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How will Brexit affect the UK sanctions regime?

November 2017  |  SPECIAL REPORT: PREPARING FOR BREXIT

Financier Worldwide Magazine

November 2017 Issue


Over the last decade, economic sanctions have become an increasingly important tool for the UK and European Union (EU) to achieve their respective foreign policy objectives. The EU has imposed a wide array of list-based financial sanctions on individuals and entities engaged in certain illicit activities, as well as trade sanctions restricting the supply of goods and services to designated persons and countries. In concert with the US, the EU has also crafted a novel set of sanctions targeting specific Russian industrial sectors following the events in Ukraine in 2014. The UK has played a leading role in pushing the EU to enact many of these sanctions programmes.

The UK has also recently taken steps to increase the effectiveness of sanctions enforcement, including EU sanctions. In 2016, the government created the Office of Financial Sanctions Implementation (OFSI) within HM Treasury to administer and enforce economic sanctions within the UK. A year later OFSI was granted the power to impose significant civil penalties on sanctions violators. Historically, only criminal violations of the UK sanctions regime were punishable by law, but OFSI now has the authority to levy civil fines on sanctions violators of up to the greater of £1m or 50 percent of the value of the unlawful transaction. This civil penalty structure closely resembles the system that the Office of Foreign Assets Control within the US Department of Treasury has used to extract hundreds of millions of dollars in civil penalties from companies and financial institutions that have run afoul of US sanctions. OFSI has not yet announced any settlement agreements resulting in civil penalties, but it is currently investigating a number of matters.

The UK’s forthcoming departure from the EU will create uncertainty with respect to UK sanctions. The UK currently develops and implements sanctions programmes in three different ways. As an EU Member State, sanctions implemented by the EU have direct legal effect in the UK pursuant to the European Communities Act 1972. In addition, the UK is obligated to implement UN sanctions at the national level through domestic legislation or indirectly via EU regulations. Finally, the UK can develop its own sanctions programmes, although its power in this regard is limited to targeting individuals and entities engaged in international terrorism.

After Brexit, the UK will still be required to implement UN sanctions through national legislation, but the European Communities Act 1972 will be repealed and cease to apply. This means the UK will not automatically adopt future EU sanctions. Furthermore, as the UK will no longer be an EU Member State, it might not have a formal role in shaping the EU’s Common Foreign and Security Policy, which includes imposing, modifying and lifting EU sanctions. The UK’s absence could therefore result in changes to the EU sanctions regime. For instance, the UK was a leading advocate for the EU to impose sectoral sanctions on Russia in 2014 and continuing them thereafter.

It is possible that the UK will elect to replicate EU sanctions on a going-forward basis by passing national legislation that mirrors EU sanctions. To do so, however, the UK will need to first enact domestic legislation that authorises OFSI and the Department for International Trade to create financial and trade sanctions programmes. The government has suggested that it will propose a ‘Sanctions Bill’ to grant UK regulators the power to impose travel bans, asset freezes, trade and market restrictions, and other types of sanctions after the UK leaves the EU.

However, while the UK could continue to stay aligned with the EU on sanctions, it also could elect to chart its own course. EU sanctions are designed to promote the foreign policy objectives of all 28 Member States, which presupposes that they are all fully aligned on their foreign policy objectives. The UK could determine that some types of EU sanctions do not advance its specific national interests and other EU sanctions could be better tailored to the UK’s foreign policy preferences. In these scenarios, the UK could seek to evaluate each EU sanctions programme on a case-by-case basis, implementing some programmes while rejecting or modifying other EU programmes.

Yet another possibility is that the UK elects to develop sanctions programmes that correspond more closely with the US’ sanctions regime. The UK and US are longstanding allies that enjoy a so-called ‘special relationship’, and the two countries have tended to move in sync when addressing major foreign policy issues. Freed from the constraints of the EU’s Common Foreign and Security Policy, the UK might seek to shift closer to the US’ sanctions model. For example, the US has frequently made use of wide-ranging, country-based sanctions that prohibit US companies from engaging in virtually all economic activity with certain countries, such as Cuba and Iran. By contrast, the EU has tended to shy away from imposing complete embargoes on foreign countries, preferring targeted sanctions directed at specific persons and industrial sectors. The UK might choose to follow the US’ lead and impose its own comprehensive sanctions on countries like North Korea and Syria. Similarly, the US has recently developed so-called ‘secondary sanctions’ designed to force foreign companies to choose between doing business with the US or with disfavoured countries, such as Iran and North Korea. The UK could elect to adopt similar measures in the future.

As with many other aspects of Brexit, the UK’s future, with respect to economic sanctions, remains unclear. The government has presented seemingly inconsistent positions on this subject. FCO minister Sir Alan Duncan has declared that the “UK plays a leading global role in using sanctions to reduce threats to international peace and security and we will continue to do so when we leave the European Union”. But the UK government’s white paper on Brexit states its intention to “continue to work with the EU on foreign policy security and defence” and “play a leading role alongside EU partners in buttressing and promoting European security and influence around the world”.

It remains to be seen whether, post Brexit, the UK will lean more toward the EU or the US on foreign policy matters. What is clear, post Brexit, is that the UK will have gained the legal ability to impose new unilateral sanctions, and all signs indicate that it intends to actively enforce them. The future may be uncertain, but it will not be uneventful.

 

Michael Casey and Marcus Thompson are partners and Douglas Badder is an associate at Kirkland & Ellis International LLP. Mr Casey can be contacted on +44 (0)207 459 2255 or by email: michael.casey@kirkland.com. Mr Thompson can be contacted on +44 (0)207 469 2170 or by email: marcus.thompson@kirkland.com. Mr Badder can be contacted on +44 (0)20 7469 2177 or by email: douglas.badder@kirkland.com.

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