On 23 May 2018, the Sanctions and Anti-Money Laundering Act (the "Sanctions Act") received Royal Assent. The Act is intended to give the UK the power to control its sanctions policy post-Brexit. There has been much debate since about what that policy may look like.The recent publication of the first sanctions regimes made under the Sanctions Act (The Iran (Sanctions) (Human Rights) (EU Exit) Regulations 2019, The Venezuela (Sanctions) (EU Exit) Regulations 2019 and The Burma (Sanctions) (EU Exit) Regulations 2019 (together, the "Sanctions Regulations")) and updated general guidance from the Office of Financial Sanctions Implementation ("OFSI") on UK financial sanctions that will apply post-Brexit provides an interesting (if limited) insight. We look at four particular points below.
1. Ownership and control
The EU Court has previously held that legal certainty and transparency requires entities "owned or controlled" by a designated person and to which asset freezing measures apply to be specifically named. Notwithstanding this, OFSI's currently applicable guidance states that asset freezing measures also apply to entities that are owned or controlled directly or indirectly by a designated person. The meaning of ownership and control is generally not set out in the existing EU sanctions regimes and businesses have instead had to consider OFSI (and EU) guidance and EU case law. Post-Brexit, the Sanctions Regulations will put on a legislative footing both that asset freezing measures apply to entities that are owned or controlled directly or indirectly by a designated person and the test for ownership and control. Thus:
A person who is not an individual ("C") is "owned or controlled directly or indirectly" by another person ("P") if either of the following two conditions is met (or both are met).
(1) The first condition is that P
(a) holds directly or indirectly more than 50% of the shares in C;
(b) holds directly or indirectly more than 50% of the voting rights in C; or
(c) holds the right directly or indirectly to appoint or remove a majority of the board of directors of C.
(2) The second condition is that it is reasonable, having regard to all the circumstances, to expect that P would (if P chose to) be able, in most cases or in significant respects, by whatever means and, whether directly or indirectly, to achieve the result that affairs of C are conducted in accordance with P's wishes.
Each of the Sanctions Regulations sets out in a schedule detailed rules for interpreting the first condition. Compare this with current OFSI and EU guidance in relation to "ownership", which merely refer to the possession of more than 50% of the proprietary rights of, or a majority interest in, an entity. The schedule explains, for example, that a share or right is held "indirectly" when a person has a "majority stake" (which is also defined in the schedule) in another person that: (a) holds the share or right; or (b) is in a chain of persons each of whom (other than the last) has a majority stake in the person immediately below it in the chain and the last of whom holds the share or right.
There is no schedule in the Sanctions Regulations for interpreting the second condition. However, OFSI's post-Brexit guidance suggests that OFSI is likely to take into account similar factors as it (and the EU) currently takes into account in relation to "control".
It remains to be seen whether the UK's post-Brexit approach will result in any practical difference with the EU's. For international businesses dealing with financial sanctions questions, yet another sanctions regime is only likely to increase the burden on them.
OFSI's post-Brexit guidance does, however, state that the UK Government will look to designate owned or controlled entities in their own right "where possible". This presumably applies where the UK Government has determined that an entity is owned or controlled directly or indirectly by a designated person. This would improve certainty but we will have to see if (and how regularly) it is applied in practice.
2. Licensing grounds
There was some hope that, in moving away from the EU sanctions regimes, the UK might adopt a more purposive approach to licensing, rather than the current narrow interpretation of the limited licensing grounds set out in EU sanctions. For instance, the UK's domestic sanctions regimes in relation to terrorism do not set out specific licensing grounds and instead provide OFSI with a general power to issue licences. However, for reasons that are not explained, the UK Government has decided to stick with the EU approach of setting out specific licensing grounds in the Sanctions Regulations. The UK's post-Brexit grounds broadly mirror the EU's grounds, with some notable exceptions.
