27 June 2018 - Post by:Calum Macdonald
When the Sanctions and Anti-Money Laundering Act 2018 was first proposed, the expectation was that it would enable the UK to maintain the status quo after it leaves the EU in the areas of sanctions and anti-money laundering and no more. However, now the Act is law, the position is not quite that simple. In this article, we summarise how the Act enables the UK Government to go beyond the current position under EU law.
The Act (which received Royal Assent on 23 May 2018) creates powers to enable the UK to comply with any future international sanctions or anti-money laundering obligations and to impose its own sanctions and anti-money laundering measures post-Brexit. Its key provisions are intended to come into effect when the UK leaves the EU and is no longer subject to EU law in these areas.
In short, while the Act does not require any immediate actions, it creates a risk that the UK will diverge from the existing EU regimes in due course. All UK businesses and persons, but particularly financial institutions, financial services firms and exporters will need to consider this in the future.
- Wider scope than existing EU sanctions: In summary, the UK Government will be permitted to impose sanctions regulations that are considered “appropriate” for a number of purposes. These include: compliance with a UN obligation or any other international obligation, for the prevention of terrorism, in the interests of national or international peace and security or to further a UK foreign policy objective. In a late addition to the Act, it also specifically allows the UK to impose sanctions on those who commit gross human rights violations under the so-called “Magnitsky amendment”. Accordingly, it potentially widens the scope of the UK sanctions regime especially as UK sanctions will not need to be agreed by the 27 other member states in the future.
- Potentially broader financial sanctions reporting obligations: Since 8 August 2017, current UK financial sanctions regulations require relevant businesses and professionals (e.g. financial institutions, lawyers and accountants) to report to OFSI when they know or suspect that a person is an asset freeze target or has breached a financial sanction. Failing to do so is a criminal offence. The Act allows for such sanctions reporting obligations to be imposed on any individual or firm. This broader power reflects existing reporting obligations provided for under EU law, breach of which has not to date been a criminal offence under English law.
- Designation by description: The UK Government will gain the power to designate persons not only by name but also by description in situations where it is impractical to identify by name all designated persons. The description, however, must be sufficiently precise that a reasonable person would be able to identify individuals falling within the designation. This begs the obvious question, if a reasonable person could identify sanctioned individuals; why does the UK Government not simply designate them by name? If frequently used, this provision is likely to create uncertainty for firms tasked with identifying those individuals who meet a description, particularly if that description is broad or requires individual-by-individual research.
- A tightly controlled review mechanism: The Act prevents designated persons from immediately challenging regulations before the courts; they must request either variation or revocation of their designation from the Secretary of State. Only after that stage may a designated person seek judicial review of a sanctions related decision. Even if judicial review is successful, the UK Government will only be liable for damages if it is found to have acted negligently or in bad faith. Finally, a closed court procedure may be used in cases where individuals have been designated based on sensitive intelligence material. Whilst a similar procedure is theoretically available in the EU courts, it is more likely to be utilised by the UK Government, which may increase the number of designations based on sensitive intelligence material.
- A broad licencing power: the Act includes a broad licencing power. The UK Government has confirmed that it intends to issue general licences for issues that are urgent; that could not be foreseen at the time of the drafting of the sanctions regulations; or need to be time-limited. For example, a general licence may be issued where the UK Government introduces an unrelated financial services policy that would otherwise be hindered by sanctions law and does not contradict the policy intent of the sanctions regime. We anticipate that the practice is likely to be similar to OFAC’s current practice.
What are the new anti-money laundering powers?
- Enabling Powers: Part 2 and Schedule 2 of the Act provide the powers for the UK Government to continue to make provision in relation to anti-money laundering, specifically: the detection, investigation or prevention of money laundering or terrorist financing or the implementation of Financial Action Taskforce (FATF) standards.
- Registers of beneficial ownership: A high profile amendment to the Act was the inclusion of section 51 which requires the UK Government to make provision for public registers of beneficial ownership of companies in all British Overseas Territories by the end of 2020. This excludes the Isle of Man, Jersey and Guernsey but includes significant offshore jurisdictions such as the British Virgin Islands and Cayman Islands.
The Sanctions and Anti-Money Laundering Act undoubtedly creates scope for the UK sanctions and anti-money laundering regimes to gradually differ from the equivalent EU regimes. However, whether the UK has the appetite to diverge is a different question. Historically, it has been extremely rare for the UK to impose unilateral financial sanctions (the most recent examples being the Landsbanki Freezing Order 2008 issued against certain Icelandic financial institutions during the financial crisis and the Andrey Lugovoy and Dmitri Kovtun Freezing Order 2018 against the suspected killers of Alexander Litvinenko). In addition, the UK Government has indicated that it will seek to coordinate UK and EU sanctions even if it is outside of the EU’s Common Foreign and Security Policy.
Nonetheless, a number of political events make divergence more likely. Most immediately, we are awaiting the report of the Treasury Committee after its inquiry into Economic Crime which closed on 8 May. One of the focuses of the inquiry was the anti-money laundering and sanctions regime (see our previous blog post here). Further, the UK’s FATF mutual evaluation is due to conclude later this year and this may flag weaknesses or recommend improvements in the UK’s financial crime framework. Finally, as the current differences between the US’ and the EU’s approach to sanctions on Russia and Iran illustrates, even historically close international allies can have highly divergent sanctions regimes. It is very likely that in the coming years differences in foreign policy approach between the EU and UK will emerge which will affect the sanctions landscape considerably.
This blog post is based on an article written for Allen & Overy’s European White Collar Crime Report by Matthew Townsend, Jonathan Benson and Calum Macdonald