Sanctions have – unsurprisingly – dominated the headlines over the past month. The recent increased use of these restrictive measures is aimed at pressuring Russia to cease its military aggression in Ukraine. Sanctions are therefore best understood as political tools designed to achieve foreign policy objectives, be that the promotion of state values or the deterrence of state action.
In recent months the UK Government, European Union, and a large number of other countries have imposed a raft of sanctions on Russian-linked individuals and entities. These sanctions include targeted asset freezes, travel bans, and trade restrictions. New designations of individuals and entities are being announced on an almost daily basis. Both public and political pressure continues to lead to calls for individuals to be added to the sanctions list, including MP’s exercising parliamentary privilege to make allegations that may or may not be substantiated by material in possession of the State.
This article explains the operation of the UK’s sanctions regimes following the recent legislative amendments brought into force on 15 March 2022. It provides a brief overview of the relevant law, how sanctions are imposed, the consequences of breaches of sanctions, exceptions, licences, and how to challenge sanction designations.
The Sanctions and Anti-Money Laundering Act 2018 (“Sanctions Act”) is the predominant source of law relating to sanctions, under which unique thematic and geographical sanctions regimes are created by regulations. For example, the Russia (Sanctions) (EU Exit) Regulations 2019, as amended by eight successive regulations, were made under the Sanctions Act and form the basis of the UK’s Russian sanctions regime.
On 15 March 2022, The Economic Crime (Transparency and Enforcement) Act 2022 (“Economic Crime Act”) received royal assent. It followed a fast-tracked passage through Parliament in response to Russia’s invasion of Ukraine. The Act amends the Sanctions Act by “streamlining” the process of imposing sanctions, introducing a new “urgent” procedure, and increasing the ease by which penalties can be imposed. All of the amendments to the Sanctions Act other than those relating to monetary penalties commenced on 15 March 2022.
What is the test for creating a sanctions regime? An “appropriate Minister” may establish a sanctions regime if they consider it appropriate to do so to further one of the listed purposes in section 1 of the Sanctions Act. The Economic Crime Act has stripped away section 2 of the Sanctions Act which set out additional criteria to be met where a sanctions regime is created otherwise than in compliance with an international obligation (also known as “autonomous sanctions”). A Minister no longer has to consider whether sanctions are a reasonable course of action in furtherance of that specified purpose. Nor need that Minister now lay before Parliament a report justifying the sanctions regime. Hence the process of making sanctions regulations now being described as “streamlined”. However, as with the majority of amendments to the Sanctions Act, seeking maximum flexibility and speed inevitably comes at the expense of oversight, scrutiny, and – ironically given the short title of the new Act – transparency.
Once a sanctions regime is up and running with designation criteria, names can be added to the list – individuals and entities who will be known as “designated persons” – with the Government choosing from a buffet of available sanctions which ones to impose.
Sections 11 and 12 of the Sanctions Act require sanctions regimes to permit Ministers to choose whether to designate persons by name or description under either the standard procedure, or the brand-new urgent procedure. A deeming provision in section 61 of the Economic Crime Act means that pre-existing sanctions regimes are deemed to include the urgent procedure, which will therefore include the Russian sanctions regime.
Neither procedure now requires a Minister to consider such a designation to be appropriate having regard to the purpose of the sanctions regime and the likely significant effects of the designation on that person (the “appropriateness test”). The crucial difference between the procedures, insofar as designating persons by name is concerned, is that the new urgent procedure dispenses with the requirement that a minister must have reasonable grounds to suspect that the person is or has been involved in, or connected to, an activity specified in the relevant sanctions regime (the “involved person test”). A Minister can only utilise the urgent procedure where they consider it in the public interest to do so and the person has already been sanctioned by another relevant country. A designation made under the urgent procedure will remain in place for 56 days, unless it is extended following a Ministerial certification. Importantly, a statement of reasons for designation must be provided whether the urgent or the standard procedure is used.
The decision to remove the “appropriateness” and “involved person” tests arguably does not sit easily with the Prime Minister’s previous assurances in Parliament that individuals named in Parliament and by the press would not be designated until due process had been followed. Amending the legislative framework governing every sanctions regime by watering down procedural safeguards in response to a single geographical conflict may also be said to be an illustration of the old adage that hard cases make bad law.
Depending under which umbrella category a sanction falls – financial, trade, transport, or travel – a different government department will carry responsibility for its implementation. To take financial sanctions as an example, the Office of Financial Sanctions Implementation (“OFSI”) will implement measures such as targeted asset freezes on behalf of HM Treasury.
And so we now have an active sanctions regime with a number of persons designated. An individual designation on the UK sanctions list will set out the designated person’s name, personal details, the sanctions imposed, and a short statement of reasons. Asset freezes and travel bans are the most common sanctions imposed on individuals. Where an asset freeze is imposed, the funds and economic resources are to be immediately frozen by the person in possession or control of them. Institutional reporting obligations may also follow.
Both criminal and civil enforcement options are available in response to breaches of financial sanctions. While the wording of prohibitions will vary amongst sanctions regimes, generally speaking, an individual or entity will commit a criminal offence in relation to asset freezes where it deals with funds or economic resources owned, held, or controlled by a designated person, or makes such funds or economic resources available, and either knew or suspected that the funds or economic resources were being dealt with or made available. The maximum sentence is 7 years’ imprisonment and/or a fine.
