On 27 February 2011 the Libya (Financial Sanctions) Order 2011 (the "Order") came into force in the UK. It has since been supplemented by the Libya (Asset-Freezing) Regulations 2011 (the "UK Regulations"). These have been enacted in response to UN and EU sanctions on Libya, and separate legislative amendments have been made in order to impose a travel ban on certain individuals and a prohibition on the export of banknotes to Libya. Other countries around the world, notably the US, have also issued financial and other sanctions. This briefing summarises the sanctions as they affect UK firms and discusses some of the key issues arising, with a particular focus on the financial sanctions.

Background

On 26 February 2011 the United Nations Security Council voted unanimously to impose sanctions against the Libyan authorities, implementing an arms embargo, a travel ban, freezing the assets of Colonel Muammar Gaddafi, four of his sons and his daughter, and referring to the ongoing violent repression of civilian demonstrators to the International Criminal Court (United Nations Security Council Resolution 1970 (2011) concerning Libya ("Resolution 1970")). Pursuant to Resolution 1970, the Council required all UN Member States to freeze, without delay, all funds, other financial assets and economic resources owned or controlled, directly or indirectly, by the individuals or entities listed in Annex II of Resolution 1970. This includes Muammar Gaddafi and designated members of the Gaddafi family.

The US had already taken action on Friday 25 February 2011, by Executive Order 13566, to locate and freeze assets in the US jurisdiction linked to Gaddafi, three of his sons and his daughter, the Central Bank of Libya, and other state-controlled agencies and instrumentalities. This is reported to be the largest blocking action ever taken by the US.

The Order was brought into force in the UK to give effect to Resolution 1970 and applies to any person in the UK, any entity incorporated in the UK and any British national located outside of the UK. The Order does not apply to subsidiaries of UK companies operating wholly outside the UK and which do not have legal personality under UK law.

The EU Regulation entered into force on 3 March 2011 and is directly applicable in the UK and other Member States (Regulation 204/2011). It includes an asset freeze on the six Gaddafi family members designated by the UN as well as an additional 20 individuals. The extended asset freeze (i.e. including the additional individuals) is also mirrored in the new UK Regulations, which came into force on 3 March. A list of current UK and EU Libyan asset freeze targets is available here: http://www.hm-treasury.gov.uk/d/libya.htm  

HM Treasury has issued two advisory Notices in relation to the sanctions, and a General Licence permitting certain normal course dealings with non-Libyan financial institutions that are ultimately owned or controlled by designated individuals.

Key Provisions of the Order and UK Regulations

The Order and the UK Regulations are similar in form to many of the UK's other sanctions instruments. Other than the identity of the designated individuals, the Order and the UK Regulations are also in very similar terms to each other.

Freezing of funds and economic resources

  • Article 3 of the Order imposes an obligation to freeze all funds, other financial assets and economic resources owned or controlled, directly or indirectly, by: (a) specified members of the Gaddafi family, or other individuals designated by the UN Sanctions Committee ("designated persons"); or (b) an individual or entity acting for or on their behalf or at their direction, or entities owned or controlled by them.
  • Articles 4 to 7 prohibit the making of funds, financial assets or economic resources available to or for the benefit of designated persons.
  • Article 10 creates offences of contravening these prohibitions, or knowingly and intentionally participating in activities which have the object or effect of circumventing the prohibitions.

Exemptions

  • Financial institutions are permitted to credit frozen accounts with interest, or payments due under contracts entered into before the freeze.
  • HM Treasury is able to issue general or specific licences, authorising acts which would otherwise contravene the prohibitions referred to above.
  • On 3 March 2011 HM Treasury granted a general licence to permit certain dealings with non-Libyan incorporated financial institutions (even if such financial institutions could be considered to be owned or controlled by a designated person). This exemption does not, however, extend to transactions which it is known or suggested will result in funds or economic resources being made available to designated persons or their owned/controlled entities.

Reporting

  • The Schedule to the Order imposes an obligation on financial institutions to report to HM Treasury in specified circumstances (including where they have frozen a designated person's account in accordance with the sanctions regime).

