Following Russia's invasion of Ukraine on 24 February 2022, there has been a renewed focus on whether the existing legislative framework in the UK that governs financial sanctions and the prevention of economic crime goes far enough to tackle high-profile money laundering offences and the influx of illicit funds into the UK economy. Recent research by Transparency International identified that £1.5bn of property in London is linked to Russia – the majority of which is owned by shell companies in offshore tax havens.
The Economic Crime (Transparency and Enforcement) Bill (the "Bill"), that was published on 28 February 2022 and fast-tracked through the House of Commons on 8 March 2022 (reaching the second reading in the House of Lords at the time of publication), introduces a raft of new legislative measures designed to establish a register of overseas entities and their beneficial owners, amend financial sanctions law and reform the UK’s Unexplained Wealth Order regime to empower criminal investigators. The Bill is likely to enter law during the course of next week (w/c 14 March 2022).
The focus in the press has naturally, given events in Ukraine, been on the provisions that will stop wealthy Russians using the City of London for money laundering and hiding dirty money, and those which make it easier to sanction individuals and freeze assets. However, tucked away in s48 of the Bill is an amendment to s146 of the Policing and Crime Act 2017 (the "PCA 2017"), regarding penalties for sanctions breaches, which could have a wide ranging impact far beyond tackling Russian oligarchs and money launderers.
Financial penalties for sanctions breaches
The UK government can currently bring criminal and/or civil actions against a person or a corporation who has breached financial sanctions legislation (the key legislation being the Sanctions and Anti-Money Laundering Act 2018 (SAMLA 2018), Counter-Terrorism Act 2008 under Schedule 7 (CTA 2008), and Anti-Terrorism, Crime and Security Act 2001 (ATCSA 2001)).
The PCA 2017 established a civil route to impose monetary penalties for sanctions breaches (administered and enforced by the Office of Financial Sanctions Implementation ("OFSI")).
Under s146 of the PCA 2017, the OFSI has power to impose civil monetary penalties for breaches of financial sanctions legislation. The maximum penalty is £1 million or 50% of the estimated value of the breach, whichever is higher.
Such a monetary penalty may be imposed on any person, (either an individual or a company), if the OFSI is satisfied that, on the balance of probabilities:
- The person has breached a prohibition, or failed to comply with an obligation, that is imposed by or under financial sanctions legislation; and
- The person knew, or had reasonable cause to suspect, that they were in breach of the prohibition or (as the case may be) had failed to comply with the obligation.
The second limb of s146 requires the OFSI to be satisfied that the person had 'knowledge' or a 'reasonable cause to expect' that their activity breached financial sanctions legislation, for example, that they dealt with the funds of a sanctions target or made funds or financial services available to a target.
The OFSI's monetary penalty powers extend beyond UK borders and will be engaged as long as there is a connection to the UK. By way of example, the OFSI provides a non-exhaustive list of when a UK nexus might be created, as follows:
- A UK company working overseas;
- Transactions using clearing services in the UK;
- Actions taken by a local subsidiary of a UK company (depending on the governance);
- Action taking place overseas but directed from within the UK; or
- Financial products or insurance bought on UK markets but held or used overseas.
The OFSI has been slow to impose fines for sanctions breaches, with only 6 fines issued since 2019. Other than the £20.47m fine issued to Standard Chartered Bank in February 2020 and the fine of £146,000 issued to Telia Carrier UK Limited in September 2019, none of the other fines has exceeded £50,000 (and the first issued was only £5,000). However, the Standard Chartered fine shows just how significant the fine could be if the breach is serious enough.
Amendments in the Bill – introducing strict liability
Section 48 of the Bill will amend the PCA 2017 by entirely removing the second limb of the test the OFSI must apply under s146(1). Accordingly, whether the person knew, or had reasonable cause to suspect, that they were in breach of sanctions legislation will no longer be a consideration. In fact, new wording to be inserted through the Bill expressly instructs that for the purposes of determining whether there has been a breach, any requirement imposed under the relevant sanctions legislation for the person to have known, suspected or believed any matter is to be ignored.
This amendment is designed to make it easier for the OFSI to step in and exercise its powers to impose fines on offenders, even if the person is unaware that they have breached financial sanctions legislation. It must be assumed that there have been numerous breaches that "but for" the knowledge test would have resulted in a fine.
Further changes introduced through the Bill include allowing the OFSI to publicly name organisations that have breached financial sanctions even where it has decided not to impose a penalty, the rationale being that the reputational risks will prove a deterrent. The Bill also proposes to permit government departments and relevant bodies to share information proactively with HM Treasury to facilitate the OFSI's function. All of this suggests a far more proactive OFSI is coming.
How to protect your business
In light of these developments, we expect there to be a significant uptick in the OFSI's activities and the issuing of fines.
Businesses will be no doubt be asking what they can do to protect themselves in short order from potentially significant fines for breaches they did not know they were committing. It should be noted that although this amendment introduces strict liability, there is no inbuilt defence, for example for having preventative policies and procedures similar to that in the Bribery Act 2010 or Criminal Finances Act 2017 in relation to the "failure to prevent" bribery or facilitation of tax evasion offences. Nonetheless, the strong likelihood is that if businesses can show they have in place robust compliance procedures to prevent, as far as possible, an inadvertent breach of financial sanctions legislation, that will be a relevant factor in the OFSI's decision whether to impose a fine and the level of such a fine.
We highly recommend that businesses review their compliance regimes in light of the imminent amendments and decide, in light of their business risk and risk tolerance level, whether these need to be altered. For many, there will be a balance to be struck between increasing the stringency and regularity of checks and the increased burden (both in terms of costs and time) that that will place on the compliance function.
Unfortunately, this is yet another, in a long line of, additional financial and compliance burdens that is being imposed on businesses. With the Law Commission's options paper on the reform of corporate criminal liability (which will have a significant impact on how businesses must address economic crimes such as fraud, false accounting and money laundering) also due imminently, such burdens only look likely to increase.
Please contact our Sanctions and/or Financial Crime teams for further advice and support for your business.
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