The European Union Financial Sanctions (Amendment of Information Provisions) Regulations 2017 ('the regulations') come into force on 8 August.
The regulations will extend to 'independent legal professionals' and other 'relevant businesses or professionals' the requirement to inform the Office of Financial Sanctions Implementation (OFSI) of known or suspected financial sanctions breaches. (An independent legal professional is defined in the regulations as 'a firm or sole practitioner who by way of business provides legal or notarial services to other persons, when providing such services'.) The requirement previously applied only to financial institutions.
This extension is only in relation to UK financial sanctions, and not to suspected violations of trade sanctions or export controls.
What the regulations mean
The new regulations require that a report is made to OFSI if a relevant business knows, or has reasonable cause to suspect, that:
- a person has committed an offence under the financial sanctions/assets seizure regimes
- or is a 'designated person'.
A relevant business must provide:
- the information or other matter on which the knowledge or suspicion is based
- any information it holds about the relevant person by which the person can be identified and
- (where relevant) the nature and amount of funds or economic resources held by the institution for the relevant person.
Failing to notify OFSI is a criminal offence if a relevant business knows or has reasonable cause to suspect that a person has committed a sanctions offence or is subject to an asset freeze. OFSI will be publishing new reporting obligations for independent legal professionals and other relevant businesses, professions and institutions to be included in its general guidance on financial sanctions.
The new reporting obligation arises only in respect of information which is received by relevant businesses on or after 8 August 2017.
It is striking that the regulations have not been subject to consultation nor to parliamentary scrutiny, while the explanatory notes say that no impact assessment was necessary because the Treasury claims the impact on business will be negligible.
We have asked for more practical guidance on when the reporting obligation actually arises and the scope of that obligation, because of the potential for a large number of reports of little or no value being made to OFSI and a disproportionate burden being placed on firms. Given that non-compliance with reporting requirements is a criminal offence, it is important that this is clearly defined.
Guidance from OFSI should make it clear that firms are not obliged to undertake further investigations or seek further information from clients or counterparties for the purpose of providing it to OFSI.
Legal professional privilege
The new regulations will not require firms to report privileged information and we have asked for this to be clearly set out in the guidance. We have also asked for the guidance to make 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).
In our view, there is no justification to apply a more limited exception to sanctions violations than terrorist financing or money laundering.
We have also raised concerns with the OFSI about their approach to LPP in relation to the licence application process.