- Trends and Overview
1.1 Sanctions Market
The UK's sanctions sector continues to expand exponentially, principally as a result of measures taken in response to Russia's continuing actions in Ukraine. Delays caused to criminal enforcement by under-resourcing and the COVID-19 pandemic have played some part in the UK's sanctions enforcement landscape remaining relatively quiet, though this is beginning to change, with activity in both criminal prosecution and monetary penalties.
1.2 Key Trends
Expanded Use and Provisions of the UK's Russia Sanctions Regime
The last 12 months or so have seen continued expansions in the list of designated persons (DPs) under the UK's Russia sanctions regulations, in the types of goods restricted under their trade sanctions heading, and in the plethora of provisions they include.
Recent amendments to these regulations have:
- expanded their purpose to include promoting the payment of compensation by Russia for damage, loss or injury suffered by Ukraine on or after 24 February 2022 as a result of Russia's invasion of Ukraine;
- expanded their potential effect to include disqualification as a director of a UK company ("director disqualification sanctions");
- expanded their designation criteria to include people who own or control (or hold various rights or roles in connection with) entities involved in destabilising Ukraine, and persons who provide financial services (or make available funds, economic resources, goods or technology) to a person or entity involved in a business of economic or strategic significance to the government of Russia;
- expanded their scope to include (among other things) a ban on legal advisory services (in connection with acts that breach UK sanctions, and overseas acts that would breach them if they occurred in the UK);
- expanded their reporting requirements, so that DPs are obliged to report assets they own, hold or control to the Office for Financial Sanctions Implementation (OFSI); and
- expanded the grounds for OFSI licensing to include voluntary "divestments" of DPs' Russian assets.
Broader Developments in UK Sanctions
In addition to that:
- a Parliamentary select committee has examined the effectiveness of sanctions, particularly in the context of Russia;
- the courts have reviewed and approved several designations from the Russia list, and considered the impact of sanctions on contracts and litigation (see further below);
- a small handful of DPs on the Russia list have been de-designated at the pre-court stage;
- a new Office for Trade Sanctions Implementation (OTSI) has been opened, though at the time of writing its functions are not yet operational; the human rights sanctions regime has been used to sanction "extremist" Israeli settlers, on the basis of alleged abuses against Palestinians; and
- a new set of regulations has come into force affecting members of the regime in Iran.
1.3 Key Industries
The impact of UK sanctions has been felt in various sectors, but undoubtedly the biggest impact has been felt in its financial services industry. Various professional sectors (including accountants, lawyers, and trustees) have been impacted by the bans imposed as part of the UK's response to Russia's actions in Ukraine.
1.4 Overview
1.4.1 Types of Sanctions
Purposes of UK Sanctions
The Sanctions and Anti-Money Laundering Act 2018 (SAMLA) empowers ministers to make sanctions regulations for various purposes, including to comply with UN resolutions, to advance human rights, and to further UK foreign policy objectives. Most regulations made under SAMLA relate to a specific country (such as Belarus, Iran, North Korea, Russia, or Syria), while others relate to a specific issue (such as chemical weapons, corruption, cyber-attacks, or human rights).
Uses of UK Sanctions
Sanctions regulations can impose various restrictions, including:
- financial sanctions (asset freezes and prohibitions on making funds or economic resources available to DPs or their companies, or for a DP's benefit);
- restrictions on the provision of certain financial products and services (including trust services);
- director disqualification sanctions (preventing DPs from acting as directors of UK companies);
- immigration sanctions (travel bans); and
- trade sanctions (restricting the provision of goods and services).
1.4.2 Scope of Sanctions
Prohibitions under sanctions regulations apply to everyone (businesses and individuals) in the UK, and extra-territorially to "UK persons" (a term defined to include all UK citizens and all companies incorporated in the UK).
Equivalent regulations apply in the UK's Crown Dependencies (Jersey, Guernsey, and the Isle of Man) and Overseas Territories (including the British Virgin Islands and the Cayman Islands). These prohibitions similarly apply extraterritoriality, with the effect for example that a BVI or Jersey bank, corporation or trustee is bound by the equivalent of UK sanctions in all their actions around the world.
1.4.3 Domestic and/or Supranational Measures
Following the UK's exit from the EU, sanctions imposed as a result of international obligations are in practice limited to those imposed by the UN. The rest are imposed at a domestic level. An urgent procedure allows short-term designations purely on the basis that the person has been designated in one or more specified jurisdictions (including the EU and the US).
