The Policing and Crime Act 2017, which came into effect in April, introduces a tougher range of penalties for those who breach financial sanctions.
Failure to comply with it can lead to fines of up to £1 million from HM Treasury. The Treasury’s Office of Financial Sanctions Implementation (OFSI) is also given power under the Act to offer deferred prosecution agreements.
While it is a new piece of legislation and, therefore, will require time for its effectiveness to be fully assessed, it ushers in a new era; with significant monetary and criminal penalties for breaches of it.
It affects any person in the UK, any UK citizen wherever they are, all corporates operating in the UK and any corporates incorporated in the UK that may be based abroad; including the actions of a foreign subsidiary of a UK company. Guidance from the OFSI states that a company is subject to its enforcement measures if it has a UK connection. Such a connection can even include a non-UK company conducting an international transaction via the UK or buying financial products in the UK for use overseas.
Under Section 146 of the Act, HM Treasury has the power to impose a monetary penalty on “a person” - this includes both a legal person and a natural person - if it is satisfied, on the balance of probabilities, that the person has breached a financial sanction and knew, or had reasonable cause to suspect, that a breach was being committed.
Breaches of financial sanctions include failure to comply with:
- Asset freezes.
- Restrictions on individuals in certain financial markets and services.
- Directions to stop trading with a certain person or group or in a named country or business sector.
When assessing the seriousness of the breach – and, therefore, the appropriate penalty - OFSI will look at the conduct in question, compliance standards in that sector, the behaviour of all relevant parties, the number of breaches, and whether those breaches have been reported to OFSI.
The OFSI guidance states that the “penalty threshold” will be reached where:
- On the balance of probabilities there has been a breach.
- The person committing it knew or had reasonable cause to suspect a breach is being committed.
- The breach involved funds being made available directly to a designated person via arrangements that were made to deliberately circumvent the law
Without the above factors being present, OFSI believe that a monetary penalty is appropriate and proportionate. The maximum financial penalty, where the breach does not relate to specific funds, is £1 million. Under sub-sections (3) and (4) of Section 146, if it does relate to particular funds, the maximum is £1 million or, if it is greater, 50% of the estimated value of the funds involved in the breach.
The OFSI can decide not to impose a penalty if:
- It is not in the public interest to impose one.
- Imposing the penalty would have no effect – as the penalty would be too low to either deter wrongdoing or put right what has been done.
- The wrongdoing was committed due to coercion or blackmail.
It is important to emphasise that the OFSI says that reductions of up to 50% could be available if the wrongdoing is self-reported.
The Act increases the maximum criminal penalty for failing to comply with a prohibition under a freezing order from two to seven years for conviction on indictment, and from three to 12 months on summary conviction: a clear indicator of just how tough the Act is. Section 148(1) of the Act states that where an offence is committed with the consent or connivance of a corporate body, or through the neglect of its officer, both are guilty of the offence and liable to be punished accordingly.
There is little doubt that the Act gives the OFSI more power – criminal and civil – than has been available to punish these types of offence in the past. This will surely mean that enforcement in the UK will become busier. We may see the OFSI acting in a manner that the US’ Office of Foreign Assets Control (OFAC) does: imposing large fines on those breaching sanctions. Criminal prosecutions are now more likely, as are civil penalties and out-of-court settlements.
This, in turn, means that businesses will have to make a concerted, intelligent effort to exercise caution when it comes to who they agree to do business with. This is not merely a question of who you conduct a deal with, it also extends to who you may ask to conduct it on your behalf and where you decide to conduct it. For example, would it be safer to have a transaction conducted by the main UK company rather than risk it being carried out by middleman or a subsidiary that operates at arms’ length in another country?
The Act is notable for its penalties and its robust approach to tackling wrongdoing. But those in business should look less closely at the exact penalties it carries and instead examine the way they work. What could they be doing to make sure they run no risk of falling foul of the Act?
This legislation emphasises the need for companies of all sizes to have strong compliance policies: policies that design out the potential for wrongdoing by staff or trading partners, that ensure proper checks are done on those that business may be done with and that allow for any suspicions to be raised in confidence and acted on appropriately.
Legal advice is always available for those in business who recognise that they need to devise and introduce such procedures but are unsure how to proceed. Such advice is also available if and when a company needs assistance if it recognises wrongdoing and wishes to self-report to reduce the penalties that may be imposed under the Policing and Crime Act – or any other relevant Act, for that matter.
This latest Act (and many other relating to business crime) will not be lenient to any company that failed to act when it came to either preventing or reporting wrongdoing.