UK: The Sanctions And Anti-Money Laundering Act 2018: New Challenges In Sanctions Compliance?

The Sanctions and Anti-Money Laundering Act received Royal Assent on 23 May 2018.1

Although the sanctions-related provisions of the Act are not yet in force,2 they will give the government wider powers to implement sanctions - including financial sanctions, trade sanctions and immigration sanctions. They also will allow the government to do so in a manner which could present new challenges to organisations in ensuring sanctions compliance. We recommend that organisations familiarise themselves now with these changes and the further regulations that are expected to follow.

In addition to sanctions regulation, the Act further makes new provisions in relation to the detection, investigation and prevention of money laundering and terrorist financing. These provisions will be examined separately as the subject of a further note.

WHY WAS THE ACT NECESSARY?

Without the Act, the U.K. would be at risk of breaching its international obligations following withdrawal from the EU.

As a member of the United Nations, the U.K. is required to implement sanctions passed by resolutions of the UN Security Council. Under the EU's Common Foreign and Security Policy, these UN measures are currently implemented through EU Regulations, with direct legal effect in all member states (as are the sanctions made autonomously by the EU). In addition, the U.K. currently gives effect to EU sanctions and operates a limited sanctions regime of its own, primarily targeting terrorism and related activities. The current plan under the EU (Withdrawal) Bill is to maintain EU law as it was at the date of withdrawal from the EU by transposing it into national law. However, this is insufficient in the sanctions context where the landscape is frequently changing. Without the Act, the U.K. government would not have the means by which to lift sanctions that should no longer be in place or to impose new sanctions in accordance with its international obligations.

However, the Act goes further than is strictly necessary to achieve post-Brexit international compliance: it gives the U.K. government new powers to operate its own sanctions regime and one that, in some respects, goes beyond current practice.

KEY FEATURES OF THE ACT

Permitted purposes

Section 1 of the Act confers broad powers on the Secretary of State and the Treasury ("an appropriate Minister") to impose sanctions regulations considered "appropriate" for the purposes of compliance with a UN obligation, for the purposes of compliance with any other international obligation or for a purpose that would:

  • further the prevention of terrorism, in the U.K. or elsewhere;
  • be in the interests of national security;
  • be in the interests of international peace and security;
  • further a foreign policy objective of the government of the U.K.;
  • promote the resolution of armed conflicts or the protection of civilians in conflict zones;
  • provide accountability for or be a deterrent to gross violations of human rights, or otherwise promote –

    • compliance with international human rights law, or
    • respect for human rights;
  • promote compliance with international humanitarian law;
  • contribute to multilateral efforts to prevent the spread and use of weapons and materials of mass destruction; or
  • promote respect for democracy, the rule of law and good governance.

The EU regime focuses on a necessity test; the lower threshold of "considers...appropriate" raises the possibility of a more extensive use of sanctions (albeit the government has to date indicated that it does not intend to change its substantive approach). Where sanctions regulations are being imposed for one of these so-called "discretionary purposes", a Minister may not make regulations without determining that there are good reasons to pursue that purpose and determining that the imposition of sanctions is a reasonable course of action for that purpose. The Minister must lay before Parliament an explanatory report detailing the reasons for the introduction of the regulations in such instances.

Designation by description

Controversially, the Act permits designation of persons by "description" as well as by name. This creates an obvious difficulty for organisations trying to ensure compliance.

To designate by description, the following conditions must be satisfied:

  • The description of persons specified is such that a reasonable person would know whether that person fell within it.
  • At the time the description is specified, it is not practicable for the Minister to identify and designate by name all the persons falling within that description at that time.
  • The Minister has reasonable grounds to suspect:

    • that where the specified description is members of a particular organisation, that the organisation is an "involved person"3; or
    • in the case of any other specified description, that any person falling within that description would necessarily be "an involved person".

Section 43 of the Act provides that the Minister must issue guidance about any prohibitions and requirements imposed by the regulations, which may include guidance about:

  • best practice for complying with the prohibitions and requirements;
  • the enforcement of the prohibitions and requirements; and
  • circumstances where the prohibitions and requirements do not apply.

The Act also includes (at section 44) protection from civil proceedings for acts done in the "reasonable belief" that they are in compliance with regulations made under the Act. But clear questions remain as to the nature of any guidance and the way in which the protection may in fact be applied.

The possibility of expanded reporting obligations

In August 2017 the government expanded financial sanctions reporting requirements4 – previously applicable only to organisations in the financial sector – to a range of other types of organisations including auditors, lawyers and tax advisers. The Act lays the foundations for further obligations to be imposed – though, given its terms, what these may be is unclear. It provides that regulations made under the Act may make provision:

  • for persons of a prescribed description to inform an authority of prescribed matters and to retain certain records;
  • authorising an authority to require persons of a prescribed description to provide information; and
  • for powers to inspect and copy prescribed information and related powers of entry.

The extent to which such measures are imposed, on whom and in what circumstances remains to be seen but there is a clear possibility of more burdensome requirements.

Heavier penalties

The Act makes provision for regulations to be made on the enforcement of any prohibition or requirement imposed by the regulation. Such regulations may create criminal offences punishable up to a maximum of 10 years imprisonment - an increase from the maximum of seven years imprisonment which may be imposed for breaches of financial sanctions under the Policing and Crime Act 2017.

Conclusion

This legislation has proved more contentious than expected, with multiple concerns expressed about the new powers being placed in the government's hands and human rights issues, as well as concerns around certainty. In the House of Lords it was labeled a "bonanza of regulations" and a "constitutional car crash." However, how significant a departure in approach the Act represents depends on the way in which the various powers it creates are actually used.

In terms of the substantive approach to sanctions, the U.K. government has stated that the Act is not intended to change this and that, post-Brexit, the U.K. will continue to work closely with the EU and other international partners on sanctions. Nevertheless, the Act represents a significant change to what is now possible in terms of sanctions regulation, as well as the first of the bills to deal with the post-Brexit U.K. to become law.

Footnotes

[1] https://finreg.shearman.com/uk-government-publishes-its-response-to-public-co

[2] The date on which the provisions come into force will be determined by regulation made by the Secretary of State, presumably around the time of the U.K.'s departure from the EU.

[3] "Involved Person" means a person who:

  • is or has been involved in an activity specified in the regulations;
  • is owned or controlled directly or indirectly by a person who is or has been so involved;
  • is acting on behalf of or at the direction of a person who is or has been so involved; or
  • is a member of, or associated with, a person who is or has been so involved.

[4] European Union Financial Sanctions (Amendment of Information Provisions) Regulations 2017

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Authors
Barnabas W.B. Reynolds
Danforth Newcomb
 
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