October 8, 2020
By: Daniel Martin, Partner, HFW*
Earlier this summer, having left the E.U. in January, the U.K. took its first steps as a fully autonomous sanctions body. The U.K. has always been a leading state in the implementation and enforcement of sanctions, in many respects second only to the U.S. Even before the E.U. referendum, the U.K. was already taking steps to increase its global sanctions credentials and strengthen the Government’s sanctions machinery, for example through the creation of the Office of Financial Sanctions Implementation (‘OFSI’) in 2016.
However, until the introduction of the Global Human Rights Sanctions Regulations 2020 in July, the U.K. had not in recent times administered its own sanctions regime. While the U.K. had implemented its own domestic counter-terrorist finance regime, which included measures akin to sanctions (for example through the Terrorist Asset Freezing Act 2010 and the Counter Terrorism and Security Act 2015), those were far narrower measures than international sanctions presenting different risks and policy contexts for regulators.
Autonomous sanctions regimes (beyond those imposed by the United Nations) will become the norm for the U.K. once the U.K. leaves the E.U.
The introduction of a human rights sanctions regime reflects a growing interest internationally in thematic, as opposed to geographically focussed sanctions. Usefully, it also allows for a point of comparison between the U.S. and E.U. approach regarding human rights measures.
While draft regulations have been laid before Parliament for other sanctions regimes pending the end of the E.U. transition period, none of these are yet ‘live’. By contrast the Global Human Rights Sanctions Regulations 2020 actively show the U.K. looking across both the Atlantic and Channel, drawing from the American approach, while retaining some of its European heritage.
History and timeline
The U.S. was the first mover on using sanctions as a tool to tackle human rights abuses globally. In 2012 it introduced the Magnitsky sanctions regime in direct response to the assassination of Russian tax advisor Sergei Magnitsky, who exposed a major corruption scandal. This sanction regime solely targeted persons involved specifically in the Sergei Magnitsky case, and persons responsible for the persecution of whistle-blowers and human activists in Russia.
However, in 2017 the U.S. went a step further and introduced the Global Magnitsky sanctions regime, which had no geographical or temporal limit. While states and international organisations have implemented sanctions regimes in response to human rights violations in individual countries, this was the first of the truly thematic human rights sanctions regimes, targeting serious human right violators, whatever their nationality and wherever their location.
The E.U. is also in the midst of preparing its own human rights sanctions regime. This was first proposed in December 2019, but is still to come to fruition.
The U.K.’s Global Sanctions Regulations, Regulation 4(2), broadly empowers the U.K. to designate anyone involved in violations of specific human rights, specifically:
(a) the right to life,
(b) the right not to be subjected to torture or cruel, inhuman or degrading treatment or punishment, and
(c) the right to be free from slavery, not to be held in servitude or required to perform forced or compulsory labour, whether or not the activity is carried out by or on behalf of a State.
This contrasts with the broader, and arguably more flexible approach available to the U.S. authorities, who under Section 1(a)(ii)(A) of Executive Order 13818 may designate anyone identified ‘to be responsible for or complicit in, or to have directly or indirectly engaged in, serious human rights abuse.’
The U.K.’s narrower and less flexible approach potentially provides greater legal certainty, in circumstances where, separated from the E.U., the U.K. will assume direct responsibility for designations (with the potential for challenge).
The Bank Mellat case shows the risk of getting designations ‘wrong’. The Supreme Court found that restrictions on the Iranian bank had been made unlawfully, including on procedural grounds, in circumstances where Bank Mellat initially claimed damages of USD4bn.
Ultimately a trade-off has been made in the U.K. legislation between flexibility of designation, and legal certainty. Arguing whether a specific human right has been breached is more straightforward than arguing whether a breach was serious or not.
Where the U.K. does have more flexibility is in actually effecting its designations, which is in direct contrast to its E.U. counterparts. E.U. sanctions policy, and the choice of sanctions target depends on unanimity between its 27 members. This poses a significant barrier in responding decisively to emergent issues, requiring alignment of 27 Member States’ foreign policies, whereas the U.K. can potentially move more quickly, being only required to consider its own interests.
The challenge within the E.U. is clearly demonstrated by the recent blocking by Cyprus of the E.U. implementing asset freezes in response to the current situation in Belarus. By contrast, on 24 September the U.K. announced it was preparing designations in coordination with the U.S. and Canada targeting those responsible for recent human rights violations in Belarus. On 29 September, the U.K. designated 8 Belarusian individuals under its Global Human Rights Sanctions regime, including President Lukashenko and his eldest son, demonstrating the speed with which it can now act.
Ursula von der Leyen, President of the European Commission did recently suggest in her State of the Union address that the E.U. will seek to manage this issue through the use of qualified majority voting for the implementation of human rights sanctions. Whether this comes to fruition, is effective in avoiding voting blocs, or will be applied to other sanctions regimes remains to be seen. For now, at least the U.K. has the potential to be a more dynamic and agile sanctions body.
Corruption – an omission?
Where the U.K.’s Global Human Rights sanctions regimes does differ from the U.S.’ Global Magnitsky sanctions regime is its omission of corruption as a basis for designation. The U.S.’ Global Magnitsky sanctions make involvement in corruption a separate ground for designating current or former government officials.
There is no equivalent U.K. provision. Corruption is, of course, addressed separately in U.K. legislation (for example through the Proceeds of Crime Act 2002 and the Bribery Act 2002). The E.U. human rights sanctions regime is also anticipated not to include corruption as a ground for listing.
