UK financial sanctions compliance is a critical consideration for any business interacting with designated individuals, organisations, or countries subject to prescribed sanctions.
Sanctions serve as a powerful tool through which the UK government restricts financial services and freezes economic resources to uphold national security, support UN obligations and tackle illicit activity. Understanding the scope of the Sanctions and Anti‑Money Laundering Act 2018 and keeping pace with regulations from the Office of Financial Sanctions Implementation (OFSI) is essential to avoid criminal liability or hefty fines.
Whether you need to establish robust screening processes, obtain licences for permissible transactions or implement tailored compliance frameworks, our financial services solicitors can guide you through every step, offering sector‑specific advice and hands‑on support to safeguard your business.
Contents:
- What is the Sanctions and Anti-Money Laundering Act 2018?
- What is the territorial scope of regulations made under the 2018 Act?
- For what purposes can sanctions regulations be made under the 2018 Act?
- Who can be ‘designated’ by regulations under the 2018 Act?
- What types of sanctions can be imposed under the 2018 Act?
- What kind of financial sanctions can be imposed by regulations under the 2018 Act?
- Who looks after financial sanctions and related licences in the UK?
- What financial sanction regimes are currently in place?
- Is there any guidance to help me comply with UK financial sanctions requirements?
- What about OFSI enforcement action if my business breaches financial sanctions?
- What should I think about in terms of managing the risks of breaching financial sanctions?
- Summary
What is the Sanctions and Anti-Money Laundering Act 2018?
The Sanctions and Anti-Money Laundering Act 2018 (2018 Act) is a piece of UK primary legislation made by Parliament. The 2018 Act is a so-called ‘enabling’ Act. It gives the Treasury and other Secretaries of State the power to introduce regulations (or secondary legislation) to impose different types of sanctions in various circumstances and against different people and organisations.
The powers created by the 2018 Act enable the UK government to respond quickly to changing circumstances, imposing sanctions through UK regulations without the need for a lengthy Parliamentary process to create new primary legislation each time.
However, to ensure that Parliament retains checks and balances over these powers granted to the government, the Act sets out parameters for the types of sanctions that can be imposed, the purposes for which sanctions can be used, and the penalties that can be imposed on anyone who breaches them. The 2018 Act also includes mechanisms for ensuring continuing Parliamentary scrutiny, including targeted reporting to Parliament.
What is the territorial scope of regulations made under the 2018 Act?
The UK government’s power to impose sanctions is limited to territories in which UK law can be enforced. Therefore, UK sanctions regulations are designed to apply to operations that take place in the UK and to activities undertaken anywhere in the world by a UK national or by a business incorporated in the UK.
Therefore, if your business is either operating in the UK or is UK incorporated and operating anywhere in the world, your company may have obligations to comply with the requirements of the UK sanctions regime.
For what purposes can sanctions regulations be made under the 2018 Act?
Sanctions can be imposed either in support of the UK’s UN obligations (for example, stemming from a UN Security Council Resolution) or for other purposes listed in the 2018 Act, such as preserving peace and national security, disrupting terrorist activity, tackling human rights abuse and promoting democratic principles.
Who can be ‘designated’ by regulations under the 2018 Act?
A ‘designated’ person is an individual or organisation who is an intended target of sanctions. The 2018 Act permits regulations made under it to confer powers on a relevant Minister to ‘designate’ the persons on whom sanctions are intended to bite (Sections 10-12 of the Act).
Designation decisions must be reasonable and proportionate, taking into account the purpose of the sanctions and the likely impact on the designated person. The relevant Minister must state the reasons for establishing a particular person, except where specific exemptions apply.
Ministers may designate a person by name (e.g. Mr X, Company Y) or by way of a description (e.g. any person who is a close family member of Mr X, any shareholder in Company Y). Regulations can apply different sanctions to different named people or groups of people.
The range of people and organisations that can be designated is broad. It is not subject to territorial restrictions (i.e., designated individuals could be foreign nationals or based anywhere in the world). To help your business comply with UK sanctions, the UK government publishes a list of designated persons who are subject to sanctions.
There may still be challenges for your business in identifying designated persons because you may not immediately know who falls into a particular descriptive designation category e.g. is Mr Z an associate of Mr X? Is Mr W an investor in Company Y? Therefore, you need to be continually alive to the risk that you or your firm may be doing business with, or being approached by, a designated person.
What types of sanctions can be imposed under the 2018 Act?
The 2018 Act lists the type of sanctions which can be imposed by regulations made under the Act. These include:
- Financial sanctions
- Immigration sanctions
- Trade sanctions
- Aircraft and/or shipping sanctions
- Other sanctions to support the UK’s United Nations (UN) obligations.
This article focuses on financial sanctions.
What kind of financial sanctions can be imposed by regulations under the 2018 Act?
Section 3 of the 2018 Act outlines the type of financial sanction that regulations under the Act can impose.
