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Post-Brexit UK Sanctions and Anti-Money Laundering Bill becomes law

30 May 2018

By Aline Doussin, Lourdes Catrain, Beth Peters, Louise Lamb and Jamie Rogers

Post-Brexit UK Sanctions and Anti-Money Laundering Bill has recieved Royal Assent and become an Act of Parliament. 

Currently the UK, as a Member State of the EU, adopts UK and EU sanctions through EU Council decisions and regulations, brought into effect in the UK by Section 2 of the European Communities Act 1972.

Following its withdrawal from the EU on 29 March 2019 (Brexit Day), the UK needs to be legally able to impose and implement sanctions to comply with its obligations under the UN Charter, and to develop its own sanctions regime.

The Sanctions and Anti-Money Laundering Bill was introduced to the UK Parliament at the end of last year to do just that. It received Royal Assent yesterday, meaning that the new UK sanctions regime will come into effect on Brexit Day. 

What does it mean for you?

The Government has sought to play down the impact of the new UK sanctions regime on businesses, stating that the current compliance requirements are being maintained – they therefore do not expect businesses to make significant changes to their internal processes to be compliant, beyond some familiarisation costs. The new Act, however, is set to be more onerous for (in particular) financial institutions in a number of areas.

Whilst the political direction of Brexit remains uncertain, the new Act represents a show of intent from the UK Government on sanctions policy at a time when there is a renewed focus on enforcement in Europe and elsewhere.

Businesses and financial institutions should ensure their internal processes are robust, while remaining vigilant to the possibility of diverging sanctions regimes, and increased scrutiny from competent regulators.

Background

The EU (Withdrawal) Bill will incorporate existing EU sanctions laws and regulations into the UK legal regime, freezing the current regimes and underlying designations. The EU (Withdrawal) Bill will not, however, provide the powers necessary to add, amend or lift sanctions after Brexit Day. The Sanctions and Anti-Money Laundering Bill (SAML) therefore seeks to establish the framework through which the Government can shape an autonomous sanctions regime1.

Status of the bill

Both Houses of Parliament agreed the final text of the bill on 22 May 2018, and the bill received Royal Assent the following day. SAML is necessary for the UK to comply with any future international obligations on sanctions after Brexit, but the bill goes beyond existing EU sanctions regimes and begins to form a distinctive UK framework. 

Increased powers

SAML gives the Government increased scope for introducing sanctions, allowing it to impose sanctions regulations that are considered "appropriate" for the purpose of compliance with a UN obligation or any other international obligation, and for a variety of other reasons, such as the prevention of terrorism, to preserve international peace and security or to further a foreign policy objective. A recent "Magnitsky amendment" approved by the House of Commons also includes the purpose of promoting human rights and providing accountability for gross violations of human rights. This is much broader than the standard necessity test in force under existing EU law, and therefore widens the potential scope of an autonomous UK sanctions regime.

SAML also extends the Government's ability to designate persons not only by name but by "description". The explanatory notes state that this power can only be exercised where it is not practicable for the minister to identify by name all the persons falling within a certain description, and the description is sufficiently precise so that a reasonable person would know whether any person falls within it. This provision was repeatedly flagged during the consultation period as an obvious area of uncertainty for businesses in relation to compliance, especially given that its intention seems to  partly be to cover groups of persons where none of the names are known. In response, the Government has said that, when this power is used, it will provide as much information as possible to assist affected institutions in complying with their obligations.

The Act also gives the Government greater freedom in the disapplication of the effects of sanctions, in certain circumstances, through exceptions and licensing. Licences can be general, or issued to a person or specific categories of persons. Ministers also have the power to make "suspending regulations", suspending sanctions for a defined period, which the Government has argued would give flexibility in circumstances where sanctions might need to be temporarily lifted or amended. Further, temporary powers have been granted to enable ministers to amend existing EU sanctions regimes that have been incorporated into UK law via the EU (Withdrawal) Bill for a two-year period after Brexit. It will be possible to add or remove any person listed under the current EU regime during the two-year period, but no substantive modification of the EU sanctions regime is allowed during that time.

Concerns regarding such increased authority are exacerbated by the lengthening of the time before a review of the regime is required, from the current annual EU requirement to only every three years – though designated persons have the right to request variation or revocation of their own designation.

Reporting requirements

Under SAML, "persons of a prescribed description" may be required to report relevant information, produce documents, and create and retain registers or records. This potentially widens the existing requirement and gives enforcement agencies scope to require unregulated companies or individuals to retain and share information.  In respect of financial sanctions, the UK Government intends to require institutions to report cases where they become aware, or have reasonable grounds to suspect, that they are dealing with a designated person or that a designated person has committed an offence. This may also imply reporting on expenditure by, or on behalf of, the designated person [this is outlined in more detail in a recent blogpost from the Office of Financial Sanctions Implementation (OFSI) entitled "Reporting to OFSI: how working together helps makes sanctions more effective"].

It is worth noting that under the new Act, regulated sectors, including financial institutions and lawyers, will continue to be held to a higher standard of reporting. Under the current regime, a financial institution must report to OFSI when it has reasonable cause to suspect that a person is a designated person or has committed an offence under the sanctions regulations. The possibility of additional reporting obligations being introduced through secondary legislation, without the same level of transparency or scrutiny as for primary legislation, remains a concern.

During the debate, the Government emphasised that, despite the absence of specific text to such effect, the reporting requirements will not apply to information protected by legal privilege.

Future cooperation with EU and International allies

SAML gives the UK scope to shape an autonomous policy on sanctions, but the extent of divergence from the EU27 policy will be a political choice. The Government expects strong cooperation in the near-term, to reflect "the starting point of close alignment". Significant divergence in future, however, could lead to additional compliance burdens for businesses and financial institutions, which may have to deal with multiple regimes. The House of Lords sub-committee has recommended that, if participation in the Common Foreign and Security Policy with the EU after Brexit is not possible, then the Government should propose that a "political forum" be established between the UK and the EU to coordinate sanctions – similar to what the EU has in place with the U.S. Compliance with UN obligations and cooperation with international allies will also continue to shape UK policy2.

1 The Act repeals and replaces Part 1 of the Terrorist Asset Freezing Act 2010 (TAFA), which deals specifically with terrorist-related financial sanctions.
2 For further reading on the new UK sanctions regimes, see "the UK Sanctions Bill : A Practical Overview of the Post-Brexit UK Sanctions Regime", Aline Doussin, in International trade Law & Regulation, Volume 24 Issue 2 – 2018, Sweet and Maxwell