The view from London - Top 5 sanctions developments of 2020

Introduction

2020 was a year of firsts for sanctions. Globally, the US acted mainly against Chinese interests, motivated in particular by its opposition to the National Security Law applying to Hong Kong, and certain social media platforms. The US also fell significantly out of step with the global community over Iran, with the US attempting to force the UN Security Council to invoke the “snapback” of all sanctions under the JCPOA (the Iran nuclear deal agreed in June 2015) and failing. The EU took limited sanctions against Hong Kong officials for their role in enforcing the National Security Law.

The UK and EU also acted under cyber security and human rights measures, and the UK imposed its first significant fine for a sanctions violation.

With the end of the Brexit transition period, the UK finalised its preparation to implement its own autonomous sanctions regime and, as noted above, had already imposed unilateral sanctions under its human rights provisions.

While not strictly part of a review of 2020, we note that President Biden may take a significantly different approach to certain sanctions compared to the Trump Administration, and we can expect changes in US policy towards China, Iran and possibly Russia.

Amid all the media focus on the US and China, we have chosen to hone in on a few key sanctions developments closer to home over the past year.

UK introduced first unilateral human rights sanctions

On 6 July 2020, the UK Government announced the introduction of its new human rights sanctions regime. This was the first independent sanctions regime to be established under the Sanctions and Anti-Money Laundering Act 2018 ("SAMLA 2018"). The UK Global Human Rights Sanctions Regulations 2020 (SI 2020/680) (the Human Rights Regulations) established a framework to impose asset freezing sanctions and travel bans on individuals and entities deemed to be involved in human rights abuses.

The initial wave of measures, dubbed the “Magnitsky” sanctions after Russian lawyer Sergei Magnitsky who died in 2009 after investigating alleged corruption by Russian officials, were introduced in respect of 49 individuals and entities from Russia, Saudi Arabia, Myanmar and North Korea. The designations were made against 25 Russian nationals involved in Magnitsky’s death, 20 Saudi nationals implicated in the murder of journalist Jamal Khashoggi, two generals involved in the systemic killing of Rohingyas in Myanmar, and two organisations using forced labour in North Korea.

These Regulations were noteworthy insofar as they represented the first time in which the government imposed unilateral economic sanctions under national law since Brexit. The sanctions showed the willingness of the government to maintain a robust sanctions regime post-Brexit, taking a path independent of the EU, including alliance with non-EU allies such as the US. The US first implemented equivalent sanctions against those involved in Magntisky’s death in 2012. Despite the UK’s indication of autonomy, Dominic Raab acknowledged the benefit of continued co-ordinated sanctions action with the EU and stated that the government will “strongly support efforts to bring an EU human rights sanctions regime into effect”.

On 29 September 2020, the UK Government announced further human rights sanctions under the Human Rights Regulations against eight individuals from Belarus, including Alexander Lukashenko and his son Victor. The travel ban and asset freezes were implemented in co-ordination with Canada as a response to a string of human rights violations in Belarus against opposition figures. The EU later followed suit.

For more information on the Global Human Rights Regulations, see Practice note, Sanctions and Anti-Money Laundering Act 2018: overview: Power to impose sanctions for serious human rights violations.

Cyber-security sanctions from EU against Russian and Chinese officials

In July 2020 (see here), the EU imposed its first cyber sanctions regime against Russian, North Korean and Chinese individuals held responsible for cyber-attacks against EU member states. The sanctions, which included a travel ban, asset freeze and a prohibition on the provision of funds, were imposed against six individuals and three entities. Further Russian individuals were added to the sanctions list in October 2020.

The introduction of cyber sanctions is noteworthy from an attribution angle as governments often lack, or are unwilling to disclose, evidence publicly attributing perpetrators to particular cyber-attacks. In this case, the EU attributed the NotPeyta cyber-attack in 2017 and an attack on the German parliament in 2015 to the Russian military intelligence directorate, and the WannaCry and Cloud Hopper cyber-attacks in 2017-18 to North Korean and Chinese individuals and entities respectively.

It remains to be seen whether cyber sanctions provide an effective deterrent to attackers and whether similar measures are implemented more widely.