It is likely, however that the U.K. will in due course introduce a separate corruption regime. In his statement to the House of Commons when introducing the Global Human Rights Sanctions regime, Foreign Secretary Dominic Raab commented that:
‘we are already considering how a corruption regime could be added to the armoury of legal weapons that we have.
In particular Mr Speaker, I’m looking at the UN Convention Against Corruption and practice under the frameworks in jurisdictions like the U.S. and Canada.’
The U.K. is cautiously following the U.S.’ approach, but it is notable that while it is following the same trajectory, it is expressly citing multilateral frameworks such as the UN Convention mentioned by Mr Raab. In this respect the U.K. is beginning to forge its own course and identity as a sanctioning body.
The prohibitions imposed by the Global Human Rights sanctions regime apply within the U.K. and its territorial sea, and to U.K. persons (natural and legal) wherever they are located in the world.
By contrast, the U.S. Global Magnitsky sanctions regime applies both primary and secondary sanctions. The sanctions primarily apply to property within the U.S. and in the possession of U.S. persons wherever located. Secondary sanctions are also created through wording that enables the U.S. to designate anyone (regardless of nationality or location) identified to have provided material assistance, or financial, material or technological support to a designated person. Essentially, non-U.S. persons can be designated for transacting with designated persons, even though there is no inherent jurisdiction.
While the U.K.’s measures do have a limited extraterritorial application (to U.K. persons wherever located) they stop short of the far wider reach of the U.S. measures. The U.S. has always been exceptional in this regard, maintaining the only truly extraterritorial and extra-jurisdictional sanctions program in the world.
In addition, the U.S. can call on the global importance of the U.S. dollar and the U.S. onshore financial centers (especially its clearing banks) to the global economy to achieve its sanctions objectives. Notwithstanding London’s importance, Pound Sterling does not have the same standing.
In respect of licensing (that is authorization for conduct that would otherwise be prohibited under the asset freeze measures), the U.K.’s approach mirrors the E.U.’s in all but one respect. The Global Human Rights sanctions regulations contain all of the licensing grounds that would normally be found in E.U. sanctions regulations. For example funds may be unfrozen or made available to designated persons (subject OFSI authorization) where those funds are need to meet a designated persons basic needs or to pay their legal expenses. Similarly, the U.K. measures contain the same exceptions as are common place in E.U. measures, such as the ability of financial institutions to credit frozen accounts without a license.
However, Regulation 20(2)(b) of the Global Human Rights Sanctions Regulations 2020 provide that Treasury licenses may be specific or general. This approach will be familiar to readers acquainted with U.S. sanctions.
In the U.S. it is common for very broad prohibitions to be imposed by Executive Order, and then for OFAC to introduce various general licenses, which authorize specific types of activities. The E.U. does not take this approach, and instead embeds such permitted activities directly into its sanctions regulations. For example oil trading wind down provisions were directly included in the 2010 and 2012 E.U. Iran sanctions regulations, whereas equivalent provisions in the U.S. would have been achieved by general license.
This difference in approach reflects the division in the E.U. between the machinery responsible for imposing sanctions (the European Council), and the licensing authorities in individual Member States. While less flexible, the E.U. approach of legislating for exemptions is necessary to enable cohesion across 27 Member States. This issue no longer applies to the U.K., and while no general license has yet been issued by the OFSI, this is surely a valuable part of their tool kit as an independent sanctions authority, that was not previously available to them. Practitioners should be alert to a potentially significant divergence in sanctions implementation and licensing approaches between the U.K. and E.U. Member States.
Ownership and control
E.U., U.S. and U.K. measures are broadly aligned in respect of determining ownership of a company or asset by a company in so far as they all use 50% share ownership as the relevant metric. However, the U.K. has formalized its historic approach (which was previously contained in guidance) and has confirmed that it will adopt the same approach as the U.S. in looking to both direct and indirect shareholdings.
The U.K. has, however, added another formal condition which if satisfied will mean a non-expressly sanctioned company will be treated as subject to sanctions. Under Regulation 7(4) Global Human Rights Sanctions Regulations 2020, it states that, ‘it is reasonable, having regard to all the circumstances, to expect that [a designated person] would (if [if that designated person] chose to) be able, in most cases or in significant respects, by whatever means and whether directly or indirectly, to achieve the result that affairs of [the company] are conducted in accordance with [the designated person’s] wishes’.
This broad definition formalizes the broad approach taken as an E.U. member in applying E.U. guidance on determining control. This remains a key difference between the U.K. (and E.U.) and the U.S. The U.S. does not consider ‘control’ by a designated person, when considering whether a company should be treated as if it were subject to sanctions.
The Future of U.K. Sanctions
The U.K.’s first autonomous sanctions regime reflects the U.K.’s place in the world, between the Atlantic and the Channel. The U.K. has made the most of its independence by adopting a robust and agile human rights sanctions regime. Even so, it has retained a number of technical aspects, such as specific licensing grounds and concepts of ownership and control from its past as an E.U. Member State and as a key architect of E.U. sanctions regulations.
However, it is interesting that it has clearly looked to the U.S. as a model, for example in taking powers to issue general licenses and to make quick and decisive sanctions designations.
Though there is no telling whether the U.K. will sway more towards the E.U. or U.S. model in the future, it is clear that the U.K. has decided to forge a path towards becoming a leading international sanctioning authority.
*Daniel Martin is a Partner and Head of the Regulatory Group at Holman Fenwick and Willan (HFW) in London. Daniel advises traders, ship-owners, freight forwarders, insurers and brokers on a host of regulatory and compliance issues, including international trade sanctions, export controls, customs and anti-corruption legislation.