Changes to the financial sanctions reporting regime
The New Requirements
It has been announced by the Treasury that as of 8 August new regulations (European Union Financial Sanctions (Amendment of Information Provisions) Regulations 2017[i]) will mean that solicitors will be among those facing potential prosecution for failing to report to the Office for Financial Sanctions Implementation (OFSI) information that could undermine the UK’s financial sanctions.
There are two components to the EU financial sanctions regimes. The first is a general obligation that applies to everyone and requires that “natural and legal persons, entities and bodies …. supply OFSI as soon as practicable with any information that would ‘facilitate compliance’ with the regulations”. The second reporting obligation, which is the one that now applies to solicitors, is a more targeted obligation that applies to specified businesses and professions. Those businesses and professions are:
- an auditor
- a casino
- a dealer in precious metals or stones
- an estate agent
- an external accountant
- an independent legal professional
- a tax adviser, and
- a trust or company service provider.
For these purposes, an independent legal professional is defined as “a firm or sole practitioner who by way of business provides legal or notarial services to other persons, when providing such services”.
Thus, whereas businesses already had an obligation placed upon them to report to OFSI if they were acting for anyone subject to financial sanctions, enforcement action could only be taken against them if they were financial services firms. This is no longer the case and any business which falls within the definition of a relevant institution or relevant business or profession must report to OFSI as soon as practicable if they know or have reasonable cause to suspect that a person:
- is a designated person, or
- has committed an offence under the regulations
What is the Reporting Requirement?
Businesses which are regarded as relevant institutions are required to report any relevant information (or, indeed any matter on which knowledge or suspicion is based) that has come to the relevant institution in the course of carrying on its normal business and must include:
- the information or other matter on which the knowledge or suspicion is based, and
- any information held about the person or designated person by which they can be identified
In addition, if the relevant institution knows or has reasonable cause to suspect that a person is a designated person and that person is a customer of the institution, then the institution must also state the nature and amount or quantity of any funds or economic resources held by them for that customer.
The new reporting obligation only applies to information received by relevant institution on or after 8 August 2017. Failing to comply with the reporting requirements will be a criminal offence and carries a penalty on summary conviction of imprisonment for up to six or twelve months (depending whether the conviction occurs in England and Wales, Scotland or Northern Ireland), or a fine not exceeding £5,000, or both.
What Needs to be reported?
Examples of the kind of information to be provided to OFSI can be found in Table 5.A. of the OFSI Guide to Financial Sanctions[ii]. It applies to activities in relation over 20 countries including Afghanistan, Belarus, Democratic Republic of Congo, Egypt, Iran, Iraq, Libya, North Korea, Syria, Tunisia and Ukraine.
Table 5A, which contains the examples of information to be reported, provides:
|Person is a designated person||A customer or client of yours is a designated person. You must provide OFSI with any information you hold about the designated person by which they can be identified.|
|Offences||Exact offences will depend on the particular legislation, but can include:|
|Funds and economic resources a||You must include details of any funds and economic resources that you have frozen.|
|Credits to frozen accounts b||A relevant institutions must inform OFSI without delay whenever it credits a frozen account with:|
|a See Section 3.1.3 of this guide for a definition of what constitutes funds and economic resources.|
b A relevant institution does not need to inform OFSI when it credits an account with interest or other earnings.
OFSI maintains two lists of those subject to financial sanctions.
The first list called “The consolidated list”[iii] includes 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. This list is published to help businesses and individuals comply with financial sanctions and OFSI aims to update this 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.
The second list is entitled “List of entities subject to capital market restrictions” [iv]which are entities subject to specific capital market restrictions. These entities are not contained on the consolidated list.
The consolidated list contains a range of information to aid the identification of designated persons. For an individual, this can include their:
- date of birth,
- passport details,
- last known address, or
- employment or government role.
It is possible that when dealing with someone on the list you will find an exact match to their name on the list. However, things are not always that clear cut. It may be that the institution is dealing with someone who has the same name as someone on the list but is not them or, equally, they could be dealing with someone whose name does not seem to be on the list because the person is using a different name or a different iteration of their name. In the former case, if the institution is satisfied that the person with whom they are dealing is different from the one named on the list then they do not need to take further action. If having consulted the consolidated list the institution believes that a new alias, for example, is being used or the institution is still unsure as to whether it has a target match, the OFSI can be contacted for assistance.
Legal professional privilege
Finally, a word on professional privilege.
Both EU and UK regulations make it clear that the reporting requirements do not apply to information to which legal professional privilege is attached. However, OFSI expects legal professionals to carefully ascertain whether legal privilege applies, and which information it applies to. OFSI may challenge a blanket assertion of legal professional privilege where it is not satisfied that such careful consideration has been made.
Clarification on this is currently being sought by the Law Society.
Whilst it is not yet clear how these requirements will interact with existing professional and regulatory duties, nevertheless, firms who deal regularly in international matters do need to be aware of the requirements now and formulate their plans as to how they will respond to them.
Clearly there are implications for law firms in terms of breach of confidentiality, professional privilege and the requirements for disclosure. At this time, it is for firms to decide themselves how any conflicting duties should drive the way in which they respond. They must, however, given the fact that criminal sanctions can result, be extremely careful and if in doubt should contact OFSI for clarification.
Not all firms will be affected by the regulations and those who have no international connections will be less likely to be affected. However, all firms should be on their guard since almost anyone could get drawn into such issues.