Policing and crime act 2017: how sharp will OFSI's teeth prove to be?

Banking and Finance Litigation Update

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The Policing and Crime Act 2017 (PCA) received Royal Assent on 31 January 2017. Buried within Part 8 are a number of provisions which make significant changes to the financial sanctions regulatory landscape. Most likely to be of concern to financial institutions is the prospect of fines of £1 million or more being imposed outside the usual judicial process by the Office of Financial Sanctions Implementation (OFSI). The key provisions came into force from 1 April 2017.

OFSI was formed in March 2016 with the stated aim:

"(to)ensure financial sanctions make the fullest possible contributions to the UK’s foreign policy and national security goals and help maintain the integrity of and confidence in the UK financial services sector"

The government committed to introducing new laws to ensure that suitable remedies were available to address breaches of financial sanctions.

The new measures introduced by the PCA cover three key areas:

  • Sentencing - an increase in maximum criminal penalties
  • Enforcement - new powers to impose civil penalties and other orders
  • Implementation - a more direct approach to implementing asset freeze provisions

A full analysis of these issues is beyond the scope of this article; we therefore focus on the key issues likely to have the most significant impact.

Sentencing

The PCA will substantially increase the maximum penalties for the criminal offence of failing to comply with a prohibition under a freezing order. A freezing order is an order which prohibits any person in the UK, any UK national or any UK company from making funds available to or for the benefit of any named person.

Previously the maximum penalty for breaching such an order was, for individuals, two years custody, this is now increased to seven years. Further, where an offence is committed with the consent or connivance of a body corporate, or through the neglect of its officer, both are guilty of the offence and liable to be punished accordingly.

To date this provision has not been widely used and there have been no reported prosecutions. However, the maximum penalties now align more closely with those available for other breaches of the sanctions regime, and reflect the level of seriousness of such a breach. Whilst it is difficult to imagine that the increase in maximum penalty will make a substantive difference in terms of deterrence it should certainly focus the minds of those charged with keeping their organisations on the right side of the line.

Enforcement

Whilst custodial sentences may grab the headlines, in our view it is the introduction of a new civil financial penalty which is of greater practical concern. This will be available where, on the balance of probabilities, there has been a breach of financial sanctions and the person responsible either knew or has reasonable cause to suspect that they were in breach.

The maximum penalty in such circumstances will be £1 million or 50% of the value of the funds involved, whichever is greater. The impact of this change is spelt out in the recently published OFSI guidance on monetary penalties which is in force as of April 2017.

Key issues to note from the guidance document include:

  • The decision to impose a penalty rests with the Treasury. Decisions can be reviewed by a Minister of the Crown and then by appeal to the Upper Tribunal.
  • The Treasury may impose a penalty on “a person”. This includes both a legal person and a natural person
  • If a monetary penalty is payable by a body, a penalty can also be imposed on an officer of that body if the relevant breach took place with their consent or connivance or by their neglect
  • Cases involving deliberate circumvention will be treated particularly seriously and are very likely to be dealt with by prosecution or a financial penalty
  • Voluntary disclosure may mean that a less serious view of a case is taken than the facts might merit. It may also reduce the level of penalty imposed by up to 50%
  • The level of any penalty will be calculated with reference to the statutory maximum and then adjusted to ensure it is reasonable and proportionate

This new power appears similar in effect to the ability of HMRC to impose a Compound Penalty for breach of export controls in lieu of a criminal prosecution, a disposal which they have pursued with some enthusiasm as being quicker and less costly than bringing a prosecution.

We can expect an escalating scale for dealing with breaches; the imposition of a monetary penalty follows enforcement correspondence and the making of a reference to the relevant professional body or regulator. It remains to be seen how far OFSI will be prepared to engage in promoting compliance before resorting to the option of imposing a financial penalty.

Breaches of financial sanctions are now included under the list of offences for which a Deferred Prosecution Agreement (DPA) may be considered. As demonstrated by the recent high profile DPA's for Rolls Royce and Tesco such arrangements are likely in practical terms to be reserved for the most serious and complex cases.

In addition there is also the power to impose a Serious Organised Crime Prevention Order (SOCPO), which is a civil sanction but where breach is a criminal offence punishable by up to five years custody for individuals or an unlimited fine. Historically whilst SOCPO's can be imposed either post-conviction in the Crown Court, or as a standalone order in the High Court, the former route has been the most usual chiefly for cases involving drugs, money laundering and proceeds of crime offences. It remains to be seen how often they will be used in financial sanctions cases.

Comment

From April 2017 the gravity and consequences of a breach of financial sanctions has increased. Organisations must take action to satisfy themselves that their processes and people are not exposing them to significant monetary and reputational risk.