OSFI's largest sanctions fine against Standard Chartered

In April 2020, the UK's Office of Financial Sanctions Implementation ("OFSI") imposed a significant fine of £20.5 million against Standard Chartered Bank (SCB) for breach of the EU’s Russian/Ukraine sanctions. These sanctions prohibit the provision of loans with a maturity over 30 days to certain Russian state-owned entities, as well as their majority-held non-EU subsidiaries. In this case, SCB made loans to Denizbank, a Turkish bank, majority owned at the relevant time by Sberbank, one of the relevant state-owned entities. Prior to the case, the previous largest fine imposed by OSFI was £146,000.

The case is noteworthy for at least two other reasons. First, the fine resulted from a voluntary disclosure of the conduct, and received a reduction of 30% as a result of that disclosure. Second, the case was the first to make use of the power of the party in breach to have the matter reviewed by a Minister. In this case, that review resulted in the initial fine being reduced from £31.5 million to £20.5 million, showing that there may be significant merit in asking for the review.

For more information on the SCB fine, see Practice note, Financial sanctions: implications for financial institutions: Monetary penalties regime.

Noteworthy cases

Banco San Juan Internacional Inc v Petróleos De Venezuela S.A.

In November 2020, the Court handed down a judgment in a summary judgment in a summary judgment application in claims brought by BSJI, a bank incorporated in Puerto Rico, against PDVSA, the Venezuelan state-owned oil and gas company (Banco San Juan Internacional Inc v Petroleos De Venezuela SA [2020] EWHC 2145 (Comm)). The claims concerned a debt of around USD86 million owed by PDVSA (as borrower) to BSJI (as lender) under two credit agreements. BSJI sought summary judgment. 

PDVSA raised a number of defences. In particular, PDVSA argued that US sanctions had the effect of suspending its contractual payment obligations. The Court considered each of PDVSA’s arguments, including the Ralli Bros rule, but ultimately concluded that the paying party (PDVSA) was not excused from making the payments, not least because it was open to it (indeed the credit agreements obligated it) to apply for a licence from OFAC for permission to make the payment. We considered the judgment in more detail here.

Lamesa Investments Ltd v Cynergy Bank Ltd

The case appealed a 2019 High Court judgment that found that Cynergy Bank Ltd was entitled to refuse to pay interest payments to Lamesa Investments Ltd under a facility agreement, due to a concern that Cynergy would be subject to US secondary sanctions(Lamesa Investments Ltd v Cynergy Bank Ltd [2020] EWCA Civ 821). The Court of Appeal dismissed the appeal, agreeing with the High Court decision but disagreeing with some of the reasoning.

The case serves as a reminder of the importance in being as clear as possible in sanctions clauses, particularly given the complexity of how US sanctions can apply and the fact that a number of factors will be balanced in interpreting sanctions clauses.

Looking forward

EU sanctions ceased to apply in the UK as at 11pm on 31 December 2020. The UK has implemented a range of UK sanctions through regulations under SAMLA 2018, as with the Human Rights Regulations referred to above. The government has published a list of the new UK sanctions regimes that have come into force.

The government also provided guidance around the implementation of the onshored EU Blocking Regulation (2271/96) from 2021. As it stands, the Blocking Regulation seeks to protect UK persons trading with countries affected by the extraterritorial application of US sanctions against Iran and Cuba. These sanctions seek to regulate the activities of non-US persons in any jurisdiction. The government’s guidance provides detail on various aspects of the new regime including protected persons, enforcement for breaches, licensing, reporting and damage recovery.

Since 1 January 2021, the UK has had a completely unilateral financial sanctions regime almost identical in scope to the EU system it has taken over from. However, this regime is detailed and, in some cases, more complicated than the EU system it has replaced. While the two systems start out from the same point, we can expect that they will diverge. It is likely that the UK will act more quickly and aggressively than the EU which, given its political make-up, requires time to reach consensus. It is also possible that the systems will diverge on major issues, such as whether to continue sanctions on Russia, with the UK possibly deepening the current sanctions, and the EU possibly relaxing them.

As we touched on above, the UK has already signalled a willingness to align its sanctions policy with non-EU allies through the imposition of unilateral “Magnitsky” sanctions. It will be interesting to see whether this trend continues or whether the UK acts largely in line with its European neighbours.

Authors: Ross Denton, Senior Consultant and Catherine Lillycrop, Trainee Solicitor.