The risks and penalties of money laundering for charities and how to guard against it
On 3 April 2017, the Office of Financial Sanctions Implementation (“OFSI”), part of HM Treasury (“HMT”), published guidance (“the Guidance”) on the issue of monetary penalties for breaches of financial sanctions following the coming into force of section 146 of the Policing and Crime Act 2017 (“the 2017 Act”). The Guidance sets out OFSI’s processes and considerations in relation to monetary penalties for financial sanctions breaches.
Financial sanctions include targeted asset freezes, restrictions imposed on individuals or entities in financial markets and services or directions to cease all business of a specified type with a specific person, group, sector territory or country.
Breaches of financial sanctions are potentially criminal offences, governed by the Terrorist Asset-Freezing etc. Act 2010, the Counter Terrorism Act 2009 and Anti-Terrorism, Crime and Security Act 2001. Broadly speaking, the criminal offence will bite where a person knows or has reasonable cause to suspect that they are acting in breach of a financial sanction.
From 1 April 2017:
We will consider the criminal regime and these changes in Part 2 of this series of blogs.
In this blog, we focus on the fact that the monetary penalties regime created by the 2017 Act provides a civil alternative to criminal prosecution for breaches of financial sanctions legislation.
New financial sanctions penalty regime
Burden of proof
The test for the penalty regime under section 146 of the 2017 Act is lifted from the criminal regime, in that it requires proof of knowledge or reasonable suspicion. However, OFSI has the power to impose a monetary penalty on a person if it is satisfied to the lower, civil standard of proof, on the balance of probabilities, (i.e. more likely than not) that—
(a) the person has breached a prohibition, or failed to comply with an obligation, that is imposed by or under financial sanctions legislation, and
(b) the person knew, or had reasonable cause to suspect, that the person was in breach of the prohibition or (as the case may be) had failed to comply with the obligation”.
A ‘person’ includes individuals and ‘a body of any type’.
What does ‘reasonable cause to suspect’ mean?
In its Guidance, OFSI confirms that this is an objective test that asks whether there were factual circumstances from which an honest and reasonable person should have inferred knowledge or formed the suspicion that the conduct amounted to a breach of sanctions.
It is of note, therefore, that a mistake which does not meet this reasonable cause to suspect test would not meet the legal standard for a penalty.
Which cases will meet the ‘penalty threshold’?
If OFSI is satisfied on the balance of probabilities of the test set out at section 146 of the 2017 Act, it will go on to consider whether one or more of the following factors apply and if so, may impose a penalty:
Financial sanctions penalties for ‘officers’
If a monetary penalty is payable by a body, then section 148 of the 2017 Act empowers HMT to impose a monetary penalty on an ‘officer’ of that body where that breach or failure took place with the consent or connivance of the officer, or was attributable to any neglect on the part of the officer. The definition of an ‘officer’ includes a director, manager, partner and person concerned in the management or control of the body (see section 148(2)).
In addition, the Guidance notes that it is possible for OSFI to impose a penalty on one person involved in a case and for another to be prosecuted criminally. OFSI will not normally impose a penalty on any person who has already been prosecuted. This raises the possibility that OFSI might, depending upon the circumstances of a particular case, seek to impose a monetary penalty on a body whilst seeking a criminal prosecution of, for example, a director of that body.
This highlights the need for those implicated in financial sanctions breaches to take prompt legal advice. The Guidance recognises that it is reasonable for individuals to take legal advice before self-reporting breaches.
Does the regime apply only to breaches that occur in the UK?
No. Enforcement under the financial sanctions regime is extra-territorial where it is committed by a UK National or a body incorporated or constituted within the UK. Further details of the ‘UK nexus’ test are set out at 3.5 to 3.9 of the Guidance.
Level of penalties
Sub-sections (3) to (4) of section 146 set out the permitted maximum of a monetary penalty at either £1,000,000 or 50 per cent of the total value of the breach, whichever is the greater. The explanatory notes to the 2017 Act give the following example to explain how this might work in practice:
…where the total value of the breach was £600,000 the maximum monetary penalty would be £1 million, but in a case where the total value of the breach was £10 million, the maximum monetary penalty would be £5 million.
In its Guidance, OFSI confirms that the test will be whether the level of penalty is:
Reductions will apply for voluntary disclosure (see further below).
When will OFSI use these powers?
In the Guidance, OFSI explain that there are four ways in which it could respond to a financial sanctions breach:
The Guidance notes that Monetary penalties will be a useful tool to deal with those cases where it is not in the public interest to pursue a criminal prosecution, SCPO or DPA and where the level of the breach or conduct of the individual or organisation is such that a warning letter alone is unlikely to bring about a sufficient change in behaviour.
According to the Guidance, OFSI will examine each suspected breach on its own merits. We will assess the facts to decide on an outcome that is fair, proportionate and best enforces the regime. In forming this assessment, OFSI will take account of a number of factors in determining how severe or serious the breach is and the conduct of the individuals involved. In summary, the more aggravating factors there purportedly are, the more likely OFSI will impose a monetary penalty. The more serious the breach, and the worse the conduct of the individuals, the higher any penalty is likely to be.
The factors relevant to OFSI’s determination (set out at 3.15 to 3.42 of the Guidance) include:
The importance of voluntary disclosures
In addition to reminding us of the criminal offence of failure to provide information on financial sanctions breaches, the Guidance stresses the importance of persons making voluntary disclosures following the discovery of a financial sanctions breach. It states that voluntary disclosures should be made in a timely fashion, as soon as reasonably practicable after discovery of the breach. Depending on the circumstances, this will be treated as a mitigating factor.
Indeed, the baseline penalty allows up to a 50 per cent reduction to a person who gives a prompt and complete voluntary disclosure. OFSI recognises that some documents are protected by legal professional privilege and that relying on legal professional privilege could be … a reasonable excuse not to disclose a document. However, it warns that incomplete disclosures made in bad faith will normally be subject to a monetary penalty, where the matter is not being prosecuted criminally.
Of course, these voluntary disclosures in themselves may put persons at risk of criminal prosecution where the offence could be proved to the criminal standard (and, in the case of a corporate, they are unlikely to pass the test for a DPA) and therefore should be considered carefully.
Finally, the Guidance sets out the way in which a person can make representations in writing within 28 calendar days of the receipt of the ‘initial letter’ from OFSI regarding the imposition of a financial penalty. In broad terms, a person has a right to make representations in writing to OFSI, to seek a Ministerial review, and appeal any decision to the Tribunal.
In a footnote, the Guidance refers to the outcome of the June 2016 referendum. Many domestic financial sanctions stem from European Union financial sanctions regulations. As yet, the Government has not explained whether and how the UK will continue to mirror the EU financial sanctions regime once the UK exits the EU in the spring of 2019.
In this context, the Government might be assisted by the House of Lords EU External Affairs Sub-Committee which has recently launched a new inquiry into UK sanctions policy after Brexit. The Committee will hold oral evidence sessions for the inquiry in April and May 2017 and should report later this summer.
In the meantime, the UK Exchequer will no doubt be looking forward to building up its Consolidated Fund as a result of penalties payable under these new provisions.
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