The OFSI: a new approach to enforcement of sanctions legislation in the UK?

Written on 3 Jun 2016

On 1 April 2016, a new body was established within the Treasury to support financial sanctions implementation. The government has said that the Office of Financial Sanctions Implementation (OFSI) will “provide a high quality service to the private sector, working closely with law enforcement to help ensure that financial sanctions are properly understood, implemented and enforced”. But what will this actually mean in practice?

OFSI sanctions guidance

Companies eager to see how the OFSI would assist them to understand sanctions regimes did not have to wait long for the OFSI to release its Financial Sanctions Guidance.

The guidance is presented in two parts.

  • Part A provides a general overview of financial sanctions which apply in the UK.
  • Part B provides practical examples of how OFSI will generally approach licensing and compliance questions.

This guidance is by far the most comprehensive guidance published by the UK government to date and is the first substantive financial sanctions guidance since 2013.

Section 9 of Part B, in particular, provides practical examples which will assist companies to apply sanctions legislation to everyday sanctions scenarios. The OFSI points out in this section that as financial sanctions are widely publicised, businesses, particularly those operating in an international context, will not be able to avoid liability simply by “failing to consider their sanctions risks”. In other words, wilful blindness to sanctions risks will not be tolerated. The guidance also provides a detailed section on the procedure for applying for a licence, and the grounds upon which the OFSI is likely to grant one.

This guidance is not going to have all the answers, and will not replace the requirement to seek legal advice on sanctions compliance. Nevertheless, businesses will welcome the guidance, which provides much-needed assistance for those looking to navigate the intricate web of UN, EU and UK sanctions legislation.

A new range of penalties for breaches of sanctions legislation

In addition to the creation of the OFSI, new legislation is currently passing through Parliament which will give greater enforcement powers for breaches of sanctions legislation. The Policing and Crime Bill contains a new range of administrative penalties, with the maximum custodial sentence for breaching financial sanctions being increased to 7 years. Monetary penalties will also increase to the greater of £1m or 50% of the value of the breach, and the details of any penalties being handed down will be published. The Bill will also provide for the swifter implementation of UN financial sanctions pending their implementation at EU level.

A new style of enforcement?

When the creation of the OFSI was first announced in July 2015, commentators questioned whether the UK was looking to emulate a US-style enforcement agency, in the form of the Office of Financial Asset Control (OFAC). OFAC and other US enforcement agencies have levied eye-watering fines on companies that have breached US sanctions legislation. A recent report issued by the US Government Accountability Office stated that between January 2009 and December 2015, $6.8bn was collected for sanctions violations.

Whilst we will have to wait and see whether the OFSI will operate in a similar manner to OFAC, it is likely that we will see the OFSI working closely with organisations such as the FCA to apply a robust enforcement regime.

An unexpected consequence of the creation of OFSI is that, should the UK vote for a ‘Brexit’, the UK would have a ready-made body that was able to coordinate a post-EU financial sanctions policy, whether that be a separate UK policy or a policy aligned with the remaining EU Member States.

What should you do now?

The legislative regime at the EU and UK level remains unchanged for now. As such, the creation of the OFSI will not affect the way in which sanctions compliance must be undertaken. However, the creation of the OFSI indicates that the UK government is taking sanctions compliance seriously, and potential new penalties increase the risks associated with any breach. Companies should review their sanctions compliance policies and procedures now and ensure that they will stand up to scrutiny if the OFSI comes knocking.