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14 Aug 2017

Anna Rothwell discusses developments in sanctions enforcement in CrimeLine

Solicitors and other professionals may be somewhat alarmed to learn that as of 8 August 2017 the European Union Financial Sanctions (Amendment of Information Provisions) Regulations 2017 came into force, extending a reporting requirement that previously only applied to financial institutions to ‘independent legal professionals’, as well as to accountants, auditors, tax advisors, estate agents and others such as casinos and dealers in rare stones.  If legal professionals and other relevant businesses fail to report a known or suspected financial sanctions breach to HM Treasury’s Office of Financial Sanctions Implementation (“OFSI”), they are now committing a criminal offence, punishable by a fine or a maximum of three months’ imprisonment.

OFSI, created on 31 March 2016, is the competent authority responsible for administering UK, EU and UN sanctions regimes within the UK.

As a result of the extension that came into force this week, if a legal professional or another relevant business knows, or has reasonable cause to suspect, that:

– a person has committed one of the offences under the financial sanctions / asset seizure regimes (for example, by making funds or economic resources available to or for the benefit of a “designated person”);

– or is a “designated person”,

then that business must make a report to OFSI as soon as reasonably practicable, or they commit an offence.  The new reporting requirement arises only in respect of information which is received on or after 8 August 2017.

As of 7 August 2017, the UK imposes financial sanctions in 27 sanctions regimes with 9280 named individuals or legal entities on the current consolidated list of targets produced by OFSI. The substantial list of designated persons includes both foreign nationals and British citizens.

The checks required are also different to those needed in order to comply with the money laundering regulations.  For example, a solicitor may be satisfied that a transfer of funds does not involve the proceeds of crime and that the funds are to be used for a legitimate purpose; however, if the person from or to whom the money is transferred is a “designated person” then an offence has been committed, which a solicitor may be obliged to report (subject to privilege; see below).    As noted by the Law Society in their advice note on sanctions and conveyancing retainers published in 2012, because sanctions are generally based around particular jurisdictions, an awareness of the sanction regimes is a useful starting point in assessing whether a client might be on the consolidated list of targets.  This is all the more important now that failure to report is a criminal offence and given the increasing speed at which sanctions can be imposed by the United Nations, European Union and the UK Government in response to fast moving foreign policy concerns.

The information that the solicitor or other business must provide in their report to OFSI is similar to that required by a money laundering Suspicious Activity Report, namely the information on which the knowledge or suspicion is based, any information held about the relevant person by which they can be identified, and (where relevant) the nature and amount of funds or economic resources held by the institution for the relevant person.

As ever, the thorny question of legal privilege makes reporting matters and disclosing documents more complicated for solicitors and other legal professionals.  OFSI’s guidance states that lawyers are not required to provide information that is subject to LPP.  However, they state that they expect legal professionals to approach their disclosure obligations with “rigour and precision” and that “blanket claims of privilege will be viewed dimly”.  The Law Society have confirmed that they have asked OFSI to make their guidance clear that a law firm is not required to report any information which is received in privileged circumstances or a belief or suspicion based on information which is obtained in privileged circumstances. This would be consistent with sections 330 and 342 of the Proceeds of Crime Act 2002 (failure to disclose and tipping off offences) and sections 19 and 21A of the Terrorism Act 2000 (duty to disclose and failure to disclose offences).  We agree with the Law Society that there is no justification to apply a more limited exception to sanctions violations than terrorist financing or money laundering.

In addition to the reporting requirement, solicitors and other professionals must also continue to be careful not to commit any of the substantive offences contained in the regulations.  OFSI’s Financial Sanctions Guidance confirms that generally lawyers are not prohibited from providing legal advice under an asset freeze.  However, the payment for legal services and the provision of legal services on credit do require a licence from OFSI, which once granted enable transactions or activities otherwise prohibited to proceed (as well as asking for more practical guidance on when the reporting obligation arises, the Law Society have also raised concerns with OFSI about their approach to LPP in relation to the licence application process.)  OFSI’s guidance confirms that certain legal services such as the provision of company formation services may constitute the provision of “financial services” which are otherwise prohibited under the Terrorist Asset-Freezing etc. Act 2010.  In addition, where sanctions prohibit specific actions (such as restructuring of finance), solicitors must be careful that they do not facilitate or participate in a breach.  An example the guidance provides is that of raising capital on EU markets.  If this is prohibited, providing advice on how this effects a business will be permitted.  However, preparing the documents required to raise such capital may amount to attempted circumvention of sanctions.

The extension of the reporting requirement to legal professionals and others is consistent with an increasingly aggressive approach being taken to pursuing breaches of sanctions violations since the creation of OFSI.  The Policing and Crime Act 2017 has changed the legal framework for enforcing the financial sanctions regulations and strengthened the range of enforcement tools available by creating powers for OFSI to impose civil monetary penalties, and making Deferred Prosecution Agreements and Serious Crime Prevention Orders available.  Since 3 April 2017, OFSI has had the power to impose penalties up to £1million or 50% of the breach, whichever is higher.  Unsurprisingly, given the short period that these penalties have been available, none have yet been reported.  It therefore remains to be seen if OFSI will become as aggressive in the pursuance of such penalties and in its extra-territorial reach as the equivalent United States sanctions body, the Office of Foreign Asset Control (“OFAC”) which has become renowned for imposing enormous fines on both U.S. and foreign companies, such as the US$1.192 billion penalty it imposed on a Chinese telecommunications giant ZTE Corp. in March this year.

This article was originally published in CrimeLine and can be found here

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