When the Brexit transition period expired at 11pm on 31 December 2020, the UK became a fully-fledged ‘autonomous’ sanction regime. Until then, the financial sanctions that applied in the UK were those imposed by the UN and the EU; with the exception of a few domestic asset freezes adopted under rarely invoked domestic counter-terrorist legislation.
From the start of this new era, it has been clear that the UK’s autonomous sanctions will play an integral part of the UK’s foreign policy post-Brexit. In July, the UK adopted a global human rights sanctions regime, ahead of the EU’s adoption of a corresponding regime in December. The UK also beat the EU to the post when it imposed sanctions in response to the violent repression of protests in Belarus, as the EU struggled to secure the unanimity required to adopt country-specific sanctions. More recently, the UK announced the introduction of a new global anti-corruption sanctions regime and the immediate listing or ‘designation’ of a number of individuals. Both regimes are intended to cement the UK’s status on the global arena as a foreign policy force to be reckoned with in its own right; but what does it mean for HNWIs?
Avoiding a breach
Firstly, it is becoming increasingly important for HNWIs, as for everybody else, to be aware of their exposure to financial sanctions and of the consequences of breach. In part, this is because of the sheer volume of financial sanctions in existence today. The adoption of financial sanctions has expanded exponentially since the shift away from country-wide embargoes to targeted ‘smart’ sanctions in the 1990s. There has also been a clear trend towards adopting financial sanctions on grounds relating to the preservation of democratic values, including the rule of law and respect for human rights. There is much debate about the intrinsic value of sanctions as a foreign policy tool, with questions being asked about whether they can ever realistically be expected to achieve their stated objectives. There are also question marks about whether the collateral damage, whether foreseen or not, can ever be justified, such as the adverse impact on the ability to deliver humanitarian assistance. Whatever the merits or demerits, the reality is that sanctions have become the ‘go to’ response for governments worldwide, including the UK.
Financial sanctions are a pervasive feature of day-to-day life
It is also important to understand how financial sanctions operate because of the extent to which they permeate daily life, and the range of otherwise perfectly lawful activities that would either need to be licenced or that are absolutely prohibited. There needs to be no connection to regulated work or any other kind of business activity, as they apply with equal strength in purely private settings and without any ‘de minimis’ value threshold. Often described as a ‘financial death sentence’, the impact of an asset freeze is far more devastating than any conventional court order that you would come across in connection with civil or criminal proceedings. A breach of an asset freeze is a criminal offence and would only have to be proved to the civil standard of proof (on the balance of probabilities) in order to attract a civil monetary penalty in an amount up to £1 million or, if higher, 50% of the value of the breach.
How do you spot a financial sanction?
For a start, there are no clear terms to follow, and no particular property or amount identified like there may be in the case of a court order. Instead, it falls on you as a private individual or entity to identify when, and in respect of what, an asset freeze applies. The opportunities for inadvertent breaches are many, as you will understand when you look at the definition of ‘funds’ and ‘economic resources’ – the former capturing financial assets and benefits of every kind, and the latter “…assets of every kind, whether tangible or intangible, movable or immovable, which are not funds but can be used to obtain funds, goods or services.”
The freeze also extends beyond the sanctioned person’s direct interests to capture anything indirectly owned, held or controlled by them – including, importantly, any legal entities that they may own or control, which will not be spelled out anywhere and falls to be ascertained by due diligence on the ownership and control structure. This concepts of ownership and control have specific definitions for this purpose, with ownership satisfied by a majority interest. The concept of control has an even broader scope, and under the UK’s autonomous sanctions regime extends to any circumstances in which it would be reasonable to expect that an entity’s affairs are conducted in accordance with someone’s wishes.
Finally, the ‘freeze’ is forward-looking. It also prevents any funds or ‘economic resources’ being made available to the sanctioned person, whether directly or indirectly. In short, financial sanctions prohibit everything with anything.
How do I breach financial sanctions?
Where you have inadvertently dealt with a sanctioned person, the question is unlikely to be whether the asset freeze is engaged. Instead, it will be whether you knew, or had reasonable cause to suspect, that you were dealing with a sanctioned person. This is an easy answer where you are sitting on information but fail to consult it – such as a copy of someone’s passport, which would let you clearly link someone to a corresponding entry on the Consolidated List. This example of a simple failure to consult information already in one’s possession was precisely what led to the first two civil monetary penalties ever imposed by the UK’s Office of Financial Sanctions Implementation (OFSI). Beyond these relatively clear-cut examples, it is less obvious when there will be reasonable cause to suspect, particularly as there is no freestanding legal obligation to conduct sanctions-specific due diligence beyond the extent to which it is subsumed under AML/CTF or related regulatory obligations to prevent financial crime.
