The European Union Financial Sanctions (Amendment of Information Provisions) Regulations 2017 (the regulations) came into force on 8 August.
The regulations 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 listed in OFSI’s consolidated list of financial sanctions targets.
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
- (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. The new reporting obligation arises only in respect of information received by relevant businesses on or after 8 August 2017.
There is a lack of clarity in the regulations and supporting OFSI guidance on the scope of the reporting obligation. Pending clarification, firms should err on the safe side and report suspicion or knowledge at the earliest possible point. Given that non-compliance with reporting requirements is a criminal offence, we have asked for the point at which the obligation arises to be clearly defined in law.
OFSI should also make it clear that firms are not obliged to undertake further investigations or seek further information from clients or counterparties to provide it to OFSI.
Where an asset freeze applies to the sanctioned individual, a firm must not deal with the frozen funds or make funds available to them without checking for a legal exemption or applying for an OFSI license. Launched in March 2016, OFSI has not yet released data on the number of licensing applications received last year.
The regulations were not subject to consultation nor to parliamentary scrutiny, while the explanatory notes said that no impact assessment would be necessary because the Treasury had claimed the impact on business would be negligible.
We do not believe this is the case. Long delays in receiving licenses, for example, have been reported to the Law Society, and OFSI has room for improving its responsiveness to enquiries from legal professionals.
Legal professional privilege
The new regulations will not require firms to report privileged information and this is now clearly set out in the guidance. However, professionals will need to state clearly whether privilege applies, and what information it applies to – ‘blanket’ statements of privilege could be challenged.
We have also raised concerns with the OFSI about their approach to LPP in relation to the licence application process.
Brexit Sanctions and AML Bill
Launched in the House of Lords, the Sanctions Bill is at the time of writing going through the committee stage in the Lords. The Bill seeks to enable the UK to develop its own sanctions regime after Brexit, but grants wide-ranging powers to future ministers, and allows criminal penalties and new types of sanctions to be created by regulation.
The Bill will not immediately affect OFSI or current reporting requirements. The Law Society has made submissions to the House of Lords commenting on technical aspects of the Bill and highlighting the inappropriate breadth of powers granted to ministers.