Financial sanctions: OFSI imposes its first monetary penalty for breach of financial sanctions

Written on 20 May 2019

As we previously reported in June 2017, under the Policing and Crime Act 2017, the Office of Financial Sanctions Implementation (OFSI) was granted powers to impose monetary penalties for breaches of financial sanctions.

OFSI is the UK's competent authority for implementing and enforcing financial sanctions, and its creation was interpreted by many as a signal that the government was serious about enforcing sanctions legislation and imposing substantial monetary penalties for non-compliance.

However, despite this, it has taken until 21 January 2019 (over 20 months since the coming into force of the 2017 Act) for OFSI to exercise those powers, issuing a £5,000 fine against Raphaels Bank.

What were the circumstances of this fine?

The fine was issued in accordance with s.146 of the Policing and Crime Act 2017, for contravention by Raphaels Bank of regulation 3 of the Egypt (Asset-Freezing) Regulations 2011.

According to the OFSI report, Raphaels Bank dealt with funds belonging to a person designated under the 2011 Regulations, processing a transaction with a value of £200. Raphaels Bank self-disclosed to OFSI when it became aware of the breach, and OFSI reduced the penalty by 50% on account of Raphaels Bank's disclosure and cooperation.

OFSI imposed the monetary penalty because "it was satisfied, on the balance of probabilities, that Raphaels Bank breached a prohibition that is imposed by or under financial sanctions legislation, and knew, or had reasonable cause to suspect, that they were in breach of the prohibition".

Although this appears to be a relatively small fine, if the amount had not been reduced, it would represent 5,000% of the £200 transaction which Raphaels Bank processed. If a similar value of transaction to fine ratio was applied to larger transactions in the future, it is easy to see how OFSI could issue fines of similar size to those issued by its US equivalent, OFAC, in recent years.

What legal authority does OFSI have to impose these penalties?

As previously reported, monetary penalties may be imposed when OFSI believes that there has been a breach or failure to comply with an obligation imposed by or under financial sanctions legislation, and that the person or corporation in breach knew or had reasonable cause to suspect that they were in breach of the prohibition or had failed to comply with the obligation. The maximum penalty is the greater of £1 million or 50% of the estimated value of the funds involved in the breach.

If OFSI has been able to impose these fines since April 2017, why hasn't it used these powers until now?

As set out in OFSI's general guidance, the compliance and enforcement strategy which OFSI has pursued to date has been primarily concerned with ensuring that financial sanctions are properly understood and implemented. To the extent that education is able to promote a culture of compliance, OFSI considers that there is less of a need to resort to 'hard' enforcement powers, such as monetary penalties.

The 2017 Act is not retrospective, with OFSI's powers of enforcement only applying to breaches occurring after 1 April 2017. It is therefore possible that OFSI's enforcement function will be used more readily as investigations and research are progressed.

However, in line with OFSI's compliance and enforcement model, OFSI prefers to take a holistic approach, including contacting relevant persons and explaining why, in the view of OFSI, their actions may breach sanctions.

An indication of circumstances where OFSI considers it appropriate to impose monetary penalties may be gathered from the Monetary Penalties for Breaches of Financial Sanctions Guidance from May 2018. In this guidance, OFSI stressed the need for proportionate and fair assessments of every case, and that penalties will only be imposed in cases classified as 'serious' or 'most serious'.

What can we expect in the future?

In its 2018 annual report, OFSI stated that penalties will become more common, which suggests that the current philosophy of restraint and reluctant punishment may change. OFSI guidance is due to be revised in April 2019 and we wait to see whether greater emphasis will be placed on monetary penalties following the first use of its powers

In 2017, the total value of breaches reported to OFSI was £1.4 billion. Between coming into force and the publication of its 2018 annual report, OFSI received reports of 103 contraventions. As these investigations progress, and the number of reports increases, it becomes more likely that the threshold for imposing penalties will be met.

If OFSI does issue more fines, it would echo the approach taken in the US, where OFAC has employed monetary penalties extensively for many years. In 2017 alone, OFAC imposed $119 million of fines on companies found to be in breach of US financial and trade sanctions, including companies based in the EU. On the basis of the size of its first fine however, OFSI still has some catching up to do to match the fining power of its US equivalent.