Preventative due diligence to avoid breach
Sanctions lists are publicly available, but you need to know where to look – in addition to HM Treasury’s Consolidated List of Financial Sanctions Targets in the UK, there is now the more comprehensive UK Sanctions List maintained by the Foreign, Commonwealth and Development Office. Importantly, there is also a separate list of a number of Russian state-owned entities that are subject to less debilitating capital market restrictions as compared to a full asset freeze.
You also need to keep looking, as the lists are frequently added to (and less frequently subtracted from). You may well also need to look at multiple lists, as many individuals and legal entities will fall within the scope of more than one country’s sanctions. Because sanctions are foreign policy tools targeting predominantly conduct outside the jurisdiction, they typically have more extensive extra-territorial application than conventional laws. UK sanctions are no exception: although less ambitious than US sanctions in their application outside UK territory, they still catch anything done outside the UK by a UK national or UK-incorporated entity. No two sanctions jurisdictions will be the same in every respect, as demonstrated by the already significant contrast between the EU’s and the UK’s respective sanctions lists: immediately on the expiry of the Brexit transition period, more than 100 EU designations were not carried over to the corresponding regimes under UK law.
Avoiding sanctions designations
Another important aspect for HNWIs to understand is the risk not just of breaching financial sanctions but of being designated themselves as targets of asset freezes and travel bans under one of the UK’s new autonomous sanctions regimes. On the one hand, it is important to not overstate this risk. Unlike the risks posed to Politically Exposed Persons (“PEPs”) by Anti-Money Laundering and Counter-Terrorist Financing (AML/CTF) regulations and associated criminal justice measures, such as Unexplained Wealth Orders, there is no direct link between PEP status and exposure to potential sanctions designation. The grounds on which an individual or legal entity could become sanctioned are very broad; but just because a ground might be satisfied does not mean sanctions will follow. It is incredibly difficult to predict when financial sanctions will be deployed and against whom, because they are political tools designed to address perceived foreign policy risks rather than the risks of crime, money laundering or terrorist financing. This is particularly true under the UK’s autonomous sanctions regime, by contrast to the inevitable ‘lead-in time’ for EU sanctions, as these can only be adopted once unanimity has been secured in Council. Similarly, just because someone is the actual or potential target of financial sanctions does not necessarily mean that they are alleged to have been involved in any unlawful conduct.
There is, however, an increasing criminal justice component to the foreign policy goals pursued not just by the UK but also by other sanctioning jurisdictions; but which is very well illustrated by the UK’s new global anti-corruption sanctions regime. For the purposes of designations under this regime there is no need for a sanctions target to have been convicted or to even have been the subject of any formal allegations, whether in the UK or elsewhere. They are based entirely on the subjective assessment of the relevant Minister (the Secretary of State for Foreign, Commonwealth and Development Affairs).
So, what do you do if you find yourself targeted by the UK’s autonomous sanctions? There is a formal procedure in place for requesting a revocation, which should in the first instance be directed to and determined by the relevant Minister. To inform the request it would be advisable to first seek further details of the evidence relied on in support of the designation which you may be able to obtain by making a Subject Access Request (“SAR”) under data protection legislation and/or a request under the Freedom of Information Act 2000 (“FOIA”). There is no prescribed time limit by which requests must be made, or by which the Minister must make a determination. However, if and when the request is refused, an application can be made to the High Court on judicial review principles.
In the event that a sanctions designation is removed, there is a limited possibility to seek damages where you can establish negligence or bad faith; but in many respects the damage is irreversible. Historic designations will continue to be highlighted as potential indicators of ‘high risk’ for those who operate in the ‘regulated sector’.
Prevention is better than cure
Despite their devastating effect, the threshold for designations is incredibly low. The evidence relied on by the Minister making the assessment is expected to predominantly consist of publicly available information, such as reports by public authorities and non-governmental organisations, press reports and even blog posts. There is, however, nothing to preclude reliance on intelligence and classified sources of information, and there are broad exceptions to SARs and FOIA requests and a ‘closed material’ procedure in place to govern the consideration of ‘secret’ evidence that would be withheld from the target in the event of any High Court proceedings.
There is also nothing to stop civil society organisations from proactively supplying relevant Ministers with representations as to why someone should be designated, with supporting evidence. One only needs to have a look at written questions asked by Members of Parliament over the last few months to get a sense of potential targets of the UK’s new autonomous global human rights and/or anti-corruption sanctions regimes. This was clearly an expected outcome as guidance was published alongside the adoption of that regime, specifically addressed to the NGO sector, on the factors that would be considered as part of the designation process.
