Crime, fraud and investigations 2017: Financial sanctions

2017 looks likely to be a significant year for sanctions enforcement, with new UK legislation and significant political shifts.

In brief

  • New, stiffer, penalties are likely to be introduced for breaches of financial sanctions, along with new powers for the Office for Financial Sanctions Implementation.

  • Global political events in 2016 mean that there could be changes to sanctions regimes in relation to Russia and Iran.

  • As Brexit negotiations start, the UK’s position regarding EU sanctions may become clearer with the possibility of a more independent, but less influential, role for the UK in the imposition of sanctions.

The Policing and Crime Bill

UK sanctions implementation and enforcement measures are currently limited to criminal prosecution or an administrative warning letter. The maximum penalty for breaching financial sanctions is a two year custodial sentence - considerably less than the maximum penalties for breaching a domestic terrorist asset freeze (seven years) or trade sanctions (ten years).

New legislation will be introduced in 2017 aimed at bringing consistency to penalties across the financial sanctions regimes and ensuring that penalties have sufficient deterrent effect. In addition enforcement agencies will be granted broader and more flexible powers, including tools to address conduct which warrants more than a warning letter but is not in the public interest to prosecute.

The proposed changes to financial sanctions enforcement include:

  • an increase in the prison sentence for sanctions violations on summary conviction from six to 12 months, and on conviction on indictment from two to seven years
  • a new power for the Office for Financial Sanctions Implementation (OFSI) to impose civil fines for financial sanctions breaches of up to the greater of (i) 50% of the value of the funds or resources involved (if quantifiable) or (ii) £1m, where it is satisfied on the balance of probabilities that a breach has occurred and that the person involved knew or had reasonable cause to suspect that their actions were in breach of sanctions
  • an amendment to the Crime and Courts Act 2013 to allow for a deferred prosecution agreement (DPA) to be entered into by a corporate that has committed a financial sanctions offence, and
  • an amendment to the Serious Crime Act 2007 to include financial sanctions breaches in the list of offences for which a Serious Crime Prevention Order (SCPO) may be imposed.

A recipient will have an opportunity to make representations before a fine is imposed and the right to seek a review of any fine by a government Minister who has the power to uphold it, cancel it, or change its amount. Both OFSI’s decision and that of the reviewing Minister are within the scope of a judicial review application. An amendment to the bill introduced at the Lords’ Second Reading stage also provides for a right of appeal to the Upper Tribunal, to ensure that there can be a full-merits hearing on both points of law and fact. On 01 December 2016, OFSI published a consultation on its draft Guidance on the circumstances in which a monetary penalty for a sanctions breach will be imposed. The consultation closes on 26 January 2017.

The Policing and Crime bill proposes other changes to the financial sanctions regime including provisions to allow for new UN financial sanctions regimes to be implemented in the UK without delay. HM Treasury will be able to give immediate effect to new regimes on a temporary basis (for up to 60 days), pending the adoption of EU legislation. This change aims to address the risk of assets being removed from the UK before sanctions are imposed - the EU takes an average of four weeks to implement UN asset freezes.

Russia

A range of restrictive measures have been introduced by the EU against Russia over its interference in Ukraine. These include so called “sectoral” sanctions, which are restrictive measures introduced to target specific sectors or industries within a country. In respect of Russia/Ukraine, measures have been introduced which target (among others) the finance, defence and energy sectors. The sectoral sanctions remain in force, having been extended fior six months in December 2016.

However, there are some doubts over the future of the measures following Donald Trump’s election victory. Mr Trump’s policy on Russia is less than clear, but he has expressed admiration for President Putin on a number of occasions and has indicated that he would like the US to work more closely with the Kremlin. However, the introduction of new sanctions on 30 December 2016 in response to Russian interference in the US election may prevent any thaw in relations in the near future.

Should the US take steps to weaken the sanctions currently in place against Russia, it is likely that the EU will come under pressure to do the same. Germany, France and Britain maintain a strong stance in respect of Russia, and recently sought the imposition of further sanctions against Russia over the bombardment of Aleppo in Syria. However, the EU sanctions against Russia remain contentious, with Italy, Hungary and Greece pushing for their dilution. If Mr Trump asserts his will over his party, it is possible that we may see some easing of the measures in place in the coming year.

Iran

Donald Trump’s upcoming presidency also places a question mark over the status of the Joint Comprehensive Plan Of Action (JCPOA) nuclear deal between China, Russia, the US, the EU and Iran. Following the deal, the majority of EU sanctions in respect of Iran’s nuclear programme were lifted. Over 300 Iranian people and entities were delisted, leaving in place much more limited measures including financial sanctions against specific designated persons, certain product controls and terrorism and human rights related sanctions.

US and EU sanctions in respect of Iran are no longer broadly in sync - US businesses and individuals continue to be prohibited generally from dealing with Iran. However the JCPOA did see the lifting of US secondary sanctions, which applied to restrict non-US persons from engaging in transactions with Iran or Iranian entities prohibited by US sanctions programmes.

Whilst Mr Trump has conceded the difficulty in revoking a deal supported by a UN resolution, he has heavily criticised the agreement and has suggested that he would try and renegotiate it and reinstate or increase US sanctions against Iran. Imposition of new sanctions or the “snapping back” of previously existing measures could cause significant issues for non-US persons who have sought to take advantage of the lifting of US secondary sanctions and invest in Iran, including participating in joint ventures with Iranian entities. The US Treasury will not view as sanctionable legitimate transactions entered into whilst the JCPOA is in force, but there is no guarantee that it would licence payments under those contracts in the event of the imposition or reinstatement of sanctions.

The future of sanctions enforcement?

The introduction of a power to impose civil penalties and an increase in the maximum custodial sentences available may be the first steps towards increased financial sanctions enforcement in the UK.

Another factor which may lead to increased domestic sanctions enforcement is Brexit. In a sanctions context, the UK’s exit from the EU is likely to be felt most in relation to policy. Post-Brexit, the UK will have no formal input into the designation of EU sanctions targets or the formulation of EU sanctions policy. In the past, securing the required unanimity from the Member States has often depended on strong support from the UK. Its absence from discussions may result in weaker measures being introduced by the EU which in turn could prompt the UK to introduce more stringent measures of its own.

However, the impact of any such measures is likely to be limited without wider support from the EU, or perhaps the US. In the short term it seems most likely, given their close trade, political and geographic ties, that the UK will continue to push for the use of robust restrictive measures within the EU, albeit now from the side-lines.

For more details of the impact of Brexit on crime, fraud and investigations, see the relevant page of our microsite.

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.