable that you are screening against the right lists?
• Is your firm’s culture conducive to compliance in this area - i.e. is there a culture of customer-centricity and compliance in your firm that filters downwards from the top of the business to the bottom?
• Is responsibility for oversight of sanctions apportioned to the correct senior people?
• Lastly, has a financial crime risk assessment been performed that incorporates the current state of sanctions checking in your firm?

On this last point; typically, financial crime risk assessments do not take the granular approach required in order to sufficiently mitigate all areas of risk. A risk assessment should explicitly assess a firm’s performance in key areas, including fraud, money laundering, counter-terrorism, anti-bribery and market abuse, and not just be a set of generic ‘financial crime’ metrics.

Read the full publication.