One of the grounds on which OFSI may issue a licence is to enable the implementation or satisfaction of a judicial, administrative or arbitral decision or lien against a designated person, but only if the decision or lien was made or established before the date of designation and it is enforceable in the UK. This is similar to one of the licensing grounds in older EU sanctions regimes. However, in more recent EU sanctions regimes, this ground applies to: (a) an arbitral decision rendered prior to the date of designation; or (b) a judicial or administrative decision rendered in the EU or a judicial decision enforceable in the EU, prior to or after that date. More recent EU sanctions regimes also allow payments due under judicial, administrative or arbitral decisions in favour of a designated person and rendered or enforceable in the EU to be made to frozen accounts. No such exception is contained in the Sanctions Regulations. It is not clear why the UK has adopted the older approach.
The Sanctions Regulations do, however, include some exceptions not found in EU sanction regimes. In particular, a non-designated person that holds a legal or equitable interest in frozen funds or economic resources is permitted (provided that the interest is not held jointly with a designated person) to transfer that interest to another person. The purpose of this exception is not explained in OFSI's guidance.
The UK has also included some licensing grounds not found in EU sanctions regimes. In connection with The Iran (Sanctions) (Human Rights) (EU Exit) Regulations 2019 only, OFSI may also issue a licence to enable anything to be done in connection with the performance of any humanitarian assistance activity. It is not clear why this licensing ground has not been included in the two other Sanctions Regulations. However, it is referred to in OFSI's post-Brexit guidance and so it may become more common.
OFSI may also issue a licence to enable anything to be done to deal with an extraordinary situation. This is in addition to the existing licensing ground in relation to extraordinary expenses. It may be that this will give OFSI scope to take a more purposive approach to licensing. OFSI's post-Brexit guidance states that this ground applies to a situation which is extraordinary in nature but does not necessarily involve an expense. It cannot be used where other grounds are more suitable or as a way of avoiding the clear limitations of other grounds. In our experience, the current licensing grounds are very restrictive and simply cannot deal with every situation that arises in practice. We have seen a number of situations that may have been able to utilise this new licensing ground if it had been available in the past. It will be interesting to see what use OFSI makes of this licensing ground post-Brexit.
3. General licences
Post-Brexit, OFSI is more likely to issue general licences, which would permit a broad range of individuals or entities to undertake certain activity that would otherwise be prohibited. OFSI's post-Brexit guidance indicates that general licences will usually be considered in relation to unforeseeable circumstances where HM Treasury has decided that issuing a general licence will best support the Government's policy priorities. It is hoped that OFSI does make use of general licences to deal with common situations that do not undermine the relevant sanctions policy and to avoid overburdening OFSI with licence applications. The Office of Foreign Assets Control of the US Treasury ("OFAC") has issued a number of general licences in relation to US sanctions and our experience is that they have real practical utility. If OFSI does issue a general licence, you may require registration with OFSI before you can rely on it. It may also include reporting or record keeping requirements so that OFSI can monitor activity.
4. Disclosure of information
Finally, the Sanctions Regulations provide much wider bases on which OFSI can disclose information to third parties. Post-Brexit, these will include: (a) any of the purposes of the relevant sanctions regime (as set out in the relevant Sanctions Regulations); (b) compliance with an international obligation; and (c) "facilitating the exercise by an authority outside the United Kingdom or by an international organisation of functions which correspond to functions under these Regulations". The last basis (which is not contained in the currently applicable sanctions regimes) is particularly interesting. It will presumably entitle OFSI to disclose information to OFAC in cases in which UK and US sanctions policies are aligned.
The proliferation of sanctions and their reach into international business already places a great burden on international businesses. The recent publications indicate that they will need to get to grips with yet another set of sanctions regimes post-Brexit, with potential for divergence as to the scope of asset freezing measures and the derogations from those measures. But the improvements to the licensing regimes – provided they are put into practice – are welcome news. Only time will tell how big an impact the UK's post-Brexit sanctions policy has.