On 24 May 2018, the Sanctions and Anti-Money Laundering Act 2018 (the “Act”) received Royal Assent, marking the conclusion of its passage through Parliament and its entry into law. The sanctions powers under the Act are expected to be exercisable following the UK’s withdrawal from the European Union in March 2019 (“Brexit”). This blog post takes a look at the sanctions provisions in the Act and explores how the UK’s sanctions regime might look following Brexit.
Sanctions after Brexit
At present, the European Communities Act 1972 (the “ECA”) empowers the UK Government to implement sanctions decisions adopted at the EU level, and in many cases provides for EU sanctions to have direct effect in UK law. The implementation of certain UN sanctions also relies on the ECA. However, Brexit will result in the repeal of the ECA, and the Government’s sanctioning powers that are not derived from the ECA have until now been limited. Therefore, to maintain the sanctions programmes in place and to be able to use sanctions to pursue foreign policy and national security objectives in future, the Act has provided the Government with powers similar to those it currently enjoys under the ECA, albeit with some important differences.
Whilst the UK does currently maintain its own sanctions independently of the EU and UN, such ‘domestic’ sanctions have to date been limited. The new authority to impose sanctions under the Act is much wider than any authority under pre-existing authorities. The Act thus raises the prospect of the UK adopting its own sanctions policy independent of the EU after Brexit.
Nonetheless, the Government’s post-Brexit sanctions strategy is not yet clearly defined. The Government stated in August 2017, in response to a consultation, that “sanctions are most effective as a foreign policy tool when delivered by a number of countries simultaneously” and expressed its intention to “continue working closely with the EU and international partners in future on sanctions, including on licensing and other implementation-related issues.” Foreign Secretary Boris Johnson echoed such sentiments in a statement released 24 May 2018, noting that the UK’s continued foreign policy cooperation with European and international partners was in “all our interests,” but also emphasizing that the UK will have “full control” of its sanctions policy following Brexit.
As UK sanctions policy will be formulated and administered at the UK level after Brexit, it is likely that the role of the Office of Financial Sanctions Implementation (OFSI), which was set up in April 2016, will become more pronounced — possibly even resembling that of the Office of Foreign Assets Control (OFAC) in the United States.
The new legislation – basic principles
The Act empowers the Government to impose financial, immigration, trade, aircraft and shipping sanctions where the relevant Minister considers they would:
- prevent terrorism;
- further national security;
- further international peace and security;
- further UK foreign policy;
- promote the resolution of armed conflicts or protection of citizens in conflict zones;
- provide accountability for or to be a deterrent to gross violations of human rights, or to otherwise promote human rights;
- promote compliance with international humanitarian law;
- contribute to non-proliferation and disarmament; and
- promote respect for democracy, the rule of law and good governance.
The inclusion of the item above regarding human rights, the so-called “Magnitsky amendment,” perhaps heralds a future shift away from existing EU sanctions policy and towards that of the United States, which since 2012 has under the Magnitsky Act implemented restrictive measures on individuals complicit in human rights violations.
Under the Act, sanctions may be applied to three categories of people: (i) designated persons, (ii) persons connected with a prescribed country, territory or region, or (iii) a prescribed description of persons connected with a prescribed country, territory or region. This tracks EU and US practice; the third category being equivalent to the so-called ‘sectoral sanctions’ regime.
Sanctions will be implemented via regulations, which will be imposed by the relevant Government Minister. Regulations that impose financial sanctions that go beyond what is required to comply with UN obligations will take effect without going through the conventional legislative process, but must be presented to Parliament after being made and approved by each House within 28 days. This means that sanctions can be imposed quickly and without warning, although Parliament will have a degree of post-facto control over policy. The relevant Minister is obliged to present a report to Parliament explaining why sanctions are being imposed.
