OFSI Guidance on Sanctions Breaches

Zulfi Meerza outlines the latest updates from the Office of Financial Sanctions Implementation.

The Office of Financial Sanctions Implementation (“OFSI”) has recently updated its guidance on enforcement and monetary penalties for breaches of financial sanctions. The update helpfully clarifies the ‘ownership and control’ due diligence expectations.

The latest update does not change the criteria for ownership and control assessment. But it focuses on the extent to which the regulator considers due diligence in relation to ownership and control to be a mitigating or aggravating factor when assessing breaches of financial sanctions.

For instance, OFSI will consider an appropriate and good faith determination of a party’s ownership and control to be a mitigating factor in its enforcement decision.

OFSI lists the following actions as ‘potentially mitigating’:

• An examination of the formal ownership and control mechanisms of an entity to establish whether there is available evidence of ownership and control by a designated person;
• An examination of actual, or the potential for, influence or de facto control over an entity by a designated person;
• Open-source research on an entity and any persons with ownership of, or the ability to exercise control over the entity, together with an examination of whether such persons are, or have links to, designated persons such that further investigation may be warranted;
• Direct contact with the entity and/or other relevant entities to probe into indirect or de facto control, including, where appropriate, seeking commitments by UK persons as to the role of any designated person or person with links to a designated person;
• Regular checks and/or ongoing monitoring of the above where appropriate.

The Guidance also establishes that failure to carry out appropriate due diligence on the ownership and control of an entity, or the carrying out of any such due diligence in bad faith, could be viewed as an aggravating factor. The weight attributed to whether particular conduct amounts to a mitigating or aggravating factor (as applicable) will be assessed on a case-by-case basis.

The list provided in the Guidance is not exhaustive. The regulator made it clear that it would expect to see evidence of a decision-making process that took account of the sanctions risk(s).

The above clarification has been welcomed by practitioners due to the fact that the ownership and control assessment has proved to be quite problematic, especially since June last year when OFSI broadened its powers with the ability to impose civil penalties on a strict liability basis. In practice it means that a person, who has conducted due diligence and has not identified any associated risk(s) relating to ownership and control, may still be ordered to pay a monetary penalty, even if the assessment was made in good faith.

Having said that, the new Guidance sets out the expectations of the regulator and gives an indication of the correct approach going forward. We can now see that the ownership and control criterion is not set in stone, and we can expect further assessment guidance to be received from the regulator.

It is of paramount importance that businesses align their sanctions screening and due diligence processes with OFSI’s approach, and ensure that proper attention is given when conducting an assessment of ownership and control, especially given that some factors are not immediately obvious.