By Mikhail Vishnyakov, counsel at City law firm Cooke Young & Keidan
Since 15 June 2022, the Office for Financial Sanctions Implementation (OFSI) has had the power to fine and publicly name businesses for breaching sanctions, even in the absence of knowledge or reasonable cause to suspect the breach.
This development places a greater burden upon entities to ensure that they do not fall foul of the financial sanctions regimes. Its timing is particularly notable, given the recent wide-ranging sanctions imposed on Russia.
How does OFSI prove a breach of sanctions?
OFSI now needs to prove that – on the balance of probabilities (i.e., more likely than not) – a breach of financial sanctions occurred. Once that is proved, OFSI can issue a monetary penalty. Furthermore, that penalty will normally ‘name and shame’ the offender, notwithstanding the reputational consequences that may entail.
In determining whether to issue a monetary penalty, OFSI will take into account various aggravating and mitigating factors.
Although knowledge or reasonable cause to suspect no longer needs to be shown in order to issue the penalty, OFSI will “take into account” the presence or absence of such (actual) knowledge and will also assess the knowledge expected of the particular company. Additional factors which OFSI may take into account include:
- Financial value of the breach;
- Attempted circumvention;
- Harm or risk of harm to the sanction regime’s objectives;
- Behaviour, for example: whether the breach appears deliberate, whether there has been a systems and control failure, whether an individual appears unaware of their responsibilities or whether there has been a simple mistake;
- Repeated, consistent or extended breaches;
- Failure to provide information on financial sanctions breaches; and
- Public interest.
What should firms do?
Given the imposition of civil strict liability penalties, it may now be easier for OFSI to find that there has been a breach of financial sanctions legislation. It would therefore be prudent for firms to ensure that compliance procedures and policies are maintained, monitored and adhered to, with regular training provided to all members of staff.
Additionally, firms should ensure that they conduct the requisite level of due diligence where they consider that work conducted may interact with the financial sanctions regimes or the counterparty may be subject to financial sanctions.
In the event that a breach is discovered, firms should consider self-reporting to OFSI as soon as possible: OFSI “values voluntary disclosure” and this may be a mitigating factor. As such, while not absolving an entity in breach of its sanctions obligations, self-reporting may potentially save a business from a monetary penalty.
Naming and shaming
Even if OFSI does not consider that a breach justifies a monetary penalty, companies or individuals may still be ‘named and shamed’ for breaching sanctions.
In certain circumstances, OFSI says it may “decide that it is not appropriate to publish a summary, for example where it is not in the public interest to do so or where the impact of publishing is considered to be disproportionate”.
However, it is for the individual or entity in breach to notify OFSI in representations about any effect publication may have, and OFSI notes that the bar for not publishing details of a breach “will be high”. This is likely to be higher still in circumstances where monetary penalties have been imposed. Notably, in the seven fines issued to date, all of the offenders have been identified.
OFSI intends to utilise this power to inform compliance decision-making and to provide lessons for other entities in similar sectors on what could go wrong, and how to avoid the mistakes made by others.
It is therefore advisable for firms to keep an eye on any publication of breaches to ensure that their compliance policies meet the requisite standard and expectations of OFSI, and to ensure that they do not fall foul (even inadvertently) of financial sanctions prohibitions.
Future of OFSI implementation approach
Notwithstanding the relatively low number of fines issued for sanctions breaches to date, individuals and businesses must continue to take their financial sanctions obligations seriously. The new strict liability offence is likely to make it easier for OFSI to prove sanctions breaches, and we may therefore see a rapid increase in fines being issued, particularly once OFSI’s extensive workload from the Russia sanctions subsides.