On 8 October 2008, powers available to the Treasury under the Anti-terrorism, Crime and Security Act 2001 were used to enact the Landsbanki Freezing Order 2008. This effected a freeze on funds in relation to the Icelandic bank Landsbanki, including those owned, held or controlled in relation to that bank by the relevant Icelandic authorities or the Government of Iceland (each a specified person).
This Order makes it an offence for any person in the United Kingdom (including English companies and British citizens, British subjects and British protected persons outside the United Kingdom) to take certain actions in relation to such frozen funds. Clearly this includes British citizens who are working overseas in banks or companies dealing with Landsbanki.
"Funds" is given a very wide definition in the Order and means financial assets and economic benefits of any kind. A non-exhaustive list of what could constitute funds is set out in the definition and includes categories you would expect, such as gold, cash, cheques, payment instruments, deposits, balances on accounts, debts and debt obligations, securities and debt instruments, interest, dividends and other value accruing from or generated by assets. However, the list also includes other less immediately obvious categories of funds such as credit, rights of set-off, guarantees, performance bonds, letters of credit, bills of lading, bills of sale and documents providing evidence of an interest in funds or financial resources.
The freezing prohibitions are wide in scope:
- making frozen funds available to or for the benefit of a specified person (which includes allowing it to withdraw from an account, honouring a cheque payable to it, crediting its account with interest, releasing documents of title (such as share certificates) held on its behalf, making available the proceeds of realisation of its property and making a payment to or for its benefit);
- making frozen funds available at the direction or instruction of a specified person; and
- dealing with frozen funds. "Deal with" is itself very widely defined in the Order.
A breach of a prohibition will constitute a criminal offence, as will engaging in an activity knowing or intending that it will enable or facilitate the commission by another person of one of the prohibited activities. There is a defence available if the person can prove that he or she had no knowledge or reasonable suspicion of the relevant circumstances.
If a body corporate has committed the offence and the offence is proved to have been committed with the consent or connivance of an officer (or to be attributable to any neglect on his or her part) he or she (as well as the body corporate) will also be guilty of the offence and liable to be proceeded against and punished accordingly.
The Order also provides for the Treasury to grant licences disapplying the prohibitions and sets out a procedure for licensing.
On 9 October 2008 HM Treasury issued a notice to clarify the treatment of subsidiaries of Landsbanki. This notice makes it clear that the Order applies to any shares owned by Landsbanki in a subsidiary. It also states that a subsidiary is required to comply with the Order by not making funds available to or for the benefit of Landsbanki or dealing with funds owned, held or controlled by Landsbanki. However, it makes it clear that the Order does not apply to funds owned, held or controlled by subsidiaries of Landsbanki.
Initially the Order caused significant concern among market participants in relation to derivatives, repos and stock lending agreements. However, on 9 October 2008 HM Treasury issued a general licence, paragraph 11 of which enables any person to exercise rights of set-off, termination, closing out, netting, reimbursement or indemnity.
The order of events in relation to the enactment of the Order has also been a cause for concern. The Order came into force at 10.10am on 8 October 2008, yet was not laid before Parliament until noon and was not published until even later that day. However, the defence available under the Order will presumably protect those individuals who unknowingly conducted prohibited transactions in this interim period.
The Landsbanki Freezing Order 2008 – Frequently asked questions
On 8 October 2008, Parliament enacted the Landsbanki Freezing Order 2008 (the Order). The Order freezes funds of Landsbanki Islands hf (Landsbanki) including funds relating to Landsbanki which are owned, held or controlled by the Government of Iceland, the Icelandic Financial Services Authority or the Landsbanki receivership committee.
Questions have arisen over the scope of the Order. The frequently asked questions below clarify where the Order applies and who it applies to. The Order prohibits dealing with the frozen funds and the definitions in the Order of "funds" and "deal with" are very broad. It is assumed for the purposes of the questions that the activity itself would be prohibited by the Order.
1 Does the Order apply to a foreign national working for a UK company operating in the UK?
Yes. The Order provides that an offence can be committed by any person in the United Kingdom, whatever their nationality.
2 Does the Order apply to a British citizen working for a non-UK company operating outside the UK?
Yes. The Order applies to all British citizens, citizens of British overseas territories, British Overseas citizens, British Nationals (Overseas), persons who are British subjects under the British Nationality Act, and British protected persons under the British Nationality Act whether they are in the UK or outside the UK.
3 Does the Order apply to a subsidiary of a UK company operating outside the UK and which does not have legal personality under UK law?
No. The subsidiary is not a "person" in the United Kingdom and is a separate legal entity from its parent. Nor is the subsidiary a "person" elsewhere but incorporated under the law of the United Kingdom. Therefore, the Order does not apply. However, employees who are British citizens would be caught by the Order (see question 2).
4 Does the definition "any person in the United Kingdom" in section 1(3)(a) of the Order mean the Order applies to both the branch of an overseas bank in London and its head office outside the UK?
The branch in London is caught by the Order. There are differing views on whether the Order also applies to the head office outside the UK (which is the same legal entity as the branch). Our view is that, following principles of international law, a court would not hold that the head office or staff of the head office who are not British citizens are subject to the Order. Any prosecution brought against the bank would be as a result of its activities in the UK. The Order would apply to British citizens in the head office (see question 2).
5 A deal involving Landsbanki funds is being run by a bank's head office in Frankfurt. Part of the transaction is carried out by staff in the bank's branch in London. Does the Order apply?
Yes. Staff in the London branch will be committing an offence in dealing with Landsbanki funds. Both the staff in London and the bank itself could be prosecuted under the Order. Individuals working on the transaction in Frankfurt will be committing an offence under English law; if they are British citizens they can be prosecuted.
6 A company incorporated in France, with no activities in the UK, is involved in a transaction with Landsbanki. The transaction is being run by a director who is a British citizen. Does the Order apply?
The Order does not apply to the French company. However, the director is subject to the Order and could be committing a criminal offence.
7 Can I deal with subsidiaries of Landsbanki?
Yes. HM Treasury issued guidance on 9 October 2008 to clarify that the Order does not apply to funds owned, held or controlled by subsidiaries of Landsbanki. Companies dealing with Landsbanki's subsidiaries are not caught by the Order.
8 I have been directed by a client to transfer money to the London Branch of Landsbanki. Can I do so?
Yes. HM Treasury issued a General Activities Licence which came into effect at 2.30pm on 9 October 2008. The Licence set out a number of exemptions to the prohibition on dealing in the Order. The exemptions apply to transactions involving Landsbanki's London Branch at 15 St Botolph Street, London and provide that:
(a) any person can pay funds into accounts at the London Branch;
(b) customers holding accounts at the London Branch can make withdrawals from their business accounts;
(c) the London Branch can, on behalf of its customers, transfer currency and carry out foreign exchange transactions; and
(d) banks holding accounts in the name of Landsbanki can operate those accounts in accordance with instructions from the London Branch.
9 Can I exercise rights of set-off?
Yes. The General Activities Licence which came into effect on 9 October 2008 provides that any person can exercise rights of set-off, termination, closing out, netting, reimbursement or indemnity.
ISDA has announced that it will launch a protocol to facilitate settlement of credit derivative trades involving Landsbanki.
10 A bank is involved in a transaction which, if it proceeds, will involve dealing with frozen funds. If the transaction does not go ahead, the bank will breach its obligations to a third party who will suffer loss. Is there anything the bank can do?
Yes. The Order provides that the Treasury can issue licences authorising dealing with frozen funds. To apply for a licence the bank has to make a written application to the Treasury providing all documentation which may be required by the Treasury to decide whether to grant a licence.