- Overview of Regulatory Field
2.1 Primary Regulators
The primary regulators for sanctions activity in the UK are:
- the Office for Financial Sanctions Implementation (OFSI), which issues guidance, makes licensing decisions, and imposes monetary penalties in connection with financial sanctions;
- the National Crime Agency (NCA), which conducts criminal investigations into breaches of sanctions;
- the Crown Prosecution Service (CPS), which brings prosecutions in criminal cases;
- HM Revenue and Customs (HMRC), which deals with enforcement of trade sanctions;
- the Export Control Joint Unit (ECJU), which has hitherto dealt with licensing decisions in connection with trade sanctions;
- the Office for Trade Sanctions Implementation (OTSI), only recently established at the time of writing, which will be the equivalent of OFSI for trade sanctions; and
- industry regulators, such as the Financial Conduct Authority (FCA), which regulates the financial sector generally (including in connection with sanctions).
2.2 Enforcement
2.2.1 Enforcement Responsibilities
A Public-Private Partnership
The enforcement of sanctions in the UK is a complex landscape, with the state agencies responsible for criminal investigation and prosecution sitting at the top of, in effect, a vast public-private partnership.
In order to have the impact on DPs, and in many cases the broader impact on the target country's economy, the UK effectively relies on compliance measures by countless UK businesses aimed at ceasing engagement with, or freezing the assets of, their own customers (and/or turning away potential customers).
The Role of Regulated Firms
Many of these businesses are regulated in some way, most notably the financial sector, whose sanctions compliance procedures are policed (along with much else) by the Financial Conduct Authority. Professional bodies also play their part, notably in policing the compliance efforts of lawyers and accountants.
Reports (to OFSI, and often also to the National Crime Agency under money laundering legislation) and licence applications from these businesses also play a significant part in sanctions enforcement, putting the authorities on notice of the location of relevant funds and economic resources and of potential breaches.
OFSI (and in due course its trade sanctions counterpart, OTSI) then play what has hitherto been a relatively small part in enforcement against sanctions breaches (as compared with the resource-intensive, but relatively low-profile) licensing function.
Civil and Criminal Processes
For appropriate cases, OFSI can impose monetary penalties on any person (individual or business) it considers responsible for breaching financial sanctions. Relatively uncommon so far, these penalties can be severe and also carry the risk of reputational damage from public censure.
For trade sanctions involving goods, the seizure and potential forfeiture of wrongly imported products is often the preferred route for enforcement.
The more serious breaches (or alleged breaches) of sanctions are criminally investigated by the NCA, and prosecuted independently by the Crown Prosecution Service.
Proceeds (or alleged) breaches can also be subject to civil recovery processes under the Proceeds of Crime Act 2002 (POCA), which do not require a criminal conviction. In theory any law enforcement agency can drive these processes, although in practice the NCA would likely take the lead where assets were said to derive from a breach of sanctions.
2.2.2 Breaching Sanctions
Breach of the prohibitions in sanctions regulations constitutes a criminal offence. Where the breach relates to financial sanctions, the maximum term of imprisonment is seven years; where it relates to trade sanctions, it is ten years. Unlimited fines can also be imposed.
2.2.3 Mitigation
Co-operation and Self-Reporting
OFSI's published guidance stresses the positive impact on penalties where a perpetrator self-reports and co-operates with the ensuing investigation. In practice, much will depend on the detail of how the breach took place, who was involved, the quantum of assets that were handled or not reported, and the extent to which any ongoing impact can be remedied.
Preventative Procedures
The guidance also says that OFSI will take into account any compliance procedures a business had in place to prevent inadvertent breaches of sanctions, even in circumstances where those procedures in fact failed to prevent the breach. There may therefore be significant value in businesses designing and implementing such procedures, notwithstanding the fact that monetary penalties can now be imposed on a "strict liability" basis (see 2.2.4 "Strict Liability").
2.2.4 "Strict Liability"
Criminal offences in connection with financial sanctions require the perpetrator either to know that funds or economic resources are owned, held or controlled by a DP (or an entity they own or control) or to have reasonable cause to suspect that this was the case. This requirement however is disapplied for the purposes of OFSI's monetary penalties regime.
While commonly referred to as an imposition of strict liability on sanctions breaches, this is not precisely correct. Criminal liability remains the same, and monetary penalties for circumvention still require intention.
2.3 Licensing
2.3.1 Derogation
Licences can be granted for acts that would otherwise breach sanctions regulations. Where these relate to financial sanctions, licences are granted by OFSI and must be covered by one or more of a set of grounds listed in annexes to the regulations.
