In April last year, the U.K. parliament suddenly realised that—even with the Great Repeal Bill—if new sanctions were imposed on a country by the U.N., it had no legislation to deal with introducing or complying with such sanctions. A White Paper was hurriedly put together, and in August, the Sanctions and Anti-Money Laundering Bill was introduced to the House of Commons. On 18 October, the same bill was introduced to the House of Lords. Which is where it still is, having reached the second committee stage by mid-December. The report stage, a further chance to examine the bill and make changes, is scheduled to begin on 15 January this year.
But why doesn’t Britain already have sanctions regulations? The U.K. currently uses European law to implement sanctions, regardless of whether they originated at the U.N. or the EU. The EU currently imposes some 30 sanction regimes, of which about half come from the U.N., for example, restrictions against people, institutions and trade in Russia, North Korea, Syria, Iraq, Iran and other countries. The new law will allow the U.K., for the first time, to impose sanctions on another country by itself. Currently, the U.K. has limited powers to impose some financial sanctions unilaterally, such as through the Terrorist Asset Freezing etc. Act 2010 or the Anti-terrorism, Crime and Security Act 2001. This new legislation is needed because, after Brexit, the Great Repeal Bill would only be able to maintain current sanctions.
The Sanctions and AML bill aims to:
create powers for the government to make regulations to impose sanctions
allow financial, immigration, trade, aircraft and shipping sanctions to be imposed
allow for regulations to create exceptions and licences to allow activities to take place that would otherwise be prohibited or restricted by sanctions
have ministerial and judicial review processes to allow individuals and organisations to challenge sanctions imposed on them
allow regulations to be made to update existing provisions on anti-money laundering and terrorist financing, particularly the Money Laundering Regulations 2017, to be updated after the UK’s exit from the EU
During the same period last year, the U.K. Office of Financial Sanctions Implementation (OFSI) was given new civil powers to implement fines and prosecutions. It reportedly opened 125 investigations between March 2016 and July 2017. The OFSI also revealed that there are 60 ‘live’ investigations into organisations suspected of breaching the U.K. sanctions regime. The OFSI has come to be known as a new ‘U.K.-OFAC’ (referring to the U.S. Treasury’s sanctions enforcement agency, the Office of Foreign Assets Control).
What is the nature of the sanctions regime in the U.K.?
The most frequently applied measures are:
bans on exporting equipment that might be used for internal repression
asset freezes and financial sanctions on designated individuals and corporate entities
travel bans on named individuals
bans on imports of raw materials or goods from the sanctions target
In general terms, it is a criminal offence to:
deal with funds or economic resources belonging to, owned, held or controlled by a Designated Person, if it is known, or if you have reasonable cause to suspect, that you are dealing with such funds or economic resources
make funds available to, or for the benefit of, a Designated Person if it is known, or if you have reasonable cause to suspect, that you are making funds so available
make economic funds available to, or for the benefit of, a Designated Person if it is known, or if you have reasonable cause to suspect, that you are making economic resources so available and, in the case of making economic resources available to a Designated Person, that the Designated Person would be likely to exchange the economic resources, or use them in exchange, for funds, goods or services
Source: Eversheds Sanctions Guide
Companies must now make the same kind of compliance efforts to manage the risk of OFSI enforcement, on top of existing EU and OFAC enforcement, especially since many continue to have a financial presence in London. If a problem does arise, OFSI guidance indicates that early internal investigation and, where appropriate, voluntary disclosures to the relevant U.K. authorities may help reduce financial penalties and/or criminal enforcement.
In the midst of all this activity comes a new report from Lexis Nexis—Better Safe Than Sorry—about building an effective sanctions compliance programme. The report’s gist is that, pushed by recent actions by OFAC, enforcement agencies, which are growing in number, are moving beyond their traditional targets, financial institutions. For example, more than half of the 17 OFAC penalties levied in 2015, for example, involved non-banking organisations. The report notes that, according to the National Law Review, seven of the nine companies, did not have a compliance programme at the time of the sanctions violations.
Take the case of National Oilwell Varco cited in the report. From 2002 to 2005, senior-level finance executives at Varco approved at least four commission payments from its Dreco subsidiary to a U.K.-based entity related to the sale and export of goods from Dreco to Iran. From 2006 to 2008, two deals worth about $13 million involved actual sales to Iran. From 2007 to 2009, Dreco engaged in 45 transactions valued at about $1.7 million involving the sale of goods to Cuba. Finally, there was a single transaction with Sudan worth around $20,000 in either 2005 or 2006; OFAC was not able to establish the precise date.
The lack of a compliance programme was not an issue with Varco, however, which introduced its U.S. Export Controls & Economic Sanctions policy in 1997. The most recent revision date for this policy was 2009 which, given its prosecution in 2015, might seem a little lax. Barclays, another company prosecuted by OFAC in 2015, and in more potential trouble if it turns out that it is associated with the Zupta scandal in South Africa, does not put a date on its sanctions policy, but it feels more recent. And HSBC—already implicated in the Zupta affair—is working on a brand-new sanctions and AML policy for introduction this year.
Barclays Sanctions Policy
The Barclays Group Sanctions Policy is designed to ensure that the Group complies with applicable sanctions laws in every jurisdiction in which it operates.
All Barclays Group Companies are required to screen against United Nations, European Union, UK Treasury and US Office of Foreign Assets Control (OFAC) sanctions lists at a minimum in all jurisdictions in which we operate, unless to do so would conflict with local legislation.
All employees receive training on the Sanctions Policy at least once a year, with more detailed and advanced training for those whose roles involve heightened sanctions risks. Failure to comply with the policy may give rise to disciplinary action, up to and including dismissal.
Source: Barclays AML Policy Statement
But sanctions are a fast-moving issue, says the report, citing new sanctions on Russian and North Korea in the last month, and fines can run into the billions of dollars, so without a robust, fast-moving compliance programme to address these issues, the costs for companies, not just financial but reputational, can be substantial. However, Lexis Nexis found that more than half of companies it surveyed did not have a sanctions compliance programme in place.
The report puts together several useful checklists, including:
know your customer & other third parties
know your product or service
know the receiving country
know the end-use
know the end-user
know the transaction
But who are the regulators in the United Kingdom? They are, unfortunately, manifold, and it does not appear that the new Bill will shrink the number of agencies involved in overseeing the sanctions regime. The Foreign and Commonwealth Office, according to the law firm Eversheds, “has overall responsibility for the U.K.’s policy on sanctions and embargoes, including the scope and content of international sanctions regimes.” HM Treasury is responsible for implementing and administering financial sanctions in the UK, work that is now carried out by OFSI. The Financial Conduct Authority is responsible for ensuring that regulated firms have adequate systems and controls to comply with requirements. The Export Control Organisation within the BIS (the Department for Business, Innovation and Skills) “is responsible for trade sanctions, such as bans on weapon exports and for export licences.” While the International Trade and Export Control Directorate of BIS and HM Revenue and Customs “advise and deal with trade policy, regimes and procedural issues governing imports to the U.K.”
With all of that enforcement in mind, there is a possibility of being issued exemptions under the regime. HM Treasury is responsible for granting exemptions to financial sanctions. The Export Control Organisation is in charge of issuing exemptions for exporting and trading in certain controlled goods. And finally, the Import Licensing Branch (also part of the BIS) is responsible for licensing exemptions for importing controlled products.
But, without a compliance programme in place, a firm would not even know it needed to apply for an exemption.