On April 3, 2017, the UK Treasury’s Office of Financial Sanctions Implementation (OFSI) announced new penalties for economic sanctions violations of £1 Million or 50% of the value of the transaction, whichever is higher. As a result, this new detective has a powerful new enforcement tool, and it may be taking notes from the aggressive U.S. sanctions enforcers.
“Never trust to general impressions, my boy, but concentrate yourself upon details”
– Sherlock Holmes, A Case of Identity
Taking our cue from the legendary Baker Street sleuth, we examine the details of the new OFSI.
Mandate. Pursuant to the Policing and Crime Act 2017 (the 2017 Act), the OFSI will enforce financial sanctions imposed by the United Nations and European Union. As the developments of Brexit unfold, the UK may adopt its own sanctions regime that would likely be enforced by the OFSI independently of UN sanctions.
Jurisdiction. The OFSI will investigate any sanctions violation for which it finds there is a UK nexus – such as a violation by the overseas office of a UK entity, a payment transiting the UK banking system, a financial instrument purchased in the UK and held overseas, or a transaction directed from the UK. The Office will not be limited to investigation and enforcement of violations that occur within UK borders. Additionally, the OFSI has stated that, if it identifies violations of financial sanctions in another jurisdiction, it may use its information-sharing powers to pass details to relevant authorities outside the UK.
“What one man can invent another can discover”
– Sherlock Holmes, The Adventure of the Dancing Men
Following Mr. Holmes’s aphorism, we take a look at what might constitute a sanctions violation, and how the OFSI might respond.
Violations. The OFSI may impose a penalty where it finds two things:
- A person fails to comply with an obligation under sanctions legislation; and
- That person knew or had reasonable cause to suspect that an act or omission would result in a violation under UK sanctions.
Penalties. In all cases, the OFSI may implement up to a £1,000,000 penalty. In a case where the breach or failure relates to particular funds and it is possible to estimate the value of the funds or economic resources, the OFSI may impose a penalty of 50% of the estimated value of the funds or resources, if that amount is greater than £1M.
Individual Liability. The 2017 Act provides for penalties on both a company and its officers, directors, and management. That means that the OSFI will consider the imposition and level of penalty on an officer of a company separately from the penalty on the company itself.
Mitigation. The OFSI will may also induce cooperation from sanctions violators by offering mitigation credit for voluntary self-disclosures. The OFSI will accept disclosures from persons who identify their own sanctions violations. The Office will offer up to 50% penalty mitigation for serious offenses and 30% mitigation for very serious offenses in exchange for an appropriate disclosure and cooperation.
“It is a capital mistake to theorise before one has data. Insensibly one begins to twist facts to suit theories, instead of theories to suit facts.”
– Sherlock Holmes, A Scandal in Bohemia
It is true that the new OFSI does not have a history for us to examine to deduce how it might pursue sanctions violations. However, the UK government has signaled that the office might take its cues from its U.S. cousin, the Office of Foreign Assets Control. Assuming that you have been actively following this blog (and of course we believe that is a fair assumption), you will have seen reports the massive enforcement penalties leveled against U.S. and non-U.S. companies for violations of U.S. sanctions. The largest penalty, imposed on BNP Paribas in the summer of 2014, ran to nearly $9 Billion (and that does not include what they paid in legal fees!)
If the OFSI adopts the approach that OFAC has taken in recent years, the office will focus its fire on financial transactions. London is a hub for international finance. The number of transactions that arise out of UK financial instruments or that transit the UK banking system will provide the OFSI a fast-flowing stream in which to fish for violators.
“As a rule, the more bizarre a thing is, the less mysterious it proves to be.”
– Sherlock Holmes, The Red Headed League
In March of 2019, it is possible that the UK will no longer be enforcing EU sanctions regulations. In that case, the country must adopt its own set of trade restrictions based on its own foreign policy. That shift would significantly increase the autonomy of the OFSI, but it is not yet clear how what direction a post-Brexit sanctions regime would take. The UK may choose to draw closer to the United States by aligning its sanctions regime more with U.S. regulations. On the other hand, as nervous financial institutions look at moves to mainland Europe, the UK may see an advantage in relaxing its sanctions regulations to invite a wider range of transactions to come through London.
When you have eliminated the impossible, whatever remains, however improbable, must be the truth.
– Sherlock Holmes, The Sign of the Four
As with any development in international trade controls, we will continue to follow the progress of the OFSI. We will report back here with any relevant developments as well as our analysis of the direction we believe the Office will take.