Overview of UK financial sanctions regime post Brexit

On 23 May 2018 the UK introduced the Sanctions and Anti-Money Laundering Act (SAMLA) to provide a framework through which it can impose and update sanctions following its departure from the EU.

A key feature of the legislation is the introduction of a power for Ministers to make sanctions regulations by way of statutory instrument:

• for the purposes of compliance with a UN or other international obligation; or
• to achieve one of a number of defined “discretionary purposes”, including preventing terrorism, promoting national and international peace and security, and imposing Magnitsky-style measures (i.e. designations to promote compliance with international humanitarian and human rights laws).

Although the substantive provisions of SAMLA which provide for the creation, review and challenge of sanctions regulations are already in force, the regulations relating to the specific sanction regimes made pursuant to SAMLA are not. Those regulations may come into force either before, on or after “exit day” (on 31 December 2020, at the end of Brexit implementation period provided for under the European Union (Withdrawal Agreement) Act 2020) – in each case, the effective date will be provided for in the relevant instrument. The UK government has acknowledged that it will not be possible to prepare regulations for all regimes before exit day and a later effective date for some country or theme specific regimes will be provided for. Until then, SAMLA provides for the continued application of the existing EU sanctions.

Once in force, the UK regulations are expected to broadly mirror the current EU sanctions regime. However, there are several important changes introduced under the domestic sanctions regime for businesses to be aware of:

• Ministers will be able to exercise their powers under SAMLA to use sanctions as a tool to further the UK’s foreign policy objectives. Dominic Raab, UK foreign secretary, has recently announced that his priority post Brexit is to introduce regulations under SAMLA that will freeze the assets of individuals responsible for human rights abuses. Whilst no official statements have been released, it has been suggested that those citizens of Saudi Arabia implicated in the murder of Jamal Khashoggi in 2018 may be amongst the first to be targeted in this way, together with human rights abusers in countries such as Russia, Libya and North Korea. It is anticipated that secondary legislation to bring this into effect will be introduced in February or March 2020.

• The UK will be able to chart its own territory by acting swiftly and more decisively in imposing sanctions regulations without the need to reach consensus with the 27 other EU member states. It will also have greater flexibility to align its sanctions policies with other countries, such as the US and Canada. However, the measures it imposes will have a narrower application, limited to activities within the UK and to the actions of UK natural and legal persons. The extent to which the UK chooses to depart from its past close alignment with its EU neighbours is likely to be heavily influenced by the development of its international trade policy over the coming years. Businesses will need to closely follow developments in international trade and foreign policy to ensure they are prepared for any new measures introduced.

• Unlike EU sanctions regulations, the statutory instruments created under SAMLA will contain express “ownership” and “control” tests. These will help to clarify how subsidiaries of designated persons will be treated - asset freezes imposed will automatically extend to entities owned or controlled by the designated person, if those tests are met.

• SAMLA will enable a more flexible and effective licensing regime in the UK. Under SAMLA the UK can issue general licences (the use of which had been limited under EU law), enabling humanitarian and development activity to be carried out with fewer administrative burdens, and providing greater scope for reassuring banks and financial service providers that processing (licensed) payments related to such activities is lawful. SAMLA will also grant a wide-ranging power to the UK's financial sanctions enforcement authority, the Office of Financial Sanctions Implementation ("OFSI"), to issue licensing derogations “to enable anything to be done to deal with an extraordinary situation” in relation to non-UN derived asset freezes. OFSI’s guidance indicates that an extraordinary situation would cover releasing funds to support disaster relief or providing other urgent aid.

• SAMLA does not impose a general and sweeping reporting obligation duty on all natural and legal persons to supply any information which would “facilitate compliance” with sanctions to their relevant regulator, as most EU sanctions regulations do. Instead, reporting requirements will only apply to “relevant” professions and businesses in certain sectors (including legal professionals, estate agents and financial institutions).

The UK enforcement landscape in 2020:

In 2019, OFSI imposed its first three monetary penalties for breach of financial sanctions since it was granted civil enforcement powers in April 2017. The first two penalties were relatively modest in value at £5,000 (Raphaels Bank) and £10,000 (Travelex (UK) Ltd.) respectively. The third which was significantly higher, came in at £300,000 initially (Telia Carrier UK Limited), though it was ultimately reduced to £146,341, after Telia invoked its right to a ministerial review.

The amounts involved in these cases and the fines imposed pale in comparison to those typically issued by OFSI’s US counterpart, the Office of Foreign Assets Control. However, OFSI’s approach to enforcement in 2019 does provide some insight into how it may treat similar and larger breaches in the near future. In particular:

1. OFSI is willing to impose fines that are a significant multiple of the amount of the breach. For example, the funds handled by Raphaels Bank and Travelex in breach of Egypt financial sanctions were £200 and £204 respectively.

2. In 2018 - 2019, OFSI received 99 reports of suspected breaches with a value of around £262 million last year, all of which were investigated (OFSI Annual Review, April 2018-March 2019).

3. The Telia case demonstrates that OFSI will interpret broadly the meaning of ‘economic resources’ when made available to designated persons in breach of sanctions: the indirect facilitation of international telephone calls to SyriaTel, a designated entity, constituted a breach of the Syria sanctions by Telia.

It is clear that OFSI is willing to use its enforcement powers to penalise both small and medium breaches. We expect that in 2020 it will be emboldened to pursue cases involving larger and more complex sanctions breaches and higher penalties. Businesses that are concerned that they may be the subject of enforcement action by OFSI under the EU or UK sanctions regimes should seek advice on the merits of making a self-report to OFSI, with a view to mitigating the consequences of that breach including the amount of the penalty that may be imposed.