Alternatively, a monetary penalty may be imposed under section 146 of the Policing and Crime Act 2017. The Economic Crime Act will amend the 2017 Act at a future date to remove the requirement for OFSI to prove that the person had knowledge or reasonable cause to suspect their activity breached sanctions, meaning there is a strict liability approach to civil penalties requiring only proof that a breach took place. Criminal offences will be untouched. The maximum financial penalty is £1 million or 50% of the estimated value of the breach, whichever is higher. Breaches can prove costly: on 31 March 2020, a penalty of £20.47 million was imposed on the UK bank Standard Chartered for breaching Russian sanctions by lending money to a bank which was majority owned by a Russian bank. The new Act also removes the mandatory review of civil penalties imposed by OFSI and provides a new “name and shame” power to publish notices detailing violations by persons of financial sanctions in cases where it has decided not to impose a penalty.
It should be borne in mind that OFSI interprets prohibitions widely. As a consequence, entities including banks, will usually take a cautious approach to avoid an inadvertent breach of sanctions legislation. The corollary is a heightened risk that funds or economic resources will not be dealt with in a way that is in fact perfectly permissible. Any person with experience of the “risk averse” nature of banks will realise that law abiding Russian clients face anxious and uncertain times processing perfectly proper and lawful payments simply because of their nationality.
Exceptions and licences
Sanctions regimes ordinarily set out exceptions to some of the sanctions prohibitions. For example, under the Russian sanctions regime, a legal and equitable interest in funds or economic resources may be transferred by an independent person to another so long as the interest is not jointly held with a designated person.
A designated person can apply for a licence from OFSI authorising acts that would otherwise breach sanction prohibitions. A Treasury licence, for example, may allow frozen funds to be released in order to pay for goods and services to meet basic needs. A wide discretion is afforded in relation to the conditions of licences. A breach of licence conditions will also lead to criminal and civil liability.
To give perhaps the most high-profile example of how licences under the sanctions regime operate, Roman Abramovich was designated under the Russian sanctions regime on 10 March 2022 and made subject to an asset freeze and travel ban. As a result, Chelsea Football Club is currently subject to an asset freeze. The Treasury granted a general licence under the Russian sanctions regime to permit Chelsea Football Club to incur costs necessary for its continued running until the end of the Premier League season. As it stands, however, the Club cannot be sold without consent and until 22 March 2022 could not even sell tickets. A variation was eventually granted after an outcry that fans were deprived of attending away games and the FA Cup Semi-Final. The sale of the Club will require Treasury approval. The variations to the licence that have been granted over the past few days illustrates that the original terms of the licence created unforeseen and slightly absurd consequences. However, the law of unintended consequences often bites when sanctions are imposed. Whilst Chelsea Football Club may be viewed as “too big to fail” merely as a result of sanctions, a small Russian owned business in London with no ties to the designated person other than being of the same nationality may not have such careful consideration given to its affairs by Government, and may not be able to afford the lawyers required to negotiate a practical modus operandi going forward.
Over the next few weeks, or perhaps days, it will be interesting to see how Gazprom’s trading arm in the UK copes with the difficulties that will inevitably arise when dealing with the UK’s risk averse banks. Many law-abiding businesses have experience of their accounts to all intents and purposes being frozen and even closed as a result of a bank believing it faces “reputational risk”. A spate of challenges to moratorium orders is likely.
At any time when a person is designated, the person may request the Minister to vary or revoke the designation. The decision must be made in accordance with public law principles. That decision may then be challenged before the High Court applying the principles applicable on an application for judicial review. The High Court recently confirmed in R (Youssef) v SSFCDO  EWHC 3188 (Admin) that these provisions were sufficient to meet a designated person’s rights, under Articles 6 and 8 of the European Convention on Human Rights, to have the arbitrariness of the listing reviewed by a court.
The Economic Crime Act makes changes to several matters relating to the review of designations. No longer must a Minister review each designation every three years, or to review and report to Parliament on each set of sanctions regulations every year. The new Act also limits the ability to claim damages to cases where the decision concerned was made in bad faith, with that amount capable of being capped by regulations. Damages therefore cannot be claimed for designations made owing to negligence.
Immediately after the Economic Crime Act received royal asset, over 370 individuals were added to sanctions lists, the majority of which were designated under the urgent procedure. The new Act means that it is easier to create sanctions regimes, designate individuals, and impose monetary penalties. Streamlining the regime has undoubtedly come at the cost of any real scrutiny. It is for these reasons that we are likely to see an influx in Ministerial and judicial reviews of designations. It would be remiss not to point out the importance that legal advice will play in assisting designated persons to navigate the new sanctions landscape, and effectively challenge designations and decisions taken by institutions who implement those sanctions.
Jim Sturman QC is joint Head of Chambers at 2 Bedford Row and ranked in band 1 of the directories for fraud and investigation. He has advised in sanctions matters around the world and in the UK.
Alex Davidson is a tenant at 2 Bedford Row with expertise in financial investigations and sanctions.
Blog | 30 Mar 22