Financial sanctions are not restricted to curbs on your business providing UK-regulated financial services to designated persons, or particular sanctioned countries (prescribed countries). Financial sanctions can include a wide range of financial restrictions, including:
- Freezing funds or economic resources owned, held or controlled by a designated person
- Preventing financial services from being provided regarding financial products issued by designated persons
- Preventing financial services from being provided to or procured from restricted parties (i.e. designated persons, prescribed countries or people connected to prescribed countries) or for their benefit
- Preventing funds or economic resources from being made available or received from restricted parties
- Preventing persons from owning, controlling or having specific interests in restricted parties.
Financial sanctions can also include wider prohibitions or requirements on people or businesses entering, or continuing to be a party to, arrangements for specified commercial purposes with restricted parties.
In addition, regulations imposing financial sanctions can also include other requirements on UK businesses, such as an obligation to keep records or file a report in certain circumstances.
Financial sanctions have the potential to have wide-ranging implications for both your business’s economic and commercial relationships, as well as for effective business administration and risk management.
Who looks after financial sanctions and related licences in the UK?
Financial sanctions in the UK are administered by the Office of Financial Sanctions Implementation (OFSI). OFSI is part of H M Treasury.
OFSI also deals with applications for licences under financial sanctions regulations. Licences can enable your business to conduct certain permitted transactions with restricted parties under specific conditions. OFSI provide more information on applying for a particular licence on their website.
OFSI may also, from time to time, issue general licences (or carve-outs from sanctions which are available to businesses generally). OFSI publishes details of general licences.
What financial sanction regimes are currently in place?
OFSI publishes a list of financial sanctions regimes currently in force in the UK. These cover approximately 25 country-specific financial sanctions regimes and several thematic regimes, including those addressing chemical weapons, human rights, corruption, and counter-terrorism.
Is there any guidance to help me comply with UK financial sanctions requirements?
Yes. OFSI produces a selection of guidance publications to help your business navigate UK financial sanctions requirements.
OFSI guidance includes general information and also guides targeted at specific sectors, such as UK charities, oil and gas companies, maritime operators, and high-value dealers. Additionally, there are publications on particular risk areas, such as ransomware attacks or import/export operations. The suite of publications also includes guides to financial sanctions imposed on prescribed countries such as Russia or Libya.
If you need support or advice in interpreting OFSI guidance or have a specific query that requires an answer, our financial services experts would be glad to help.
What about OFSI enforcement action if my business breaches financial sanctions?
Failure to comply with the requirements of financial sanctions regulations can have serious consequences for you or your business. Penalties for breach can include imprisonment for up to 10 years or large fines.
OFSI has published a guide to its enforcement activities and the types of penalties which it can impose. The guide provides a useful touchpoint on the importance of actively managing risks to your business from breaching financial sanctions.
If you are a regulated financial services business, you may also face additional scrutiny from the Financial Conduct Authority (FCA). The FCA will want to be confident that your business has in place adequate systems and controls to manage any risks of financial sanctions breaches.
What should I think about in terms of managing the risks of breaching financial sanctions?
In September 2023, following the introduction of new financial sanctions related to the Russia-Ukraine war, the FCA published the findings of its review into the adequacy of financial firms’ systems and controls for managing risks associated with breaching UK financial sanctions rules. These are likely to prove a useful guide for UK non-financial businesses as well.
The FCA review identified five areas where firms should assess the adequacy of their sanctions risk management arrangements. These were:
- Governance and oversight: Planning and providing practical management information to senior managers significantly impacted the ability of firms to deliver strong sanctions risk management.
- Skills and resources: Firms need to ensure that sanctions activities are well-resourced. Staff should be properly trained and have access to expert advice where needed.
- Screening capabilities: Sanctions screening tools, even when provided by third-party suppliers, must be adequately calibrated, frequently updated, and subject to ongoing oversight.
- Customer Due Diligence (CDD) and Know Your Customer (KYC) procedures: Effective and timely CDD and KYC are a cornerstone of effective compliance with sanctions requirements.
- Reporting breaches to the FCA: For FCA-regulated firms only, the FCA expects firms to make timely and accurate reports to the FCA on potential violations of sanctions under Principle for Business 11.
Summary
The Sanctions and Anti‑Money Laundering Act 2018 grants the UK government the power to make regulations that enable the swift application of targeted sanctions, including financial sanctions, in appropriate circumstances. However, the breadth and scope of potential sanctions regulations, coupled with the speed at which they can be introduced or updated, pose significant challenges for your business in tracking developments and ensuring ongoing compliance. Consequences for non-compliance can be severe, including the risk of criminal sanctions, substantial fines, and heightened scrutiny from the FCA. To safeguard your operations, you should invest in tailored systems and controls that keep pace with current regimes and anticipate emerging changes.
Our financial services solicitors have in-depth expertise in the UK financial sanctions landscape and offer up-to-the-minute advice on regulatory requirements, licence applications, risk mitigation strategies, and enforcement defence. Contact us today to explore how we can assist you in maintaining robust sanctions compliance and safeguarding your business interests.