For financial sanctions generally, these grounds include:
- to enable the basic needs of a designated person (or their dependents) to be met;
- to enable the payment of reasonable legal fees and related expenses;
- to enable the payment of reasonable fees or service charges for the routine holding or maintenance of frozen funds or economic resources;
- to enable DPs to satisfy prior obligations (arising before they were designated); and
- to enable extraordinary expenses or to deal with extraordinary situations.
OFSI can also grant licences for the provision of trust services, while licences for the provision of other services (that would breach trade sanctions) and various goods are dealt with by the Export Control Joint Unit (ECJU), part of the Department of International Trade.
2.3.2 Provision of Legal Services
OFSI has granted a sequence of general licences for the payment of legal fees for or on behalf of designated persons. These permit anyone to pay the fees of a DP (or an entity they own or control) subject to various thresholds (on rates, overall fees, and expenses) and reporting requirements.
2.4 Reporting
Obligations on Relevant Firms
"Relevant firms" are required to inform OFSI as soon as possible if they know or have reasonable cause to suspect that any person (i) is a DP or (ii) has committed an offence under the financial sanctions provisions of sanctions regulations. Legal advisers are not required to report if this would breach legal professional privilege (LPP).
Relevant firms for this purpose include:
- banks and other providers of financial services;
- auditors, accountants, and tax advisers;
- lawyers and notaries;
- trust and corporate service providers;
- estate agents;
- casinos; and
- crypto-asset exchange providers and custodian wallet providers.
Obligations of DPs on the Russia List
DPs themselves (on the Russia list) are now also subject to obligations to report their assets to OFSI. If the DP is a "UK person" (which includes UK citizens and UK-incorporated companies), this extends to all funds and economic resources owned, held or controlled anywhere in the world. Otherwise, it extends only to funds and economic resources owned, held or controlled in the UK.
In practice, many DPs will also have obligations under the equivalent regimes in the UK's Crown Dependencies (Jersey, Guernsey, and the Isle of Man) and/or Overseas Territories (which include the BVI and the Cayman Islands).
- Recent and Future Legal Developments
3.1 Significant Court Decisions or Legal Developments
The legislative, judicial, and executive framework for sanctions in the UK have all undergone significant developments since Russia's full-scale invasion of Ukraine in February 2022.
Legislative Developments: Expanding the Russia List
From a legislative perspective, changes introduced by the Economic Crime (Transparency and Enforcement) Act 2022:
- removed parliamentary scrutiny from sanctions regulations;
- restricted damages available from successful challenges to designations;
- introduced strict-liability monetary penalties for breaching financial sanctions; and
- removed the specific requirement for designations to be "appropriate" (though this is generally accepted to have had no effect, as designations still need to be "proportionate" under human rights law).
More important than any of these however, were the sweeping changes introduced by amendment to the Russia sanctions regulations, which brought within the scope of designations a huge range of individuals and entities that may have no involvement whatever in Russia's actions in Ukraine, but which are involved in sectors of the Russian economy deemed to have economic or strategic significance. The use of this power to drive an exponential expansion of the list of designated persons has vastly increased the impact of sanctions in the years since then.
Court Decisions: The Eugene Shvidler Challenge
This expansion contributed in turn to a wave of court decisions on designation challenges under Section 38 of the Sanctions and Anti-Money Laundering Act 2018 (SAMLA). At the time of writing, the most significant of these is the Court of Appeal's decision in the case of Eugene Shvidler, whose challenge raised a significant issue on the meaning of proportionality in this context. The Court of Appeal endorsed the approach of the High Court in directing that it was the proportionality of sanctions designations in general that fell to be measured against their policy aim, rather than (as Shvidler contended) the specific impact of sanctions on the individual applicant.
Enforcement: The Mints Test for Ownership and Control
One of the more difficult aspects of UK sanctions regulations (and one where, not coincidentally, the UK's laws differ from those of comparable jurisdictions) is the applicability of financial sanctions to companies (and other entities) who are "owned or controlled, directly or indirectly" by a DP. The UK's regulations say that, in addition to the more straightforward tests of 50% of shares or voting rights, the test is also made out where it is reasonable to expect the DP could cause the company's affairs to be run in accordance with their wishes.
The Court of Appeal prompted significant debate when it commented (in the case of Boris Mints v PJSC National Bank Trust) that this broader test could be applied to any Russian company, given that the nature (it said) of Russia's economy meant that its president (a DP) could take control of them if and when he wished. Within a few days the FCDO and OFSI had issued guidance to say that they did not take this approach, and that each case would be considered on its own merits. But while this effectively prevents OFSI enforcing a sanctions breach on the basis of the Mints test, it remains to be seen whether there is still mileage in it (for instance, where a counterparty seeks to end a contract in reliance on it).
