The Economic Crime (Transparency and Enforcement) Act 2022 – the conundrum of strict liability

The Economic Crime (Transparency and Enforcement) Act 2022 (the Act), which came into force in March 2022, aimed amongst other things, to give UK sanctions authorities greater power to take enforcement action and impose penalties on persons that breach sanctions restrictions, through the introduction of a “strict liability” test. These new powers of the UK’s Office of Financial Sanctions Implementation’s (OFSI), which are viewed as being more in line with the enforcement powers available to the US Office of Foreign Assets Control, apply to all cases where the potential breach took place on or after 15 June 2022.

OFSI’s existing power to impose civil monetary penalties derives from the Policing and Crime Act 2017, and enables it to levy penalties against ‘persons’ (including natural persons, legal persons, bodies and entities) that breach a prohibition or fail to comply with an obligation, that is imposed by or under financial sanctions legislation. In the case of individuals, OFSI can take action against such persons both in their personal capacity (i.e. where the individual themselves breaches a prohibition or fails to comply with an obligation) and, in the case of ‘officers of a body’¹, for breaches or failures by their relevant body corporate or unincorporated association that took place with the consent or connivance of the officer or which was attributable to any neglect on the part of the officer.

Previously OFSI could impose such civil monetary penalties only if it was satisfied, on the balance of probabilities, that:

(a) the person had breached a prohibition, or failed to comply with an obligation, that is imposed by or under financial sanctions legislation, and

(b) the person knew, or had reasonable cause to suspect, that the person was in breach of the prohibition or (as the case may be) had failed to comply with the obligation.

The Act removed limb (b) above, and OFSI is now able to impose civil monetary penalties on a ‘strict liability’ basis (i.e. to impose a civil monetary penalty, OFSI only needs to be satisfied, on the balance of probabilities, that a breach of financial sanctions occurred, not whether or not the person had knowledge or reasonable cause to suspect that such a breach had occurred). However, as set out in updated guidance (see OFSI enforcement guidance), the question of knowledge and suspicion remains relevant as OFSI will consider whether a person “knew or suspected that their conduct amounted to a breach” when assessing the severity of the breach and determining a “proportionate” response to enforcement.

Notwithstanding that OFSI has retained “knowledge or suspicion” as a case factor, the introduction of a strict liability offence significantly expands the scope for sanctions enforcement in the UK. It has also created legal complexity, not least because the underlying provisions of the Russia (Sanctions) (EU Exit) Regulations 2019 (the Regulations) have not similarly been updated to remove concepts of knowledge and / or reasonable cause to suspect. The effect of this is that, to be considered to have breached the asset freeze restriction, a person (“A”) will need to have known or have reasonable cause to suspect that they were dealing with funds or economic resources owned, held or controlled by a designated person. However, OFSI has the power to impose a monetary penalty if A dealt with funds or economic resources that were owned, held or controlled by a designated person, even if A did not know or have reasonable cause to suspect that was the case. Added complexity arises when considering how this strict liability impacts the potential exposure that officers of a body corporate or unincorporated association might have for breach or failure by such firms. While OFSI does acknowledge in its updated guidance that it is possible for a mistake to cause a breach, it notes that even without the knowledge that the action would be a breach or any reasonable cause to suspect this, the matter would still meet the legal standard to impose a monetary penalty (subject to all relevant factors and the public interest).

It remains to be seen whether further guidance will be published by OFSI on how it views the strict liability test under the Act interplaying with the underlying sanctions restrictions in the Regulations, and in particular what impact it may have for individuals / officers, or whether the market will need to await the outcome of enforcement actions to learn how these legal complexities will apply in practice.