Sanctions are an important mechanism for the UK government to apply economic and political pressure to people, organisations or countries which the UK believes are responsible for wrongdoing.
Financial sanctions aim to restrict the ability of certain ‘prescribed’ countries, or of people and organisations anywhere in the world who are ‘designated’ by the UK sanctions regime, to use financial services or benefit from financial interests, directly or indirectly.
If you are operating a UK business which may have interactions with prescribed countries or designated individuals or organisations, you need to understand your obligations under UK sanctions regulations and ensure that you comply. Breaching financial sanctions rules may be a criminal offence and can have very serious implications for you and your business.
This Knowledge Hub article introduces the legal framework for UK financial sanctions and looks at some of the risks for UK businesses of failing to comply with financial sanctions requirements. For tailored and sector-specific advice on the UK sanctions regime, how it might affect your business and what you need to do to comply, please contact our team of experienced financial services solicitors.
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 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 different circumstances and against different people and organisations.
The powers created by the 2018 Act mean that the UK government can respond quickly to changing circumstances to impose sanctions through UK regulations without having to go through a lengthy Parliamentary process to make 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 sanction which can be imposed, the purposes for which sanctions can be used and the penalties which can be imposed on anybody 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 which take place in the UK and to activities undertaken anywhere in the world by a UK national or by a business which is 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 business may have obligations to comply with 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, considering the purpose of the sanctions and the likely impacts on the designated person. The relevant Minister must state the reasons for designating 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). It is possible for regulations to apply different sanctions to different named people or groups of people.
The range of people and organisations which can be designated is broad and is not subject to territorial restrictions (i.e. designated people 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 for sanction purposes.
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 for the purposes of supporting 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 which can be imposed by regulations under the Act.
Financial sanctions are not restricted to curbs on your business providing UK regulated financial services to designated persons, or to 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 in relation to 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 certain 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 both for your business’ financial and commercial relationships and 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 allow your business to carry out certain permitted transactions with restricted parties under strict conditions. OFSI provide more information on applying for a specific 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). Details of general licences are published by OFSI.
What financial sanction regimes are currently in place?
OFSI publishes a list of financial sanctions regimes currently in force in the UK. These cover about 25 country-specific financial sanctions regimes and also a number of thematic regimes covering areas such as 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 to navigate UK financial sanctions requirements. To complement their published guidance, OFSI also organises webinars and events to help you comply.
OFSI guidance includes general information and also guides targeted at particular sectors such as UK charities, oil and gas companies, maritime operators and high value dealers. In addition, there are publications on specific 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 which you need answering, Harper James’ financial services team 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 manages any risks of financial sanctions breaches.
What should I think about in terms of managing risks of breaching financial sanctions?
In September 2023, following the introduction of new financial sanctions relating to the Russia-Ukraine war, the FCA published the findings of its review into the adequacy of financial firms’ systems and controls to manage risks from breaching UK financial sanctions rules. These are likely to also prove a useful guide for UK non-financial businesses.
The FCA review noted 5 areas where firms should consider the adequacy of their sanctions risk management arrangements. These were:
- Governance and oversight: Planning in advance and the provision of effective management information to senior managers affected 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, need to be adequately calibrated, frequently updated and subject to continuing 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 reporting to the FCA on potential sanctions breaches under Principle for Business 11.
Summary
The 2018 Act creates powers for the UK government to make regulations to quickly apply 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 and updated, poses challenges for UK businesses in tracking developments and ensuring that they comply with their sanctions obligations.
Consequences for non-compliance with financial sanctions can be punitive and you should ensure that you understand which financial sanctions regimes are presently in force and what you need to do to comply. Your business should invest in appropriate systems and controls to support compliance.
Our financial services regulation team has extensive knowledge of the UK financial sanctions landscape and can assist with up-to-the-minute advice on sanctions requirements, licensing, risk mitigation and enforcement. Please contact us to outline your sanctions support requirements or for further information on our sanctions-related advice services.