3.2 Future Developments
Appeals are expected in the Mints and Shvidler cases, and further designations and prohibitions (and the occasional de-listing) may safely be expected in connection with Russia sanctions. More fundamentally, debates are ongoing (in the UK as elsewhere) on the potential for forfeiture of assets currently frozen under Russia sanctions, potentially for the benefit of Ukraine's war effort. Options include the use of fines or monetary penalties under the new reporting regime for DPs, and/or the use of proceeds of crime laws to secure the forfeiture of assets that have been obtained through sanctions breaches or other unlawful conduct. Objections include the chilling effect on lawful foreign investment if any new regime (or aggressive use of existing regimes) is not seen to pay due regard to private property rights.
- Delisting Challenges
4.1 Process
The Sanctions and Anti-Money Laundering Act 2018 (SAMLA) provides for a procedure for DPs to challenge their designations.
Ministerial Review
Importantly, a challenge cannot be taken directly to court in the first instance. The first step (under Section 23 of SAMLA) is to apply for a ministerial review, by which the minister responsible for taking designation decisions under the relevant sanctions regulations will reconsider their decision. At this point they will consider any relevant material before them, including any representations and material provided by the DP themselves. The question for the minister is therefore not whether the original designation was correct but whether the DP ought to be designated at the time the review takes place.
Court Review
If the minister's decision under this procedure is adverse to the DP, they will then be able to challenge that decision (that is, the decision resulting from the ministerial review) in the High Court (under Section 38 of SAMLA). The procedure is similar, and the grounds are the same, as for judicial review more generally: importantly, the court is not asked to make a fresh decision from scratch, but to consider whether the minister has made their decision in the right way and in accordance with the Human Rights Act 1998 (the HRA). The latter includes consideration of whether the interference with the DP's rights (including for instance their right to privacy and their right to free enjoyment of their possessions) is proportionate to the stated aims of the relevant sanctions regulations.
4.2 Remedies
De-listing challenges are generally aimed at simple removal from the list, though they can in some circumstances result in an amendment to the listing or the substitution of fresh grounds. Court reviews may not result in an award of damages except in cases of bad faith.
4.3 Timing
Ministers typically take six months to make a decision on a ministerial review. Taking into account the time taken to obtain relevant material from the FCDO and to prepare the application, that decision will typically follow a year or more after the DP's designation. Court reviews are likely to take a year or more from application to judgment.
- Trade and Export Restrictions
5.1 Services
The sanctions regulations imposed by the UK in response to Russia's actions in Ukraine remains unusual in banning (under the heading of trade sanctions) the provision (technically "export", though the consumer may be present in the UK) of certain services to "persons connected with Russia" (PCWRs). For these purposes a PCWR includes anyone resident in Russia or any company incorporated or domiciled there.
Professional and Business Services
The services affected include:
- accounting services;
- advertising services;
- architectural services;
- auditing services;
- business and management consulting services;
- engineering services;
- IT consultancy and design services; and
- public relations services.
Legal Advisory Services
A more specific prohibition exists for legal advisory services that relate to acts that breach the regulations or that (if overseas) would do so if they took place in the UK.
Trust Services
The same regulations also ban (under the heading of financial sanctions) the provision of trust services to DPs and to PCWRs.
5.2 Goods
Sanctions regulations often impose restrictions on the export and/or import of goods, typically starting with goods that may be used for military purposes, but potentially expanding to include goods of importance to the target country's economy. The largest set of restrictions in the UK by far has been imposed in response to Russia's actions in Ukraine.
- Civil Litigation and Arbitration
6.1 Force Majeure
The Statutory Immunity
The Sanctions and Anti-Money Laundering Act 2018 (SAMLA), Section 44 says that a person is "not liable to any civil proceedings to which that person would, in the absence of this section, have been liable in respect of the act" where that person reasonably believes they are complying with regulations made under SAMLA.
Celestial Aviation v UniCredit: The Primary Issue
These include the Russia (Sanctions) (EU Exit) Regulations 2019 (the Russia regulations), whose Regulation 28(3) was the subject of a judicial test of the extent of the protection offered by Section 44.
Regulation 28(3) says that "a person must not directly or indirectly provide financial services or funds in pursuance of or in connection with an arrangement whose object or effect is to... (c) directly or indirectly making restricted goods or restricted technology available (i) to a person connected with Russia, or (ii) for use in Russia".
