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12 April 2019 / by / in

The day after tomorrow – Brexit and Sanctions

Introduction

While preparing for Brexit, the UK Parliament had to legislate on many things including sanctions. This article examines the current sanctions regime in the UK and explores the two alternatives on how things may develop dependant on a deal or no-deal Brexit.

Sources of sanctions

For the UK, any sanctions which are imposed emanate from either the United Nations Security Council (‘UNSC’) or the European Union (‘EU’) as part of its Common Foreign and Security Policy (‘CFSP’). If no-deal Brexit takes place, the UK will cease to be part of the CFSP and thus will be free to impose any sanctions it chooses, creating potential for a divergence of sanctions between the UK and the EU. This may apply especially in the case of Russia. For instance, the EU has considered whether to soften its approach to Russia and this view has been expressed most recently by President Macron of France. In the world of post-Brexit Britain, in light of the case of the Skripals, it would be almost impossible to see the UK adopting the same approach. Accordingly, it could matter whether trading with Russia occurs in the UK or the EU, and what is the nature of that trading.

At present, any sanctions imposed by the UNSC or the EU automatically become part of UK Law under sections 143 to 145 of the Policing and Crime Act 2017.

Types of sanctions

The typical types of sanctions which are imposed include embargoes, financial sanctions, travel bans and prohibitions on imports.

Of these, perhaps the most pertinent to London financiers are economic sanctions. These come in the following forms:

  • wide measures prohibiting the transfer of funds to a sanctioned country;
  • freezing the assets of the government of a targeted country, an individual or a corporate entity based either in the UK, or that country;
  • a prohibition on providing or performing certain financial services, such as insurance, to designated individuals or governments.

Breach

It is a criminal offence to breach a trade sanction and if convicted the defendant involved could receive a prison sentence and/or a fine. There are also potential civil penalties which are the higher of either £1 million or 50% of the value of the breach. It can also be a criminal offence to assist another to breach a trade sanction, for instance where a company turns a blind eye to what may be regarded as an obvious breach.

Under the European Union Financial Sanctions (Amendment of Information Provisions) Regulations, 2017 (SI:754/2017) there are now self-reporting provisions akin to the money laundering rules. These regulations extend to certain businesses and professions, and the offences associated with a failure to comply with the duty to inform Her Majesty’s Treasury, if they know, or have reasonable cause to suspect, that a person has committed an offence under the relevant regulations, or is a person subject to an asset freeze for the purposes of the relevant EU financial sanctions regime. A similar position is expected to emerge under the Sanctions and Anti-Money Laundering Act 2018, which received Royal assent on 23 May 2018. This Act is therefore a significant piece of legislation and reflects a key aspect of the “Brexit legislation”, which is required to fill in the gap which had previously been filled by EU laws.

No deal Brexit

What happens to sanctions if the UK leaves the EU without a deal?

Operative provisions of the Sanctions and Anti-Money Laundering Act 2018 (the ‘Act’), which received Royal Assent on 23 May 2018, will become effective once Brexit takes place and the UK will retain control over sanctions. Until then the UK legislation will mirror EU legislation.

Under the Act, the decision making on whether or not to impose, amend or lift sanctions is delegated to “an appropriate Minister” (section 34 of the Act). Therefore, the government will have ultimate control over the sanctions.

Sanction regulations may be made where the Minister considers it appropriate to do so for either:

  • the purposes of compliance with a UN obligation (section 1.1(a) of the Act);
  • the purposes of compliance with any other international obligation (section 1.1(b); or
  • for a purpose stated within section 1(2) of the Act. These are, for example, if the appropriate Minister considers that carrying out that purpose would be in the interests of national security or the interests of international peace and security. The full exhaustive list of what are collectively referred to as “discretionary purposes” is set out within that section of the Act.

The Minister may decide that it is not appropriate to make regulations for any of the discretionary purposes unless he or she has considered whether:

  • there are good reasons to pursue that purpose and has determined that there are; and
  • the imposition of sanctions is a reasonable course of action for that purpose and has determined that it is. (section 2.2 of the Act).

The UK government has also published guidance on sanctions implementation in the event that the UK leaves the EU without a deal on 29 March 2019. This guidance was first published on 12 October 2018 and has been regularly updated, most recently on 1 February 2019.

