Sanctions and Anti-Money Laundering after Brexit: navigating the new landscape

In one of the first pieces of legislation setting out how the United Kingdom (UK) will operate after Brexit, the UK has outlined how it will impose and administer sanctions and implement anti-money laundering measures. 

The Sanctions and Anti-Money Laundering Act 2018 maintains many similarities with existing frameworks, but there are some key differences which will affect how businesses approach compliance. 

• Significant discretion has been given to Ministers to re model sanctions and anti-money laundering regimes by way of delegated regulations, directions and orders. It remains to be seen how this discretion is exercised. 
• With wider discretion and powers, there is an increasing opportunity for divergence between the UK regime and those in Europe and other G7 counterparts. While businesses with international operations already have to comply with a number of different sanctions regimes, a further regime will add more complexity and this will be new territory for businesses which have had European operations to date. 
• Elements of the new regimes, such as the ability to designate a person for sanctions by way of description rather than name, may make compliance more challenging. While there are strict requirements around the use of these novel powers, the practical application and approach to enforcement is not yet clear. 

Basic framework provisions under the Act are already in force, with the remainder of the Act to come into effect on dates set out in regulations in due course.  

Background

The UK currently implements its United Nations (UN) and European Union (EU) sanctions obligations mainly through the European Communities Act 1972, retaining a small range of domestic sanctions powers through the Terrorist Asset-Freezing etc. Act 2010 and the Anti-Terrorism, Crime and Security Act 2001. 

For anti-money laundering and counter-financing of terrorism, the powers derive from the Proceeds of Crime Act 2002 and the Terrorism Act 2000. Regulatory measures for the prevention of money laundering and terrorist financing are derived from the European Anti-Money Laundering Directives and implemented via the European Communities Act 1972. 

The European Union (Withdrawal) Bill currently before parliament proposes in effect to adopt the existing EU sanctions and anti-money laundering regimes in place as at the day of leaving the EU. These laws would be frozen in UK law at that point of time. 

However, as international sanctions and the fight against financial crime and terrorist financing are fast moving and require legislative agility, the UK needs primary legislation after Brexit to implement UN sanctions, impose its own sanctions (either in coordination with allies or unilaterally) and to ensure it has a full range of powers to manage its anti-money laundering and terrorist financing threats. 

New Sanctions Regime 

The permitted purposes set out in the Act for which sanctions can be applied essentially follow existing UN and EU approaches, namely:

• complying with UN or international obligations;
• preventing terrorism in the UK or elsewhere;
• being in the interests of national security or international peace and security;
• furthering a UK foreign policy objective; 
• promoting resolution of armed conflicts or protection of civilians in conflict zones;
• promoting accountability for, be a deterrent to gross violations of human rights or otherwise promoting compliance with international human rights law or respect for human rights;
• promoting compliance with international humanitarian law;
• contributing to multilateral efforts to prevent the spread and use of weapons and materials of mass destruction; and / or
• promoting respect for democracy, the rule of law and good governance. 

The ability to impose sanctions as a deterrent to gross violations of human rights provides the UK government with so-called "Magnitsky" sanctioning powers, named after Russian lawyer Sergei Magnitsky whose death in 2009 has inspired similar legislation in the USA, Canada and a number of other nations.

The types of sanctions which can be imposed also broadly reflect the full toolkit currently in use by the UN and the EU, namely: 

• financial sanctions (including asset freezes, financial services and products restrictions, investment bans);
• immigration sanctions;
• trade sanctions (including the provision of any type of service and preventing access to land, as well as goods and technology); and
• transport sanctions (including with respect to aircraft and shipping). 

However there are a number of provisions in the Act which mean that a divergence from the current EU-derived approach is likely:

• Listings
  
  While there is a power for Ministers to update existing EU sanctions lists for a period of 2 years after exiting the EU, new names may only be added where the Minister has reasonable grounds to suspect that the person is involved in the activities at which the sanctions are targeted and that the designation is appropriate.
  
  New listings under domestic powers can be by reference to name or by description. The inclusion of the latter power is likely to make sanctions compliance more challenging, with businesses having to consider whether potential counterparties fall within a specified description, rather than merely whether their names appear on sanctions lists.  The power to designate by description is subject to requirements including that a reasonable person be able to determine whether a specific person would fall within that description, and that it is not practicable for the government to identify and designate by name all the persons falling within that description at that time.
  
  Confidential listings will be available for all regimes, not just for terrorist financing.
  
  Appeals in relation to UK and EU designations will be to UK courts, with closed material proceedings being available for all regimes, not just terrorist financing.
  
  These changes mean that there could quite quickly become a divergence between the EU and UK lists of designated persons. 

• Extent of an asset freeze
  
  While the Act enables asset freezes to extend to persons owned or controlled by a designated person, the actual definitions will be left to regulations. Although this suggests the UN and EU approach is more likely to be followed (where sanctions may extend to persons owned or controlled by persons on sanctions lists), rather than the US approach of considering majority ownership only, the percentage of ownership and indicia of control necessary to extend sanctions could vary not only from other international regimes, but also between regimes in the UK (as seen on the ownership levels applied on certain Russian investments by the US under the Countering America's Adversities Through Sanctions Act ). 
  
