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The UK’s approach to sanctions enforcement is changing after a recent law amendment has imposed strict liability on businesses and made it easier for authorities to issue fines.
Businesses that breach sanctions measures will now face fines regardless of whether they had knowledge of a sanctions breach or reasonable cause to suspect so.
The Economic Crime (Transparency and Enforcement) Act 2022, which was adopted on March 15, strengthens the enforcement powers of the Office of Sanctions Implementation (OFSI), bringing the UK sanctions regime in line with that of the United States, which is often considered the gold standard in the area of sanctions.
The act introduces a number of changes that show a shift in how the UK is handling sanctions, in part by placing a so-called "strict liability" on businesses, but also by making it easier for the OFSI to impose fines for sanctions breaches.
Strict liability in English criminal law occurs when a defendant is liable for committing an action (actus reus), regardless of what his/her intent or mental state was when committing the action (mens rea).
This means that the OFSI can now impose penalties on any entities that breach a sanctions prohibition or fail to comply with a sanctions obligation, regardless of whether the business was aware of the breach.
To date, the OFSI could issue a fine only if a business "knew or had reasonable cause to suspect" that it was in breach of the sanction.
“We are seeing potentially some changes in how sanctions are handled,” Malcolm Wright, founder of InnoFi Advisory and former chief compliance officer at BitMEX, said at a FinCrime Sanctions event on Wednesday (March 30).
There is a move away from the burden of proof, where the OFSI had to establish whether the party in breach had a reasonable cause to suspect the breach, to strict liability, whereby the fact of the breach allows the OFSI to issue a financial penalty.
This will likely mean that the number of enforcement actions will increase, with the OFSI moving to the centre of enforcement actions, Joshua Ray, partner at Rahman Ravelli Solicitors, stressed.
Although the US' history of sanctions enforcement is very different from all the other countries in the world, there is a notable gap between the number of enforcement actions carried out by the OFSI and its US counterpart, the Office of Foreign Assets Control (OFAC).
In particular, the OFSI brought six enforcement actions since its creation in 2016, whereas, during the same period, the OFAC carried out almost 100 cases.
As a result of these actions, the OFAC handed out almost $1.5bn in penalties, compared with fines of just £21m issued by the OFSI.
“With the new Economic Crime Act that has just passed in parliament, and with the new strict liability regime, it is highly likely that the OFSI is going to become a much more aggressive and active regulator going forward,” Ray said.
“This essentially means for compliance people sanctions are just going to be much more in the forefront of their concerns,” he added.
The road ahead
Many countries around the world have made an unprecedented effort to impose sanctions quickly and in a highly coordinated manner in response to Russia’s aggression against Ukraine.
These countries will now want to look at what the lessons learned are from this exercise.
“What will come out of this eventually from the current period is lessons learned,” Wright said.
Regulators will now ask: “Did we do the right thing? Did we go fast enough? Did we target the right entities, whether it is manageable for compliance officers on the other end and what could have been done?,” Wright said.
“All of these things will eventually lead to a far more effective and efficient system,” he added.
Meanwhile, businesses should prepare for the sanctions to stay with us for some time, as it is unlikely that the core sanctions would change with time, Ray added.
“I don’t expect a massive roll back in the current sanctions that are put in place, even if today a peace agreement was signed between Russia and Ukraine because that would be a bad precedent that governments wouldn’t want to set,” he noted.
If, following a hypothetical peace agreement, everything goes back to how things were before the war, “it would incentivise people to avoid sanctions because those would be seen just as temporary measures”, he stressed.
The UK, in collaboration with allies around the world, imposed a number of sanctions on Russia, initially aimed at deterring the country from escalating the situation in Ukraine, and now to force Russian troops out of Ukraine.
These sanctions include asset freezes, a prohibition to deal with Russian central bank reserves and banning several of Russia’s large banks from the SWIFT international messaging network.
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