The guidance clearly states that the UK government intends to carry over all EU sanctions at the time of the UK’s departure from the EU. The guidance also states that any sanctions not specifically addressed in the Act would continue as retained EU law under the EU (Withdrawal) Act 2018. The UK government believes that this would ensure that there are no gaps in implementing existing sanctions regimes.

Prior to the Act, the UK’s domestic sanctions regimes were confined to terrorism legislation. The Act is therefore a significant piece of legislation that will allow the UK to impose sanctions independently of the EU.

It will be interesting to see how the above quoted provisions will be exercised. The UK may have tough choices to make when it comes to sanctions. For example, in 2018 we saw the US withdraw from the deal on Iran and re-impose sanctions. The EU chose to honour the deal. Will the UK side with the US or the EU?

So far the UK publishes specific regulations for Burma, Iran (Human Rights) and Venezuela. However, the full list of countries is here:
https://www.gov.uk/topic/business-enterprise/importing-exporting

Agreed Brexit

Transition period

In the event that the UK votes in favour of the Withdrawal Agreement, the UK will enter the transition period. This may be extended by both parties for up to two years.

During this period, EU Law will continue to apply to the UK as if it were a Member State. In relation to trade, the UK will be bound by the EU’s trade policy. The UK will be bound by the obligations stemming from all EU international agreements. Third countries will have the same level of access to the UK market. During this period, the UK cannot negotiate its own trade deals unless authorised to do so by the EU. In relation to trade sanctions, the UK will be obliged to continue to apply any sanctions imposed by the EU as part of the CFSP.

This is significant because the UK during this period will no longer be part of EU decision-making. It will no longer be represented in the EU institutions, agencies and bodies, and persons appointed, nominated, or representing the UK, and persons elected in the UK will no longer take part in the EU institutions, agencies and bodies. Subject to exceptions, the UK will no longer participate in meetings of Member State groups.

Accordingly, the UK may find itself with little or no input into the EU’s trade sanctions regime during this transition period. If then, for example, there comes to be a softening in the EU’s approach to Russia, the UK is bound by that new approach. Given both the Litvinenko and Salisbury poisonings this could be difficult for the UK government to swallow.

The only option is that under article 129(6) of the Withdrawal Agreement the UK may not apply any decision taken by the EU Foreign Policy Representative “…for vital and stated reasons of national policy…”. It would appear then the UK could during this transition period refuse to implement any lesser system of sanctions. However, this provision is ambiguous. During the transition the UK is still bound by the rules of the Single Market, so it could not refuse to admit goods from Russia via say France or Belgium. Furthermore, if the UK did refuse to implement EU Common Foreign Policy what could it do in the alternative?

Backstop

The point of the Withdrawal Agreement is for the UK and EU to agree on a new permanent deal between them. Until this time, the transition deal of the Agreement applies. However, once that expires, the UK then enters this so-call “backstop” arrangement. In this situation, the UK will enter into a single customs union with the EU in which Northern Ireland will effectively remain in the EU’s internal market. The UK must though continue to abide by the EU’s trading tariffs policy. Furthermore, it cannot formulate a trading system which gives it a competitive advantage over the EU member states. Nothing is said in the Withdrawal Agreement about trade sanctions. However, it would appear the UK may remain bound by the EU’s system of sanctions still. For example, if the EU imposed a trade embargo on certain goods from Yemen while it was a member of the same customs union, the UK could hardly do the opposite.

Conclusion

The situation for the UK is perhaps unacceptably ambiguous in the event that the Withdrawal Agreement comes into force. The UK would be bound by the EU’s system of trade sanctions during the transitional period, and it would appear that this would continue in the backstop. This is unless an agreement specifically dealing with the point comes into force.

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George Kampanella

Admitted as a solicitor in 1997, George specialises in fraud matters and regularly conducts complex and high profile cases. He has particular expertise in advising clients who find themselves under active investigation by the Serious Fraud Office, Metropolitan Police, HM Revenue and Customs, National Crime Agency and the Police Central e-Crimes Unit. George also acts for individuals facing investigation under Medicines & Healthcare Products Regulatory Agency and health professional regulatory bodies.