Hard times: new monetary penalties for breaching sanctions come into force

The Policing and Crime Act 2017, which came into force on 1 April, has given HM Treasury the power to impose sizeable civil monetary penalties for breaches of financial sanctions.  Penalties could be imposed on anyone who does business in the UK or where a transaction has a UK nexus (including because funds clear through the UK).  Penalties can also be imposed on UK companies or citizens working abroad.  Firms should be reviewing their sanctions compliance processes now to ensure that they are adequate to withstand the increased risk of enforcement action under the new regime.

What's changing?

To date, there has been very little enforcement action for breaches of UK financial sanctions.  HMT's new powers increase the risk of enforcement action and the range of penalties which could be imposed.

HMT has issued guidance on when it will use its new powers and how the level of penalties will be determined. The new penalties could be significant: if the breach relates to particular funds or economic resources, the maximum penalty is the greater of £1 million or the estimated value of those funds or economic resources.  In all other cases, the maximum penalty is £1 million per breach.

Criminal penalties will still be available for sanctions breaches and deferred prosecution agreements are now available.

When can a penalty be imposed?

The decision to impose a penalty will be taken by the Office of Financial Sanctions Implementation (OFSI) within HMT.  The test for imposing a penalty is the "balance of probabilities" (i.e. whether something is more likely than not).  It is not a strict liability regime – a firm will only be fined if it had "reasonable cause for suspicion" that it as breaching the sanctions.  Following consultation, OFSI has clarified that the "reasonable cause for suspicion" test is an objective test which looks at whether there were facts from which an honest and reasonable person should have known or formed the suspicion that their conduct breached the sanctions.

If a penalty is imposed upon a firm, OFSI will also consider whether to impose a penalty on its directors and senior managers, so that individuals cannot escape responsibility.

Why might a penalty be imposed?

OFSI's position is that it will assess each case on its own merits and take a fair and proportionate approach.  It will not impose penalties in all cases – some might be referred for criminal investigation, or OFSI might decide not to take action.

The guidance sets out a number of aggravating and mitigating factors which OFSI will take into account, such as the value of the funds involved in the breach and the firm's level of culpability, including whether the breach was deliberate or a mistake.  If a breach is repeated or persistent, this will be an aggravating factor.

Are there any ways to reduce a penalty?

OFSI will give significant credit for self-reporting of breaches.  OFSI's guidance is to err on the side of early disclosure.  However, any information disclosed must be accurate and complete because providing false or misleading information is likely to damage credibility and may trigger an additional penalty.

Discounts on penalties are also available if the firm can show that the case is "serious", rather than "most serious", e.g. by pointing to mitigating factors such as compliance steps taken since discovering the breach.



Serious case

Most serious case

Voluntary disclosure

Baseline penalty, less 50% credit for voluntary disclosure.

Baseline penalty, less up to 30% credit for voluntary disclosure.

No voluntary disclosure

Baseline penalty, less potential discount of up to 15%.

Full baseline penalty, with no credit given.

There is no clear rule on when connected breaches will be treated as a single breach, with a single penalty, or as multiple separate breaches, with multiple penalties.  Firms should identify any factors which would justify connected breaches being treated as a single case, e.g. because the breaches all stemmed from a single error.

Can a penalty be challenged?

Firms can make representations to OFSI before a penalty is imposed.  If the firm does not agree with OFSI's decision, it can refer the decision for an independent review by a Government Minister.  There is also a right of appeal.

What should firms be doing now?

The best way for a firm to reduce the risk of enforcement action is for it to ensure that its sanctions compliance processes are robust.  If any breaches are identified, the firm should consider making a report to OFSI swiftly and should take immediate steps to remedy the breach.  This will put the firm in the strongest position to argue that a penalty should not be imposed or that any penalty should be at the lower end of the scale.

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