  Likewise, the definition of making funds or economic resources available to a designated person will also be left to regulations. 
• Licensing
  
  At present, exemptions and licensing grounds are set out in the relevant legislation or regulation and there is no power to permit otherwise prohibited activities outside of these exemptions. The Act requires the power to create exemptions, issue licences or directions to be included in regulations, but does not require all of the grounds on which that power could be exercised also to be included in the regulations. A power to issue general licences has also been granted. 
  
  This suggests that the UK may adopt a more flexible approach to licensing as seen in the United States, although it is not clear whether there will be a differentiation between UN regimes and UK domestic regimes and what form General Licences will actually take. 
  
  Such an approach will enable greater flexibility in mitigating unintended consequences of sanctions prohibitions, and in the case of general licences, to offer a more timely approach to responding to requests where permissions are clearly within the policy intent of the regime. On the other hand, it may mean there is less certainty in whether a licence is likely to be granted and means that licensing permissions could vary not only from other international regimes, but also between regimes in the UK. 
  
  The use of general licences and directions will mean businesses will need to have even more regard to the relevant websites of the various UK agencies administering the different types of sanctions, rather than just relying on the law, to know what is permissible. 
  
  The current recognition by the UK of trade sanctions licences issued by another EU Member State is understandably not replicated in the Act, meaning that separate UK and EU licences will now need to be obtained, where there is a cross-border angle either for the entity or the transaction. 
• Penalties for breaches
  
  The maximum criminal penalty for a breach which may be set out in regulations is 10 years imprisonment. It remains to be seen whether the financial sanctions and terrorist financing penalties (currently 7 years) will be increased to the maximum 10 years which currently applies for breach of export controls. 
  
  Deferred prosecution agreements and serious crime prevention orders are now available for breaches of trade sanctions, although the civil monetary penalty regimes will remain distinct for export control breaches and financial sanctions. 
• No procedural safeguards are included in the exercise of any of the investigatory powers which can be given to various bodies under regulations. Parliamentary scrutiny.
  
  While wide regulatory making powers are given to Ministers, the Act also imposes a number of obligations on Ministers to report to Parliament, including reporting on:

• the appropriateness of imposing sanctions, at the time they are exercised and annually; 
• the appropriateness of amending sanctions, at the time the amendment is made and annually;
• the application of criminal sanctions, at the time the offence is created;
• the continued appropriateness of existing sanctions, annually; 
• any report issued by the Independent Reviewer in the context of counter-terrorist financing sanctions, annually; and 
• on the government response to any recommendations made by Parliamentary Committees recommending that sanctions be applied for the purpose of gross human rights violations, also annually. 

Anti-Money Laundering 

The Act provides wide regulation making powers for enabling or facilitating the detection, investigation or prevention of money laundering or terrorist financing or to otherwise implement international standards set by the Financial Action Task Force. 

While the existing approach of an EU directive with minimum standards in this area already means there is some variation in anti-money laundering obligations which businesses operating across Europe need to apply, the breadth of the regulation making powers increases the opportunity for divergence. 

Schedule 2 of the Act sets out the sorts of areas the regulations are likely to cover, which follow fairly closely the current Money Laundering Regulations. However, the powers are wide enough to enable regulations to be passed relating to the actual money laundering and terrorist financing offences and the reporting regime. In some cases this may enable greater flexibility to deal with emerging issues in this area, but reduces parliamentary oversight and potentially the opportunity for public and industry engagement in the development of these changes. 

The scope of business and persons who may be subject to the regime is also left deliberately wide – as any business identified in regulations of a kind which entails risks relating to money laundering, terrorist financing or other threats to the integrity of the financial system. 

Criminal offences may still be applied to breaches of the regulations, but cannot impose a maximum penalty of over 2 years and cannot be a strict liability offence. 

While procedural safeguards may be included in regulations in relation to the exercise of investigatory and penalty powers which can be given to various bodies, there is no requirement that they are included nor requirement that they be to the same standard as those exercised by law enforcement for other criminal offences. 
The Act was also an opportunity for Parliament to steer the UK's approach on transparency of beneficial ownership. 

• Oversees entities register
  
  In March this year, the government announced that it would establish by 2021 a publicly available register of beneficial owners of overseas companies and other legal entities that own UK property and/or engage in UK government procurement. The Act requires annual reporting to Parliament on progress towards implementation of the register for the next three years. 
• Overseas Territories registers
  
  The Act gives UK Overseas Territories until December 2020 to take steps to implement their own public register of persons with significant control for companies incorporated in their jurisdiction. For those territories which do not comply, the UK government is required to prepare a draft Order in Council which would enable Parliament to vote on imposing such a register on those jurisdictions. 

Where to now

Despite the broad powers in this Act, the extent to which Ministers will have free reign to extensively diverge from European practice in relation to sanctions and money laundering will depend on the ultimate deal reached with the European Union on access to the internal market.  

What is clear is that the UK agencies responsible for implementing these new powers will need more resources to cope with the increased workload and compliance teams for businesses working in a cross-border context will need to stay alert to the nuances in the new UK regimes to ensure compliance both here and in Europe.