Key Provisions of the EU Regulation

  • As noted above, the EU Regulation is directly applicable in the UK.
  • Article 5 provides that all funds and economic resources belonging to, owned, held or controlled by the persons listed in Annexes II and III to the EU Regulation must be frozen. Annex III goes beyond the requirements of Resolution 1970 and lists 20 further individuals who are alleged to be involved in or complicit in ordering, controlling, or otherwise directing, the commission of serious human rights abuses against persons in Libya.
  • Article 8 provides that HM Treasury is also able to authorise the release of or making available of certain funds or economic resources in certain limited circumstances.
  • The UK’s Consolidated List of individuals and entities subject to financial sanctions in effect in the UK which is maintained on the Treasury website has been updated to include the designated persons named in Annex III of the EU Regulation.

Comment

It is important to note that the UK asset freeze is not limited to assets held in the name of Gaddafi and the other designated individuals. It also extends to any funds and assets which they own or control (directly or indirectly). One key issue for firms is therefore the extent to which Libyan state entities, or entities with links to the Libyan state, should be regarded as "directly or indirectly…owned or controlled" by Gaddafi, or "acting on behalf, or at the direction" of Gaddafi

The Libyan Investment Authority (a sovereign wealth fund), for example, is not specifically listed as a designated entity in the UK or EU legislation, but has been reported in the press to have had its assets frozen by some firms. Although no official figures have been provided, the LIA reportedly holds $60 billion-$80 billion in assets, and the issue as to whether it (and other Libyan state entities) should be regarded as subject to sanctions is therefore a very significant one. HM Treasury has issued the (not very enlightening) guidance that "the financial sector and other persons should bear in mind that Muammar Qadhafi and his family have considerable control over the Libyan state and its enterprises in deciding how to conduct proper due diligence over any transactions involving Libyan state assets". It is perhaps surprising that more specific guidance has not been provided at least on the more 'obvious' state entities of potential concern; but it may be that the issue is a politically difficult one. It has been reported that different EU member states have different views on the point.

For firms which are subject to the US sanctions regime, the issue may be a moot point, as the LIA, the Central Bank of Libya and certain other entities are reported to have been designated for US purposes.

Separately in relation to coverage, firms will need to consider whether their screening/rescreening processes will be effective to identify clients which are ultimately owned by sanctioned individuals. For example, does the firm re-screen beneficial owners who have been identified during AML customer due diligence? If it does not, is there a risk that the firm may be continuing to deal with an entity which, somewhere on its files, has been shown to be linked to a sanctioned individual? Note that the sanctions offences are committed if a firm knows, or has "reasonable cause to suspect", that the funds it is dealing with are those of an entity which is ultimately owned/controlled by a designated person.

A third key issue arising from the sanctions relates to the best way in which to effect a freeze of relevant assets, and the potential civil liability implications of doing so. If a financial institution simply holds funds for a sanctioned entity in an account, then the position is, of course, relatively straightforward. However, given the extent and nature of Libyan investment in Europe, many scenarios will be more complex. If, for example, relevant Libyan monies have been invested in fund entities, together with other third party funds, what is the best way to freeze the Libyan element whilst minimising the risk of prejudicing the third party investors? What are the respective responsibilities of the fund managers, custodians, any sub-custodians, and so on? How should structured investment products be addressed?

There are some protections in the EU Regulation, which provides that freezes carried out in good faith and on the basis that the actions taken are in accordance with the Regulation will not give rise to liability of any kind on the part of the person implementing the freeze. There is, however, a carve out from this protection where funds are frozen or withheld negligently.

Conclusion

It is important that all companies and banks who have involvement with investments in Libya familiarise themselves with the UN, EU and UK sanctions. Additionally, it is important to recognise that these sanctions regimes differ from each other and from the US sanctions regime; compliance with one regime does not guarantee compliance with another regime. Finally, as the position is changing very rapidly, firms will need to monitor the position to keep abreast of new legislation, new designations and, potentially, new licences.

Please refer to the link below for the current list of Libyan asset freeze targets in the UK (last updated 3 March 2011): http://www.hm-treasury.gov.uk/d/libya.htm; and to the HM Treasury page on the Libyan sanctions regime: http://www.hm-treasury.gov.uk/fin_sanctions_libya.htm