There are signs that the UK’s sanction regime is poised to become more aggressive following the disentanglement from the EU. The close of the Brexit transitional period on 31 December 2020 marks the end of the UK’s obligation to enforce EU sanctions. From 1 January 2021, the UK’s sanctions regime will be independent, with sanctions imposed pursuant to a new framework introduced under the Sanctions and Anti-Money Laundering Act 2018 (SAMLA). It is important that UK companies, including those in the energy sector, anticipate the UK’s changed regulatory landscape and are aware of the potential for new sanctions in due course.
The UK has already shown preparedness to flex its muscle in the sanctions sphere, including in relation to Saudi Arabia, a close economic partner accounting for nearly 17% of the world’s proven petroleum reserves. The Global Human Rights Sanctions Regulations 2020 entered into force this summer and were swiftly followed by the government’s designation of Russian, Saudi Arabian and Belarussian targets. This was the first time UK sanctions policy diverged from that of the EU and heralds the UK’s willingness to advance its own security and foreign policy agenda. The Foreign and Commonwealth Office (FCO) has also actively sought to make it easier for NGOs to recommend sanctions targets (individuals and organisations), publishing guidance in July on how to make a submission.
A breach of sanctions includes conduct such as:
a) Handling the funds of a person known or suspected to be subject to sanctions or paying funds to such a person in the absence of a licence issued by Office of Financial Sanctions Implementation (OFSI) ie., a commercial arrangement with either a sanctions-designated company or one owned or controlled or by a person subject to sanctions
b) Engaging in any activity falling within the ambit of a sanction in the absence of a licence issued ie., certain trade or providing energy-related technical assistance to specific countries
c) Doing anything to circumvent a sanction ie., making a payment to a third party, knowing that such a payment will ultimately go to a sanctions-designated person
Often overlooked is that a sanctions breach may trigger a concern about money laundering. Exposure to a criminal offence of money laundering under Proceeds of Crime Act 2002 will arise where property generated by criminal conduct (ie., money obtained following a breach of sanctions) is handled.
Accompanying the UK’s recast sanctions regime are signs that sanctions enforcement will be taken more seriously than ever before. Laying the foundation, the criminal penalty for sanctions breach was recently increased from seven to ten years. In March this year OFSI also imposed its first multi-million pound penalty for sanctions breach. The action sends a clear message that companies in the UK should take care to ensure they stay on the right side of sanctions laws.
Takeaways for the energy sector
The US has forged the way with aggressive sanctions action but the UK has signalled that it is also prepared to now play a role.
Looking ahead to the impact of the recast framework on the energy sector, it should come as no surprise that key EU-led sanctions will continue in the UK once the Brexit transitional period ends. The UK has passed Regulations ensuring that sanctions applying to Russia and Syria will be seamlessly maintained. In relation to Russia, the direct or indirect sale or supply of certain technology for use in deep water or Arctic oil exploration and production projects in Russia or elsewhere, if the ultimate purpose is for use in Russia will continue to be banned alongside providing energy-related technical assistance. In regards to Syria, the prohibition on crude oil will remain coupled with the ban on supplying goods or technical assistance to aid electricity production.
Events this year, however, do suggest that the UK is prepared to diverge from that of the EU when it comes to sanctions policy and take an assertive approach. Although so far this has been with individual designations, there is potential for the same assertiveness to apply to restrictions affecting trade and the supply of technology, technical assistance, goods and services to certain countries. The need for energy companies to monitor the imposition of new sanctions will be obvious. Careful analysis of new sanctions, extending to considered interpretation of legal terms, may also be required in time by companies exploring new opportunities.
Further, the recent wave of designations, including of persons very close to the government of UK allies, underscores the importance of knowing one’s agents as well as joint venture and other business partners. The unprecedented enforcement action taken by OFSI occurred in the context of dealings with an entity that was not designated under sanctions, but rather was majority owned by an organisation subject to Russian sectoral sanctions. Thorough sanctions due diligence does not stop at checking if a counterparty or business partner is designated. Understanding a prospective partner’s ownership or control structure, extending to the individuals who stand behind an organisation, and whether they or their activity falls within the scope of country-specific sanctions is key to effective sanctions risk management. Finally, although there is no legislative requirement for UK companies to have a sanctions policy per se, a clear, articulated sanctions compliance process is recommended. If enforcement action is afoot, UK business should similarly be assertive about keeping it at bay.
Anita Clifford, Barrister at Bright Line Law, with a specialist sanctions and money laundering practice.