Perhaps the most persuasive pressure for a designation may come from other jurisdictions operating comparable human rights and anti-corruption sanctions, on the basis that a sanctions designation in one jurisdiction leads to a risk of cross-contamination as other jurisdictions come under pressure to follow suit. Human rights and anti-corruption sanctions are likely to be particularly contagious.
Tackling a new terrain
Against this backdrop, it is evident that prevention is far better than cure. The heavy reliance placed on open sources means that there is enormous potential for untold damage to be caused by inaccurate or misleading information in the public domain. HNWIs are, therefore, well advised to carefully monitor their public profiles and be prepared to exercise their rights under data protection legislation as well as to avail themselves of any remedies that may be available to them under the law of defamation.
About the Authors
Dr Anna Bradshaw (Partner at Peters & Peters LLP) advises individuals and corporates on all aspects of financial crime and sanctions risk, compliance and enforcement; assisting with investigations into suspected breaches and related reporting obligations and representing suspects and witnesses in contentious proceedings. advises individuals and corporates on all aspects of financial crime and sanctions risk, compliance and enforcement; assisting with investigations into suspected breaches and related reporting obligations and representing suspects and witnesses in contentious proceedings.
Alistair Jones (Associate at Peters & Peters LLP) trained and qualified into the international department of a top tier legal 500 firm where he acted in complex, multi-jurisdictional civil litigation involving transnational corporations, as well as in high profile human rights litigation. Alistair worked on a number of cases which went to the Supreme Court. During this period, he was seconded to Parliament, where he acted as the legal advisor to the Shadow Attorney General.
-  The Global Human Rights Sanctions Regulations 2020. See:] https://www.gov.uk/government/news/uk-announces-first-sanctions-under-new-global-human-rights-regime
-  Council Regulation (EU) 2020/1998 of 7 December 2020 concerning restrictive measures against serious human rights violations and abuses. See:
-  The Global Anti-Corruption Sanctions Regulations 2021. See: https://www.gov.uk/government/news/uk-sanctions-22-individuals-involved-in-serious-international-corruption
-  Sanctions and Anti-Money Laundering Act 2018 (SAMLA), section 60(2)
-  SAMLA, section 62(5). For example, see regulation 7 and Schedule 1 to the Syria (Sanctions) (EU Exit) Regulations 2019
-  See the respective Reports of Penalty for Breach of Financial Sanctions Regulations, published by OFSI pursuant to section 149(2) of the Policing and Crime Act 2017, in respect of the £5,000 penalty imposed on R. Raphael & Sons plc trading as Raphaels Bank in connection with a transaction valued at £200, as well as the separate penalty of £10,000 imposed on Travelex (UK) Ltd in connection with the same transaction (but in the absence of a voluntary self-disclosure). Available at: https://www.gov.uk/government/collections/enforcement-of-financial-sanctions
-  Available at: https://www.gov.uk/government/publications/financial-sanctions-consolidated-list-of-targets/consolidated-list-of-targets
-  Available at: https://www.gov.uk/government/publications/the-uk-sanctions-list
-  Schedule 2 to the Russia (Sanctions) (EU Exit) Regulations 2019
-  Designations are based on the Secretary of State’s determination that there are reasonable grounds to suspect that the person in question is directly or indirectly involved (in one of a number of specified ways) in serious corruption (defined as bribery or misappropriation of property relating to a foreign public official) or with serious violations of: (a) the right to life; (b) the right not to be subjected to torture or cruel, inhuman or degrading treatment or punishment; or (c) the right to be free from slavery, not to be held in servitude or required to perform forced or compulsory labour.
-  The Sanctions Review Procedure (EU Exit) Regulations 2018. There is less scope for challenging non-autonomous sanctions, adopted in compliance with UN Security Council Resolutions: here the request would instead be for the Secretary of State to use their best endeavours to seek the removal of the designated person’s name from the relevant UN list.
-  See the Sanctions Review Request Form and further guidance on this process made available at: https://www.gov.uk/government/publications/sanction-challenge-form-designated-persons
-  Part 79 of the Civil Procedure Rules 1998
-  Foreign, Commonwealth & Development Office, ‘Global human rights sanctions: Information Note for NGOs and Civil Society’, available at: https://www.gov.uk/government/publications/global-human-rights-sanctions-information-note-for-non-government-organisations-and-others-interested-in-human-rights/global-human-rights-sanctions-information-note-for-ngos-and-civil-society