In Celestial Aviation Services Ltd v UniCredit Bank GmbH, London Branch, the primary issue was whether UniCredit was entitled to withhold payments under letters of credit (LOCs) issued in relation to aircraft leases to Russian airlines, on the basis that making the payments would have breached Regulation 28(3).
The High Court's Decision
At first instance the High Court held that UniCredit was not entitled to refuse payment under the LOCs because the aircrafts were supplied before the relevant sanctions came into effect in March 2022. So, "financial assistance" was provided at the point in time the LOCs were issued, which was before the regulation came into effect. Consequently, since the provisions were not retrospective, UniCredit was not relieved of its payment obligations.
The Court of Appeal's Decision
The Court of Appeal overturned this decision, as it found that the lower court did not properly engage with the wording of Regulation 28(3) and erred in its assessment of the purpose of the Russia regulations.
The CoA found that making a payment under the LOCs constituted the provision of "funds" in connection with an arrangement involving restricted goods, and thus breached Regulation 28(3). It arrived at this finding after observing that the words "in connection with" are to be read broadly, and that they did not require any form of legal dependence; the test was one of factual connection.
Here, the CoA found the factual connection was made out as the LOCs provided security for performance of the lessees' obligations under the leases, and it could readily be inferred that the leases required either the LOCs or some other acceptable security to be in place. The timing of the arrangement was irrelevant.
The CoA also interpreted the Russia regulations broadly, finding that they applied to any arrangement connected with the supply of restricted goods (including aircraft) to Russia, regardless of the timing of the arrangement. The CoA said that a broad interpretation was consistent with the overall purpose of the sanctions regime, which was to put pressure on Russia. While the broad reading may unintentionally capture arrangements that were otherwise compliant with the regulations, the risk was mitigated by exceptions and licences.
Accordingly, UniCredit's payment obligation under the LoCs would be suspended until the UK licence process was completed.
The Effect of the Immunity
The CoA's decision effectively clarified that compliance with UK sanctions laws takes precedence over performing contractual obligations, where performance is likely to breach the UK regulations.
The decision also provides comfort to businesses that Section 44 of SAMLA provides protection if they withhold performance or payments, where they do so in the reasonable belief that they are complying with sanctions regulations.
6.2 Enforcement
Effect of the Immunity on Court Awards
In Celestial Aviation v UniCredit, UniCredit sought to rely on Section 44 of SAMLA to refuse paying the High Court's award of costs and damages to the respondent. As the CoA found in its favour on the primary issue, a determination was not necessary. However, the CoA provided its view in obiter comments due to the provision's wider significance.
The CoA upheld the High Court's decision that UniCredit had the requisite subjective belief that the lease arrangements fell within Regulation 28(3) and that payment under the LOCs would be a provision of funds in connection with them, notwithstanding the termination of the leases.
The CoA rejected the submission that UniCredit had to "show its workings" in coming to this view, noting that having established the existence of a subjective belief, the question of whether the belief was reasonable is to be determined objectively.
UniCredit was entitled to rely on Section 44 until it received licences from the relevant authorities, since it was required to form a view about new legislation at short notice and the literal words of that legislation appeared to catch payments under the LoCs.
The Court of Appeal's Decision
However, the CoA observed that, if it had found that Regulation 28(3) did not apply, it would have held that Section 44 did not protect UniCredit against an award of costs and interest.
The CoA said that Section 44's purpose is to ensure that a person is not pressurised into doing something that risks breaching sanctions by a fear of being exposed to civil claims. The section seeks to protect against a liability created because of an act or an omission in the reasonable belief that it is in compliance with sanctions regulations. It is not aimed at protecting against pre-existing liabilities. So, Section 44 did not prevent an award of interest on a claim for debt.
- Designation, Compliance and Circumvention
7.1 Executive Body
The Foreign, Commonwealth, and Development Office (FCDO) is responsible for making designation decisions.
7.2 Scope of Designation
Financial sanctions (specifically, the "asset freeze" and related provisions) apply not only to DPs themselves but also to entities that are directly or indirectly owned or controlled by a DP.
7.3 Circumvention
7.3.1 Prohibiting Provisions
In addition to the direct prohibitions they impose, sanctions regulations also prohibit intentionally participating in activities knowing that their object or effect is (directly or indirectly) to circumvent any of those prohibitions or to enable or facilitate their breach.
7.3.2 Criminal Penalties
Breach of these prohibitions also constitutes a criminal offence. Where the breach relates to financial sanctions, the maximum term of imprisonment is seven years; where it relates to trade sanctions, it is ten years. Unlimited fines can also be imposed.
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