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New Act strengthens UK enforcement powers for financial sanctions breaches

Parliament has handed UK authorities significant new powers in relation to financial sanctions enforcement.

The Policing and Crime Act 2017 passed on 31 January: 
  • gives HM Treasury, through its Office of Financial Sanctions Implementation (OFSI), the power to impose potentially hefty civil penalties on organisations and individuals for breach of financial sanctions;
  • allows prosecutors to enter into deferred prosecution agreements in financial sanctions cases; and
  • gives the Courts the power to impose targeted restrictions on parties convicted of sanctions breaches by way of a ‘serious crime prevention order.’ 

Expansion of enforcement options 

As highlighted in our previous briefing, (‘New enforcement powers for financial sanctions breaches proposed’), where there is a breach of financial sanctions in England and Wales, the authorities’ enforcement options have been limited to pursuing a formal criminal prosecution or sending a warning letter. They have not had any alternative means of imposing fines/penalties should criminal prosecution not be in the public interest.

Once the Act is implemented, the authorities will have a broader and more flexible array of enforcement powers to deploy where there is evidence that sanctions have been breached.

Potential for significant civil penalties 

As an alternative to criminal proceedings, the Act introduces a civil penalties regime for parties suspected of breaching financial sanctions. This new regime bears some similarity to the powers of HMRC to impose ‘compound penalties’ on exporters in relation to export control breaches as an alternative to criminal prosecution in that both regimes give discretion to the regulator (as opposed to the courts) to set the level of penalty.

The Treasury will issue further guidance on when civil penalties will be appropriate for financial sanctions breaches (as opposed to a warning or a criminal enforcement action). The Government has been consulting on this guidance and is currently considering the consultation responses.

It is expected the Treasury will use these powers where it is satisfied that a person knew, or had reasonable cause to suspect, that its actions breached financial sanctions but where it is not in the public interest to pursue a criminal prosecution and the level of the breach is such that a warning letter, alone, is unlikely to bring about a sufficient change in behaviour.

The maximum penalty may be the greater of £1m or 50% of the estimated value of the funds to which the breach relates. And further guidance will follow on how the Treasury will calculate such penalties following the consultation.

For these purposes, a civil standard ‘balance of probabilities’ test will be applied, instead of the criminal standard of proof. Given the lower standard of proof required, it seems reasonable to conjecture that there will be an increased risk of enforcement action now the authorities no longer have to pursue a criminal prosecution to impose a penalty. 

Enforcement risk for management 

The new civil penalty regime also creates increased enforcement risk for senior management.

Where a company has to pay a civil penalty for sanctions breaches, a penalty may also be imposed on senior officers if the company’s breach took place with the officer’s consent/connivance or is attributable to the officer’s neglect.

It follows that companies will need to adopt a high standard of internal controls and oversight, aimed at ensuring compliance with EU/UK financial sanctions. This will be particularly important for directors and other senior management given the increased personal exposure of individual officers. There will also be increased reputational risks for individuals and companies alike.

Deferred prosecution agreements

The Act enables deferred prosecution agreements (DPAs) to be entered into with companies in relation to financial sanctions offences. DPAs may be used where prosecutors believe criminal proceedings are more appropriate than a civil penalty, but it is in the interests of justice to enter into a DPA rather that pursue a prosecution.

Such agreements will operate under the same regime as other UK DPAs. That means the agreements may include terms requiring companies to pay a financial penalty akin to what they would pay for an early guilty plea (albeit much less than what they would pay following a conviction). DPAs may also include terms requiring the payment of compensation, obliging the company to cooperate in investigations into other parties and/or to implement a compliance program.

DPAs are relatively recent additions to English law. However, the evidence so far suggests they are more likely to be available to companies that did not deliberately breach sanctions, and, on discovery of the breach, self-report and cooperate fully with the authorities. 

Serious crime prevention orders 

The Act allows the Court to impose a serious crime prevention order (SCPO) on parties who are convicted of breaching financial sanctions. An SCPO allows law enforcement to place targeted restrictions on the relevant party to prevent another breach. SCPOs, therefore, allow the government to exercise ongoing oversight over anyone convicted of sanctions breaches. 

A reminder of the importance of compliance 

The financial sanctions related provisions of the Act will come into force by way of Statutory Instrument at some point in the near future. Thereafter, we will start to see exactly how these powers will be used in practice. One thing, however, is clear—enforcement risk is increasing, which makes it more important than ever to ensure companies have procedures in place to ensure compliance with UK/EU sanctions law. 
Please do not hesitate to contact Sarah Parkes, Sylvia Noury, Daniel Lawrence or Maziar Jamnejad in our London sanctions team, your usual relationship partner or any other member of our Global Sanctions and Trade Team if you have any questions or would like to discuss any of these matters.