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.
Emerging Divergence in EU and UK Russian Sectoral Sanctions Programs
Even at this stage, some potential divergences in the sectoral sanctions imposed on Russia are apparent.
- Companies operating in the UK and EU may lose the benefit of currently available exemptions for certain transactions with EU-based subsidiaries. Current EU sectoral sanctions on Russia impose restrictions on: (i) the provision of "investment services" for, assistance in the issuance of or otherwise deal with certain "transferable securities" and "money-market instruments" of certain designated Russian banks, defence and energy companies; and (ii) making new loans or credit available to these entities. EU-based subsidiaries of these designated entities are exempt from these restrictions. Following the end of the transition period, this exemption under EU law will no longer exempt UK-based subsidiaries of the designated entities; those subsidiaries will only be exempt from the UK equivalent of this restriction, and vice versa. Anyone dealing with subsidiaries of the designated entities will likely need to carefully consider the exemptions on which they can rely and whether authorisation is required from both the EU and UK.
- EU sectoral sanctions prohibit or require authorisation for the provision for the sale, supply, transfer, or export of certain goods, as well as "financial assistance" in relation to those goods. We expect the UK equivalent of this restriction will expand the scope of "financial assistance". The UK has historically taken a much broader reading of "financial assistance" than other EU member states and the interpretation given by the Court of Justice of the European Union in PJSC Rosneft Oil Company v Her Majesty's Treasury and Others (Case C-72/15)). In the Rosneft case, the Court held that "financial assistance" does not include payment processing. However, the UK equivalent (The Russia (Sanctions) (EU Exit) Regulations 2019) refers to the provision of "financial services", which we assume has been intentionally chosen as a broader term than the EU law notion of "financial assistance". Guidance issued by the UK confirms that "financial services" include payment and money transmission services.
Such divergence will add to sanctions compliance challenges across the supply chain as these restrictions target a number of systemically important entities.
Application of Sanctions to Entities "Owned" and "Controlled" by Designated Persons
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.
Different Threshold for Designations
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:
- Complying with a UN or any other international obligation; and/or
- To achieve a particular purpose including the interests of national security; furthering a foreign policy objective of the UK government; and promoting respect for democracy, the rule of law and good governance.
The difference in threshold might result in the UK imposing restrictive measures which might not have met the threshold under European law.
Designation by Description
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.
Process for Challenging Designations
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.
Some Final Thoughts
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.
Originally published June 09 2020
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