Financial crime outlook: The changing world of sanctions regimes

Introduction

Recently, we have been seeing rapid changes to sanctions regimes around the world. In particular, there has been a number of significant developments at UK, EU and US levels and in this article we will be looking at the following themes:

• Key UK sanctions developments as a result of Brexit
• Tighter sanctions enforcement
• EU adoption of Global Human Rights Sanctions Regulations
• Biden’s Executive Orders to reverse Trump administration sanctions regimes

Key UK sanctions developments as a result of Brexit

Prior to Brexit, the United Kingdom (UK) had applied the United Nations (UN) and the European Union (EU) sanctions regimes locally. This meant that sanctions regimes in the UK and across Europe were similarly aligned, making it easier for firms operating in multiple jurisdictions to ensure compliance and monitor for sanctions developments. The UK has historically pushed for stricter sanctions regimes within the EU, and just prior to leaving the EU, the UK adopted its first autonomous sanctions regime – the Global Human Rights Sanctions Regulations 2020 (UK GHRS). The UK GHRS has been designed as a Magnitsky-style regime to specifically target individuals and entities who have committed human rights violations and abuses worldwide wherever they are in the world by imposing assets freezes and travel bans.

Whilst the UK has onshored the UN and a large proportion of the EU sanctions regime into UK law through the Sanctions and Anti-Money Laundering Act 2018 (SAMLA), enabling the regime to continue to apply in the UK post Brexit, the swift adoption of the UK GHRS demonstrates the UK’s willingness to readily enhance EU sanctions approaches and implement an extra territorial regime which aligns with its own economic and humanitarian interests.

As the UK has chosen to implement more stringent sanctions measures, the UK GHRS will have a large impact on international businesses in areas such as, for example:

• Ownership and control: under the EU regime, there is a rebuttable presumption where a non-designated person is more than 50% owned or controlled by a designated person making funds available to such non-designated person will amount to firms indirectly providing funds to the designated person. The UK regime removes this presumption and instead, looks at the extent to which the designated person can run the entity’s affairs it owns and controls in accordance with its wishes. This means firms with operations/business in the UK and the EU will need to carry out two different assessments for ownership and control to determine whether they are allowed to do business with a particular entity.
• Designated list: under the EU regime, there is a single list maintained by the European Commission. The UK has divided this list into two: the UK sanctions list and the consolidated list, with the former covering all sanctions made under the SAMLA, and the latter all financial sanctions designations. This means firms will need to be alert as to the increased number of sanctions checks it needs to conduct and ensure any service providers it uses has updated their system parameters to account for these changes.

Tighter sanctions enforcement

The UK’s Office of Financial Sanctions Implementation (OFSI), which forms part of the UK’s HM Treasury department, has increasingly been given more powers to administer and enforce the UK’s sanctions regime. Most recently, OFSI has amended its guidance on monetary penalties (which comes into force on 1 April 2021) to demonstrate it is willing to take a far tougher stance on sanctions enforcement going forward. For example:

• OFSI will now be prepared to impose financial sanctions on persons regardless of whether they are also being criminally prosecuted.
• OFSI will have a wider discretion in determining the seriousness of financial sanctions breaches and will introduce a new category of “most serious” cases, which will be cases demonstrating “particularly poor, negligent or intentional conduct.”
• As a first step in response to potential sanctions breaches, OFSI will be able to issue “written warnings” and write to UK companies asking for details as to how they propose to enhance their compliance practices. This signifies a far more direct response to firms by OFSI and one which suggests less tolerance even for accidental or non-substantial sanctions breaches.

EU adoption of Global Human Rights Sanctions Regulations

In December 2020, EU adopted its own sanctions measures, in the form of a decision and a regulation, to address serious human rights violations and abuses worldwide (the EU GHRS). Notably, the scope of the EU GHRS application appears to be broader than that of the UK GHRS with the definitions under the former also covering human trafficking, sexual/gender-based violence, violations/abuses of freedom of peaceful assembly, of opinion and expression or of religion/belief. However, the EU GHRS does not have an extra-territorial reach and thus it does not create any obligations on firms outside the EU (such as the UK).

Other important points on the EU GHRS for financial services firms are:

• Should firms find themselves dealing with a listed individual, they will be expected to supply the competent authority (of the EU jurisdiction in which they are based) with any information that would facilitate compliance with the regulation, including the details of any accounts frozen, incoming transfers, and attempts by customers to circumvent the regulation. The EU-based firms will therefore need to take more active steps to assist the EU in implementing the regime.
• The EU GHRS seeks to also target individuals and entities which provide financial, technical or material support to those involved in serious human rights violations and abuses worldwide, as well as to target the individuals and entities associated with those perpetrators. There is therefore considerable freedom for the Council of the EU to determine which individuals or entities will be penalised under the EU GHRS. Firms will need to have sufficiently robust systems and controls in place to determine exactly whom they are dealing with and whether any current or prospective clients have any associations with listed individuals or entities.

Biden’s Executive Orders to reverse Trump administration sanctions regimes

While US President Joseph Biden has reversed several executive orders issued by the previous administration on subjects such as immigration issues, he has not yet reversed any currently imposed economic sanctions. Instead, he has added to them..

In response to the 1 February 2021 coup by the military in Burma, President Biden imposed economic sanctions on Burma by issuing an executive order on 11 February. The sanctions targets include those persons operating in the defense sector, leaders in the Burmese government post-coup, and spouses or adult children of a blocked party. That same day, the US Department of the Treasury’s Office of Foreign Assets Control (OFAC) also added several persons, responsible for the coup, or associated with it, to the blocked persons list (the Specially Designated Nationals and Blocked Persons (SDN List), including individuals and three entities. Additional persons have been added since. Among other consequences of being listed on the SDN List, a sanctioned person cannot engage in financial transactions with persons in or transiting the US. All property and interests in property belonging to sanctioned persons are blocked. For more detail on the initial Burmese sanctions (which were later also imposed by the EU and the UK), please read our legal update.

Concluding remarks

The recent sanctions developments around the world demonstrate an increasing global willingness to adopt and use sanctions, not only as a means to tackle terrorism or corruption, but also as a means of standing up to governments and institutions that fundamentally do not respect human rights principles and engage in serious acts of violence against individuals. While this is a step in the right direction from a political and social perspective, the significant expansion in the scope of sanctions regimes creates more complexities for firms who will need to navigate them effectively. At the same time, the UK’s departure from the EU and change of guard in the US will foster divergence in sanctions approaches, and firms, particularly in these early days of changes, may not be able to solely rely on the automated sanctions screening tools to keep pace with change. Instead, one would expect firms to ensure there is proactive involvement of relevant staff with appropriate training to such staff being provided and to promptly review and assess any fuzzy matches and make appropriate adjustments to the software parameters in response to relevant sanctions changes.