Compliance with sanctions law is or should be at the top of the compliance agenda. A failure to have adequate procedures is not only a failure to manage risk but could also lead to criminal or civil penalties in a range of jurisdictions. As regimes around the world evolve, not least here in the UK, it is a good time to reach for the company's sanctions policy and check it – if it indeed exists.
During its membership of the EU, the UK was part of (and was one of the main champions of) the EU's sanctions regime. As a result of Brexit, the UK has developed its own autonomous national regime under the umbrella of the Sanctions and Money Laundering Act 2018.
Whilst the UK's new sanctions regime closely mirrors that of the EU in many ways (as the UK was one of the main architects of the EU regime, there was little sense starting with a blank sheet of paper), there are important differences in the UK's new approach to sanctions which businesses should be aware of and factor into their management of sanctions risk.
What are financial sanctions?
In this article we only consider 'financial' sanctions. The UK and EU also have their own trade sanctions regimes, which are measures imposing import and export restrictions in relation to a state. Financial sanctions, by contrast, are measures which target the assets of 'listed' or 'designated' entities and individuals. They generally take the form of measures freezing the assets of, and prohibiting the transfer of economic resources to, certain designated persons. As such, sanctions place restrictions on dealings between ordinary commercial organisations and persons and entities subject to sanctions.
A breach of sanctions legislation (for example providing funds or assets to a designated person), or a deliberate circumvention, is a criminal offence.
How do the EU and UK regimes differ?
While continuing to share many common features, even before the end of the transition period there were already divergences developing between the EU and UK regimes. For example, the UK introduced a new sanctions regime targeting individuals in connection with human rights abuses , as we considered in an earlier insight. Whilst the EU subsequently established a similar global human rights regime, there are already some differences between the two regimes (for example, in relation to the activities being targeted). In short, do not be lulled into a false sense of security: there may be overlap between the UK and EU regimes, but it is far from a 'cut and paste' exercise, and both regimes need to be considered separately.
To date, there have also been subtle but important changes to the mechanics of how sanctions work in the UK. These include:
- a stricter approach to situations where entities are owned and controlled by a designated person/entity, meaning entities more than 50% owned or controlled by a designated person are automatically subject to UK sanctions (under the EU regime, there is simply a presumption (which can be displaced) that funds made available to such entities were also being made available to the designated person). This emphasises the need to carry out proper due diligence up to ultimate beneficial owner level.
- abandoning EU rules which prevent breach of contract claims being brought where the breach is caused by the imposition of sanctions.
- exemptions based on territorial scope under the EU and UK frameworks need careful attention. For example, the EU's Russian sectoral sanctions have some exemptions for EU-based subsidiaries and the UK's regime only exempts UK-based subsidiaries. Accordingly, EU subsidiaries will not be exempted under the UK regime and UK subsidiaries will not be exempted under the EU regime. Businesses which may be subject to (or wish to comply with) both regimes will not benefit from any exemption.
How should businesses respond to the development of a new, separate UK regime?
Contractual sanctions clauses form an important protection for many businesses in dealing with their counterparties. These are particularly important for defining the parties' liabilities and obligations should a sanctions issue arise. Businesses should revisit their standard sanctions clauses, ensuring that they remain fit for purpose and, in particular, that they make specific reference to the new UK regime.
Managing sanctions risk typically involves searching against certain lists of sanctions targets when considering entering into a transaction. Compliance software is widely available which performs automated searches. Businesses should ensure that they have adequate software in place and that the key lists are being searched.
An effective sanctions compliance programme should be guided by an up-to-date sanctions policy, which reflects an up-to-date date assessment of the sanctions risk faced by the business. Businesses will need to consider the extent to which they need to update their sanctions risk assessments, and consequently whether their policies and procedures need to be updated in light of the new UK regime.
Risk profiles will fluctuate significantly between businesses in different sectors. However, the risks are there for all, from energy sector players to on-line retailers. As with other aspects of effective corporate compliance, developing a robust compliance culture, which drives the continuous improvement of the systems, policies and procedures, is key.