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15 November 2017

New regulations tighten financial sanctions’ grip

Categories: Blog, Financial Crime,

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Categories: Blog, Financial Crime,

Categories: Blog, Financial Crime,

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Categories: Blog, Financial Crime,

Categories: Blog, Financial Crime,

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Categories: Blog, Financial Crime,

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Categories: Blog, Financial Crime,

Categories: Blog, Financial Crime,

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Categories: Blog, Financial Crime,

Categories: Blog, Financial Crime,

Categories: Blog, Financial Crime,

By Sangeeta Bedi

Categories: Blog, Financial Crime,

Categories: Blog, Financial Crime,

Categories: Blog, Financial Crime,

Categories: Blog, Financial Crime,

Categories: Blog, Financial Crime,

Categories: Blog, Financial Crime,

Categories: Blog, Financial Crime,

Categories: Blog, Financial Crime,

Categories: Blog, Financial Crime,

Categories: Blog, Financial Crime,

Categories: Blog, Financial Crime,

Categories: Blog, Financial Crime,

Categories: Blog, Financial Crime,

Categories: Blog, Financial Crime,

Solicitors and other professionals must be wary of committing a criminal offence if they fail to report information that could undermine the administration of UK, EU and UN sanctions regimes.  Previously, enforcement action could only be taken against financial service firms.  The Solicitors Regulation Authority (“SRA”) has warned solicitors that they would now face enforcement action if they failed to report a known or suspected financial sanctions breach.  An Executive Director of the SRA, Crispin Passmore, said:

“The new financial sanctions regulations mean legal firms are obliged to comply with the reporting regime. These regulations, and the approaching Financial Action Task Force inspection, are further reminders of the importance the UK and global community places on tackling terrorist financing.

“Risks exist for every single solicitor and law firm whether conveyancing on the high street or handling global transactions, and each should be thinking about their responsibilities for tackling these issues.”

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, trust or company service providers and others such as casinos and dealers in precious metals or 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.

In order to help businesses and individuals comply with financial sanctions, OFSI published a consolidated list of all designated persons subject to financial sanctions under EU and UK legislation, as well as those subject to UN sanctions which are implemented through EU regulations.  As of 4 September 2017 (when OFSI published its latest list of financial targets), the UK imposes financial sanctions in 27 sanctions regimes with 9304 named individuals or legal entities.  Financial sanctions that relate to a specific country or terrorist group, such as ISIL (Da’esh) or Al-Qaida, are known as ‘regimes’. This substantial list of designated persons includes both foreign nationals and British citizens, and it is regularly updated.  OFSI aims to update the consolidated list within one working day for all new UN, EU and UK listings coming into force in the UK, and within three working days for all other amendments.  It is possible to sign up to email alerts from OFSI in order to be made aware of any changes to the list.

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 indicated 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, particularly given the increasing speed at which sanctions can be imposed by the United Nations (UN), European Union (EU) and the UK Government in response to fast moving foreign policy concerns.  OFSI’s latest guidance, published on the 25 August 2017, makes it clear that reporting to your regulator, or submitting an SAR, does not meet your reporting requirements under financial sanctions.

Additionally, as well as conducting name and target checks, asset freezes and other financial services restrictions will also apply to entities that are owned or controlled, directly or indirectly, by a designated person. Those entities may not be designated in their own right, so their name may not appear on the consolidated list. However, those entities are similarly subject to financial sanctions; so, it is important that legal professionals are aware of the EU Best Practices Guide for the effective implementation of restrictive measures (which OFSI states in its most recent guidance that it interprets widely), in order to assess whether a designated person has ownership or control of another legal entity.

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 latest guidance states that both EU regulations and the UK domestic regimes make it clear that the reporting requirements do not apply to information to which legal professional privilege (LPP) is attached.  However, the guidance also states that OFSI expects legal professionals to approach their disclosure obligations with rigour and to carefully ascertain whether legal privilege applies, as well as which information it applies to.  It warns that OFSI may challenge a blanket assertion of LPP where it is not satisfied that such careful consideration has been made.  It remains to be seen whether this new guidance sufficiently addresses the concerns that The Law Society have expressed previously about sanctions and the application of LPP.

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 to pursue 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. Additionally, the Act made 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.  The Office of Foreign Asset Control (OFAC), the equivalent United States sanctions body, has become renowned for imposing enormous fines on both US and foreign companies, such as the US$1.192 billion penalty it imposed on a Chinese telecommunications giant ZTE Corp. in March 2017. 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 OFAC.

This article was originally published in Compliance Monitor and can be accessed here, behind a paywall.

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