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The UK Chancellor's Summer Budget provided more detail and commitment of HM Treasury’s plans to establish an Office of Financial Sanctions Implementation. It is a welcome initiative but needs to ensure both compliance and critically, facilitate continued trade, if it is to succeed. The UK Chancellor’s Summer Budget inevitably drew headlines for its National Living Wage, increase in inheritance tax threshold, and abolition of permanent ‘non-dom’ status. But it also contained further details of an important development for those focused on the government’s efforts to harness public/private partnership more effectively to tackle financial crime and illicit finance.
First mooted in the March 2015 Budget when HM Treasury announced a review of the implementation and enforcement of sanctions, the Budget announcement provided some further details of the formation of the Office of Financial Sanctions Implementation (OFSI). According to the budget statement, the formation of this new effort is the result of a review conducted by HM Treasury of ‘the implementation of financial sanctions and its work with the law enforcement community, to ensure these sanctions are properly enforced and businesses are made better aware of the rules they are being asked to comply with.’ For financial institutions in particular, this is a welcome and overdue initiative.
Navigating the Minefield
The use of sanctions by the international community to punish or coerce intransigent nations has become the tool of choice in an expanding array of fields including state-sponsorship of terrorism, human rights abuse, nuclear proliferation, and cross-border aggression. Individuals and corporations also find themselves subject to ‘smart’ sanctions as the international community seeks to deploy sanctions in a more surgical, less blanket fashion. This web of sanctions issued by the United Nations, European Union, and United States frequently entangles banks and other facilitators of international trade, at best disrupting legitimate business as banks seek to avoid the risk of penalties, and at worst leading to financial sanction on the bank itself as its systems and processes are found wanting by the authorities.
The complexity of sanctions surrounding Iran provides a case in point. To date, the almost complete exclusion of Iran from the global market for trade and finance for an extended period has been relatively easy for the private sector to manage. Those that have chosen to continue to deal with Iran in contravention of these sanctions have, quite rightly, been punished by the authorities. The alleviation of sanctions as part of the 14 July Joint Comprehensive Plan of Action with Iran is a critical element required for success. As the US State Department’s initial factsheet in April revealed, Iran will receive US, EU, and UN sanctions relief ‘if it verifiably abides by its commitments.’ But can the P5+1 deliver on the sanctions relief they are holding out? Or will the banking sector, heavily fined in recent years for breaching the Iranian sanctions regime, remain risk-averse, thus restricting opportunity for economic growth, calling into question the concessions granted by the Iranian leadership under the JCPOA?
Against this challenging background, the Chancellor’s OFSI cannot be stood up a day too soon and should prepare itself for an early and highly complex test of its credibility, commitment, and capability. The hunger within the financial services industry for the ‘high quality service’ to which the Chancellor’s Summer Budget commits is immense.
Carrot as well as Stick
But there is one concerning element that pervades this new initiative. As revealed in the Summer Budget, the OFSI Implementation focuses almost entirely on increased enforcement and penalties – there is no obvious mention of the importance of ensuring that sanctions implementation does not disrupt legitimate or exempt trade. Fear of unwitting contravention of sanctions has contributed significantly to the wide-ranging ‘de-risking’ undertaken by banks as they seek to avoid any and every possible risk that might ensnare them in further legal proceedings. The UK, along with other G20 governments and multilateral and intergovernmental organisations such as the World Bank and Financial Action Task Force are increasingly concerned about the impact of de-risking on global trade, investment and development. De-risking will only be arrested or reversed if banks feel confident that the regulatory boundaries are clearly and consistently applied. Providing this important clarification and guidance is a critical role that the OFSI must play if it is to be effective.
It is thus of paramount importance that the new Office of Financial Sanctions Implementation offers carrots as well as sticks. The Chancellor’s initiative is to be welcomed, but unless it ensures it provides support for both the implementation of sanctions as well as the facilitation of trade, it will achieve only half its job.