Those subject to designations under the Act can make one request to the relevant Minister to vary or revoke the designation (and, if unsuccessful and the circumstances have not changed, they may not make a second). Following a request, the relevant Minister is obliged to consider the case and decide whether to revoke or vary the designation or not. Unlike under EU law, a successful challenger is not barred under the Act from seeking compensation.
Designations are to be reviewed every three years, regardless of any requested reviews. This was a significant discussion point in the consultation process.
The Act also provides for challenges to be made to designations via the courts but only after having made a request to Government to be delisted. The Act makes provision for the controversial rules of court from the Counter-Terrorism Act 2008 to be applied to review of and challenges to sanctions decisions. This “closed-material procedure” would allow secret evidence to be heard in a closed court by the judge and lawyers (“special advocates”) that have undergone appropriate security vetting. The evidence would not be made available to the challenger itself.
The Act will apply to persons in the UK, and to UK nationals and UK incorporated entities located overseas. Regulations under the Act may apply to entities incorporated in the Channel Islands, the Isle of Man or any of the British overseas territories pursuant to an order of the Privy Council. This means that whilst non-UK persons might be targeted, the penalties for dealing with them would only apply to persons in the UK or UK persons. This tracks existing policy and corresponds with the Government’s stated intention (expressed in the 2017 consultation paper) not to extend the territorial effect of UK sanctions.
The financial sanctions regime – key features
Various prohibitions or requirements may be imposed upon the use of funds ( “financial assets and benefits of every kind,” including, payment obligations, securities and interest) or economic resources (“assets of every kind, whether tangible or intangible, movable or immovable, which are not funds but which can be used to obtain funds, goods or services”). These definitions are in line with those typically used in EU sanctions legislation adopted to date. As with most EU sanctions legislation, these prohibitions include freezing measures and a prohibition on making funds or economic resources available to, or for the benefit of, sanctioned persons.
Unlike in EU legislation, prohibitions or requirements may be placed upon the procurement or provision of financial services (“any service of a financial nature.”) Sanctions may also be imposed to prevent financial services from being provided where the services relate to financial products (money market instruments, foreign exchange, derivative products, exchange rate and interest rate instruments, transferable securities and other negotiable instruments and financial assets) issued by designated persons. The definitions and usage of “financial services” and “financial products” are broader than is typical in EU legislation.
In a further departure from EU sanctions policy, the Act appears to provide for forced divestiture of interests in sanctioned entities: sanctions can be imposed to prevent persons from owning, controlling or having a prescribed interest in sanctioned persons (other than individuals).
While the Act is in some respects broader and more detailed than EU sanctions legislation, a number of key concepts are left undefined or unexplained. For example:
- whether, or to what extent, subsidiaries will be sanctioned as a result of the designation of their parent;
- the grounds on which sanctions licences may be granted has not yet been elucidated;
- whether the new legislative framework is able to accommodate so-called “snap-back” mechanisms (where sanctions are reinstated if certain conditions are breached);
- whether the power to prevent persons from holding ownership and other interests in sanctioned persons is an injunctive mechanism or a power of forced divestment;
- whether secondary legislation will impose on market participants obligations to report breaches of sanctions, as was suggested in the 2017 consultation. The Act does not impose these obligations but allows for secondary legislation to do so; and
- the exact enforcement mechanisms and penalties are to be defined in the regulations.
We would expect to see additional detail and clarity in the implementing regulations, and in further guidance. The Act provides a framework for what can be expected from the UK’s post-Brexit sanctions regime, but significant aspects are yet to be made clear.
Please do not hesitate to contact Raj Panasar (email@example.com), Polina Lyadnova (firstname.lastname@example.org) or Matthew Fisher (email@example.com) in our London office, or any of your usual contacts at the Firm, should you have any questions.
 The sanctions powers under the Act are not yet in force, but will come into force on a date specified by regulations implemented by the Secretary of State.
 Russia and Moldova Jackson–Vanik Repeal and Sergei Magnitsky Rule of Law Accountability Act of 2012