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. On 17 October 2008 HM Treasury issued a notice (the 17 October Notice) which makes it clear that British citizens who are working overseas in banks or companies dealing with Landsbanki will not be bound to the extent that the "person" performing the activity in question is a non-UK company abroad.
"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 (the 9 October Notice). 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 also 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 enabled any person to exercise rights of set-off, termination, closing out, netting, reimbursement or indemnity.
On 13 October 2008 HM Treasury issued a further licence under the Landsbanki Freezing Order 2008 exempting certain activities from the prohibitions set out in the Order so as to avoid detriment to third parties (the Further Licence).
The Further Licence came into effect at 12.40 on 13 October 2008 and supersedes the licence granted on 9 October 2008. The Further Licence allows:
- any person (including Landsbanki) to pay funds to accounts at Landsbanki's London Branch or accounts in the name of Landsbanki held in the UK;
- any person (including Landsbanki) to exercise rights of set-off, termination, closing out, netting, reimbursement and indemnity;
- the London Branch of Landsbanki to carry out various activities (and also provides that the prohibitions do not apply in respect of third parties dealing with the London Branch in relation to these activities):
- Commercial Finance;
- Asset Based Lending;
- Capital Markets & Fixed Income banking activities;
- receiving payments into and making payments from customers' business accounts held at the London Branch or (in relation to business customers) accounts held at other financial institutions;
- dealing with and making available to any third party funds held by the London Branch which are beneficially owned by a third party;
- on behalf of its customers, transferring currency and carrying out foreign exchange transactions;
- dealing with and making available funds to meet operating expenses (including, for example, salaries, expenses relating to suppliers, taxes, legal and professional costs); and
- giving instructions to clearing, payment and settlement systems and carrying out transactions through such systems;
- financial institutions (which is defined as including banks, investment firms, operators of payment and settlement systems, clearing houses, investment exchanges, market makers and custodians of securities) to:
- operate accounts in the name of Landsbanki in accordance with instructions given by the London Branch;
- receive funds into accounts in the UK and transfer funds between accounts within the UK (whether or not those accounts are in the name of Landsbanki);
- deal with frozen funds (and otherwise carry out instructions) at the direction or instruction of the London Branch or third parties (subject to the overriding condition of the Further Licence set out below); and
- make and receive payments relating to direct debit guarantees.
It is an express condition of the Further Licence that the London Branch must not, without express authorisation from HM Treasury, give instructions which would result in funds being transferred to any other part of Landsbanki's group.
Landsbanki's group includes Landsbanki, any successor entity to Landsbanki and the Authorities and Government of Iceland in their capacity as owner or controller of the activities of Landsbanki or any successor entity to Landsbanki.
On 9 October 2008 the Financial Supervisory Authority of Iceland issued a decision relating to the disposal of certain assets and liabilities of Landsbanki to New Landsbanki Islands hf.
The Further Licence provides that, other than as provided in the Further Licence, frozen funds are not to be made available to, for the benefit of or at the direction or instruction of any part of Landsbanki's group.
The 17 October Notice provides detailed guidance on the impact and effect of the Order.
The Landsbanki Freezing Order 2008 – Frequently asked questions
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?
The Order will apply to the British citizen in so far as he or she is dealing with Landsbanki funds in a personal capacity. 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.
However if the British citizen is dealing with Landsbanki funds in connection with his or her work for the non-UK company, the Order will not apply. Paragraph 12 of the 17 October Notice makes it clear that UK nationals working for non-UK companies abroad are not bound to the extent that the "person" performing the activity is the non-UK company abroad.
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.
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. Paragraph 11 of the 17 October Notice makes it clear that non-UK companies are only bound by the Order for activities within the UK. Therefore the Order will not apply to the head office.
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.
6 Can I deal with subsidiaries of Landsbanki?
Yes. The 9 October Notice clarifies 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.
7 I have been directed by a client to transfer money to the London Branch of Landsbanki. Can I do so?
Yes. The Further Licence sets out a number of exemptions to the prohibition on dealing in the Order which apply to transactions involving Landsbanki's London Branch at 15 St Botolph Street, London. The exemptions 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. However, this is subject to the overriding condition that the London Branch must not, without express authorisation from HM Treasury, give instructions which would result in funds being transferred to any other part of Landsbanki's group.
8 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.
9 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.