UNDER THE MICROSCOPE

Is the enforcement of breaches in sanctions compliance the next big focus for the UK’s financial regulator?

How should regulated firms respond to the FCA placing sanctions compliance under its enforcement microscope?

UK regulated firms will doubtless have mobilised in reaction to the initial rush to create new sanctions regimes in response to Russian actions in Ukraine.

Many will now have embedded any new processes and procedures required to ensure sanctions compliance with this rapidly evolving landscape. However, the FCA has made it clear that sanctions enforcement is a priority. This means they may have little patience for any errors firms make, however inadvertent.

Firms and their senior personnel will find themselves under the regulator’s microscope for sanctions compliance in a way they haven’t been before.

Top-down responsibility

Primary responsibility for sanctions compliance lies with senior management, which the FCA expects to take clear responsibility for and be actively engaged in their firm’s approach to addressing sanctions risks. Senior managers are expected be to be ‘sufficiently aware of the firm’s obligations regarding financial sanctions to enable them to discharge their functions effectively’ and one individual will usually be allocated the prescribed responsibility for the policies and procedures for countering the risk that the firm might be used to further financial crime. Firms should, however, ensure that employees of all levels are aware of the need for and importance of prioritising sanctions compliance. This will mean, amongst other things, ensuring training has been given and is refreshed and updated regularly.

Taking stock

When considering the FCA’s approach to sanctions, the starting point is the FCA’s Financial Crime Guide (“FCG”), which includes examples of good and poor practices when it comes to governance, risk assessment, screening customers against sanctions lists, matches and escalation¹. The guide contains a list of self-assessment questions the FCA considers firms should be asking themselves in those areas.

Firms should ensure a comprehensive self-assessment is part of any review of their sanctions compliance. Further insight may be derived from the FCA’s thematic reviews in this area² as well as its September 2021 ‘Dear CEO’ letter on trade compliance, statements made in conjunction with fines imposed for financial control failings³ and, more recently, its statement on sanctions measures in relation to Russia⁴.

Importantly, firms must ensure that the focus on sanctions survives beyond the current crisis in Ukraine. The use of sanctions is likely to continue to be a major geopolitical tool given it provides states with what can be a strong but non-military response to world events.

Enforcement prospects

While adherence to best practices for sanctions compliance has long been a tenet of the FCA’s financial crime policy, recent events have shed fresh light on who is ultimately responsible and given a new impetus to the need to police firms who are found wanting.

If there is a breach of the UK’s financial sanctions regime, we expect the chances of FCA enforcement against the firm and/or its senior managers for systems and controls failures will be high, even in circumstances where the breach was inadvertent. The FCA will be looking to make examples of those who come up short and demonstrate to the market that it takes sanctions compliance seriously, particularly considering the limited sanctions enforcement it has carried out to date. This means both individuals and firms are at not only at risk of investigation by the Office of Financial Sanctions Implementation (“OFSI”) and its law enforcement partners but also from the FCA in the event of a sanctions breach. For individuals this is most likely to mean senior management will be in the crosshairs but the FCA could well choose to investigate employees at all levels.

Reporting obligations

There is a general obligation on regulated firms to notify the FCA if they or their associates are subject to sanctions, directly or indirectly.⁵ In addition, firms and senior managers will be expected to notify their regulators, as well as OFSI, if there is a confirmed sanctions breach. The FCA, PRA and OFSI have issued a joint statement indicating they are sharing information with authorities in the UK and abroad,⁶ and it should hopefully go without saying that proactively making such a notification is the best approach. Further reporting obligations may arise under the anti-money laundering regime where a transaction involves or potentially involves the proceeds of a sanctions breach.⁷ Failure to make a report is itself both an aggravating factor (in terms of the penalties which may be applied) and potentially actionable as a separate matter.

CONCLUSION

Sanctions compliance has become a high-risk area and firms should have it front of mind. The FCA will be looking to bring enforcement actions and so firms must make sure they have the right processes and procedures in place to prevent any breaches, however inadvertent, and to report them when they occur.

There is a lens being held up to sanctions compliance which merits a stock-take of what can be done to ensure a truly holistic approach sufficient to satisfy the regulator’s increasing appetites in this area.

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MEET THE AUTHORS

JOSEPH NINAN

Senior Associate, London

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POLLY JAMES

Partner and Global Practice Co-Leader - Financial Services Disputes and Investigations, London

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This document provides a general summary and is for information/educational purposes only. It is not intended to be comprehensive, nor does it constitute legal advice. Specific legal advice should always be sought before taking or refraining from taking any action.

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