Over the past 18 months, the UK Government has been quietly at work making significant changes to the landscape of international sanctions legislation and how this is policed in a post-Brexit UK.
In order for the current EU sanctions regime (which the UK supports) to have effect within the UK post-Brexit, it will be necessary to pass equivalent or similar domestic legislation. In order to prepare the way, the recent noteworthy changes introduced by the UK Government are as follows:
- On 31 March 2016, the Treasury's Office of Financial Sanctions Implementation (OFSI) was created to ensure financial sanctions are properly understood, implemented and enforced.
- From April 2017, HM Treasury was granted powers to issue civil penalties for breaches of sanctions (previously these could only be levied by HMRC, for enforcing trade sanctions and the FCA for systems and controls violations). These carry a lower burden of proof than criminal prosecution. The level of HM Treasury's powers to issue financial penalties for serious breaches of sanctions is £1m or 50% of the value of the breach, whichever is higher.
- Also from April 2017, companies were able to enter into a Deferred Prosecution Agreement in respect of sanctions breaches.
- Between 21 April and 23 June 2017, the Government ran a public consultation on the UK's post-Brexit legal framework for imposing and implementing sanctions. The response to this public consultation was published on 2 August 2017.
- From 8 August 2017, the European Union Financial Sanctions (Amendment of Information Provisions) Regulations 2017 came into force by which the previous duty to report sanctions offences (which covered banks and certain financial institutions) was broadened to apply to a much wider range of professionals, as follows:
(c) dealers in precious metals or stones;
(d) estate agents;
(e) external accountants;
(f) independent legal professionals;
(g) tax advisers; and
(h) trust or company service providers.
Strikingly, these regulations were not subject to any consultation or Parliamentary scrutiny despite their wide-ranging effect. These reporting obligations require the relevant professional to inform the Treasury as soon as practicable if they know, or have reasonable cause to suspect, that a person (including a client or customer) either is a designated person, or has committed a sanctions offence specified in the regulation (usually the contravention and/or circumvention of the prohibitions encompassing 26 different jurisdictions). Failure to report is a criminal offence. This places a significant burden on compliance departments to review their internal processes to enable such information to be captured and such reports to be made if necessary.
(The consultation on the future of sanctions and the Government's response, discussed in more detail below, suggests that this obligation may widen further post-Brexit. The consultation document states that "the new sanctions powers will include reporting obligations on anyone who becomes aware of or suspects a breach of financial sanctions.They will be required to report to the Government if they know or suspect that a current customer, or any customer in the previous five years, is a sanctioned person, or has committed an offence under the legislation." This is not loose drafting, as the Government's response on this point states that "the obligation to report should be broad". Obviously, we will have to wait and see how these obligations are framed in the Sanctions Bill when it is published, but the current signs are that there will be a significant widening of the information provision requirements (and a corresponding widening of criminal liability for failure to do so).
The Sanctions Bill
The Government is on track to introduce a Sanctions Bill within the current Parliamentary session. This legislation is designed to ensure that after the UK's withdrawal from the EU, the Government has the independent powers to continue to impose and implement those financial and trade sanctions, often referred to as restrictive measures, which are currently derived collectively from EU Regulations. The Government launched a consultation on April 2017 and published  its response on 2 August 2017.
One of the core issues which permeates the Government's response to the consultation is the extent to which there would continue to be harmonisation with the EU on sanctions following Brexit and, although more hidden, the extent to which the UK Government will take the opportunity to increase its powers.
Although a draft Sanctions Bill has not yet been published, the Government response to the consultation hints that the UK intends to remain faithful to the current system of international sanctions. For example, the new legislation will include provisions for granting licences to permit certain financial transactions or trade. However, despite these apparent similarities, there are some significant departures. Below are some of those issues which companies who operate across jurisdictions should start thinking about now, and should keep in mind as the Sanctions Bill is debated and ultimately becomes law.
