Looking Glass Report 2020
Section 3: Technology and Innovation
UK & Europe
In this blog post, we consider some of the areas of potential divergence between the EU and UK sanctions regimes post-Brexit.
We previously examined the key aspects of the United Kingdom’s (UK) sanctions policy during the post-Brexit transition period between 31 January 2020 and 31 December 2020. At the end of this period, the UK will be free to diverge from the European Union (EU) sanctions regimes which are currently applicable in the UK. This post considers where and how such divergences could arise.
Even at this stage, some potential divergences in the sectoral sanctions imposed on Russia are apparent.
Such divergence will add to sanctions compliance challenges across the supply chain as these restrictions target a number of systemically important entities.
The Office of Financial Sanctions Implementation (OFSI) has issued post-Brexit guidance which expressly confirms that financial sanctions will apply to entities that are owned or controlled, directly or indirectly, by a designated person. The guidance sets out a number of factors for consideration to determine whether a designated person will be considered to control an enlisted entity. These factors reflect the position stated in previous OFSI guidance.
Whilst these factors are more substantive in detail and content than comparable EU guidance, it remains to be seen whether such guidance will lead to any practical divergence with the EU on this issue.
The threshold for the imposition of sanctions by the UK under the Sanctions and Anti-Money Laundering Act 2018 (SAMLA) is lower than the ‘necessity test’ under European law.
Section 1 of SAMLA empowers the "appropriate minister" (defined as either the Secretary of State or HM Treasury) to impose sanctions regulations that the minister considers “appropriate” for a number of stated purposes including:
The difference in threshold might result in the UK imposing restrictive measures which might not have met the threshold under European law.
SAMLA also provides for designation of sanctioned persons or entities by description, which is not a feature of the current EU sanctions regime. The description must be “such that a reasonable person would know whether that person fell within it.” A designation by description can only be made when “it is not practicable to identify and designate by name all the persons falling within that description at the time”.
At this point in time, no such designations have been made nor has guidance been issued on the form of a designation by description. It is also unclear whether financial sanctions will also extend to persons that are “owned” and “controlled” by individuals and entities which have been designated by description.
A designation by description can foreseeably pose sanctions screening and compliance challenges for UK persons. Expected challenges include assessing whether a person falls within the designation by description and accessing information of sufficient quality and reliability which allows for such an assessment to be made.
Current EU and UK sanctions regimes do not provide for an equivalent to the general licences available under various US sanctions programs. A general licence permits a person to undertake an otherwise prohibited activity (without the need to apply for a specific licence) provided that they meet certain conditions.
In a welcome development, SAMLA allows for the UK to introduce such ‘general licence’-style exemptions. However, a UK general licence will not obviate the need to apply for specific licences for each of the relevant EU Member State(s) in which a person operates.
Currently, persons designated under EU sanctions (whether the original listing was by the UN or by the Council of the EU in respect of a person not listed by the UN) are able to challenge their designations through the European Courts.
However, after the end of the transition period, the UK government will take its own decisions on sanctions designations rather than simply enforcing decisions made by the executive branches of the EU. Such decisions will be open to judicial review by the English courts.
Under SAMLA post-Brexit, there will also be a distinction between designations under autonomous UK sanctions, which are subject to judicial review, and designations to implement UN sanctions, which are not.
Persons designated pursuant to UN sanctions have limited recourse under SAMLA. They may request the Secretary of State to use their “Best Endeavours” to secure their removal from the relevant UN list.
Despite UK and EU officials stating that they intend to coordinate as much as possible on sanctions policy going forward, it is already apparent that there are various avenues for divergences to materialise over time.
The UK has historically taken a leading role in the design and implementation of EU sanctions. This is unlikely to continue post-Brexit, and the UK’s influence over EU sanctions policy is likely to diminish over time. Both the EU and UK could end up striking separate paths in certain areas. On the other hand, the UK will be mindful that sanctions are more effective if they are implemented collectively. Historic cooperation between the EU and US on sanctions has shown this to be the case. Whether or not the EU or UK would want to create such divergences is a separate matter.
Any such differences in sanctions policy between the EU and the UK could create sanctions compliance difficulties for UK businesses operating in the EU, which would be obliged to comply with both regimes. Such challenges add to those already experienced by businesses navigating divergences between EU/UK and US sanctions policy.
In our next post, we will consider the landscape for enforcement action by the UK post-Brexit.
Written by Partner, Patrick Murphy and Associate, Qi Jiang.