Will licences granted by HM Treasury be recognised throughout the EU,and vice versa?
The response from the Government contained within the consultation is that "Sanctions are most effective as a foreign policy tool when delivered by a number of countries simultaneously. [The Government] expect to continue working closely with the EU and international partners in the future on sanctions, including on licensing and other implementation-related issues." If there is no mutual recognition of UK sanctions licences then it is unclear what companies caught by both UK and EU sanctions will need to do to avoid breaching one or the other. These companies may need to apply for a separate additional licence from an EU agency and hope that they are approved for both.
It will be worth following whether the mutual recognition of licences will be included on the list of negotiating items for the Brexit discussions.
Those who may be affected by sanctions designations may also be interested to note that the Government's response re-affirmed the commitment to granting licences to pay for access to justice and pay for their basic needs. However, the Governmental response goes on to say that any such payments would be "set at a level which respects the basic rights of those persons and are appropriate in view of the purpose for which sanctions are imposed." What is considered the "appropriate" level will form an interesting test and potentially the basis of some dispute in certain cases.
Challenge to Designations
Once out of the EU, the UK will need a domestic route to challenge a designation on the sanctions list. What is currently unclear is to what extent the UK route will be harmonised with the EU system. For example, to what extent will a successful de-listing on the UK sanctions list result in an automatic de-listing on the EU sanctions list.
The current EU system provides that an individual may challenge his or her designation by either asking the EU Council to reconsider its decision or by challenging the legality of the imposition of restrictive measures via the General Court of the European Union - often for reasons such as failure to specify sufficient details in the reasons for listing. This has in recent years become more difficult to challenge successfully.
The UK Government response proposes what appears to be a similar structure. There is the possibility to request an administrative re-assessment at any time the individual is designated or re-designated, and at any other time if the designated person is able to put forward relevant information, evidence or arguments that have not previously been considered. Alternatively, there is also the possibility to challenge the designation in the High Court "by way of a statutory challenge procedure applying judicial review principles." Precisely what is meant by "applying judicial review principles" is not yet clear but it may be fair to assume that challenges to designations will only be possible if the designation was, for example, unreasonable or contrary to natural justice. Any proceedings are therefore unlikely to be a full review of the merits of the case.
The Sanctions Bill will set out further details of the procedure proposed. However, it can be assumed that, post-Brexit, an individual designated both in the UK and the EU may well find that they need to argue their case both before the UK and EU courts.
Whilst it is likely that at the point of Brexit the UK and EU sanctions lists will mirror each other, it is possible, if not highly likely, that they will diverge in the near future.
This can be seen in the recent instance in April 2017, when the UK was unable to secure the backing of the G7 nations for swift sanctions against Russia and Syria due to opposition from Germany and Italy.
Post Brexit, and the coming into force of the Sanctions Act, the UK, if it wished to, could impose its own differing sanctions and not be bound by the mutual consensus of the EU countries. This is because the Sanctions Bill is designed to provide the legislative framework to impose unilateral sanctions. Therefore it would not matter whether the other G7 countries were opposed to further sanctions against Russia; the UK could, in theory at least, proceed without regard to the rest of the international community.
Whilst much remains uncertain and the precise text of the new legislation remains to be seen, what is clear is that the proposed Sanctions Bill will add a further layer of complexity for individuals and businesses dealing with sanctions affected jurisdictions. At the very least, the new UK landscape will impose an additional layer of sanctions legislation with which to comply and (possibly) further licences to obtain. There could also be commercial and legal fallout from political developments, as was seen from the recent extension of US sanctions against Russia which have potentially impacted German, French and Austrian commercial interests involved in the construction of the Nord Stream 2 gas pipeline. The EU reacted by calling for retaliatory measures against the US, but then reconsidered its position.
In short, once the Sanctions Bill becomes law, those individuals and companies with an international reach could find themselves caught in the middle of a three way sanctions arm race between the US, UK and EU.