U.K. Trade and Sanctions

Crowell & Moring Partner Michelle Linderman is co-presenting a webinar, in association with SanctionsAlert.com on September 13, 2018 on “The Potential Effects of Brexit on U.K. Sanctions Law and How Compliance Officers Can Prepare for the Switch.” Michelle’s co-presenter is Susan Lake, the regional compliance head of Swiss Re’s Reinsurance Business Unit.

You can register at the link below.

Register Online ($195)

Date: September 13, 2018

Time: 10:00 – 11:15 AM EDT (3:00 – 4:15 PM in Amsterdam)

The U.K. currently derives its power to implement sanctions from European law, regardless of whether they originated at the U.N., E.U., or OSCE. Since June 2016’s ‘Brexit’ decision, when the U.K. voted to leave the E.U., it has been unclear how the U.K. will implement sanctions policy after the divorce.

The new Sanctions and Anti-Money Laundering Bill, which received Royal Assent earlier this year, provides the U.K. powers to impose, update, and lift sanctions and AML regimes after the U.K. leaves the E.U. in March 2019. But will the U.K. sanctions landscape stay the same, or is it likely to change drastically?

In this SanctionsAlert.com webinar, you will learn:

  • What powers will be derived from the new U.K. Sanctions and Anti-Money Laundering Bill and how this will change (or not change) the sanctions landscape; and
  • What the potential effect of Brexit on U.K. Sanctions Law will be as well as how Compliance Officers can prepare for the switch.

 

 

 

On August 7, 2018, EU’s newly updated Blocking Statute entered into force. The Blocking Statute generally forbids EU citizens and established entities, residents, and persons physically in the EU from complying with a variety of U.S. measures imposing secondary sanctions on Iran, including the Iran Sanctions Act of 1996, the Iran Freedom and Counter-Proliferation Act of 2012, the National Defense Authorization Act for Fiscal Year 2012, and the Iran Threat Reduction and Syria Human Rights Act of 2012. The Blocking Statute also makes foreign court judgments based on these sanctions ineffective in the EU, and allows EU operators to recover damages arising from U.S. extraterritorial sanctions from the persons or entities causing those damages.

On April 19, Crowell & Moring’s International Trade Attorneys hosted a webinar on “Trade in 2018 – What’s Ahead?”

Please click here to register and view the webinar on demand.

Summary

From the Section 232 national security tariffs on steel and aluminum imports to the ongoing NAFTA re-negotiation, the Trump administration is seeking to implement significant changes in international trade policy and enforcement. Economic sanctions on Russia continue to expand, the future is far from clear regarding Iran, and perhaps North Korea is coming into focus. A new Asia trade agreement without the United States, and a bumpy road ahead for Brexit all make for uncertainty and the need for enhanced trade risk management. Join us as we identify the international trade risks and opportunities likely to continue and grow in 2018.

Our Crowell & Moring team discussed predictions for the remainder of the year, with cross-border insights from our practitioners in the U.S., London, and Brussels. Topics included likely trends and issues in the U.S. and EU including:

  • Trade policy developments: Section 232, NAFTA renegotiation, and trade remedies
  • Sanctions in Year Two of the Trump Administration: Russia, Iran, North Korea, and beyond
  • Anti-money laundering (AML) and beneficial ownership
  • Supply chain risk management: blockchain, forced labor, the U.K. Modern Slavery Act, and GDPR
  • Europe: Brexit, the EU’s 4th AML Directive, and the EU/U.K. AML enforcement
  • CFIUS: how significant is the new legislation?
  • Export controls: Wither reform?
  • Import and customs

On February 5, the U.K.’s Chancellor of the Exchequer was asked the following:

“How many suspected breaches of financial sanctions were reported to the Treasury’s Office of Financial Sanctions Implementation (OFSI) in 2017; what the value was of those breaches; and how many investigations into breaches, by sanctions regime, have (a) been opened and (b) are ongoing since new powers to impose penalties under the Policing and Crime Act entered into force.”

Initially, the government reported 118 suspected breach cases worth £117 million had been reported to OFSI.

Now less than two weeks later they have revised the answer to 133 breach cases worth £1.4 billion.

Regarding the last question, the government said “as of April 2017, a total of 103 suspected breaches have been reported to OFSI since OFSI gained the ability to impose monetary penalties under the Policing and Crime Act 2017…”

As reported in Crowell & Moring’s previous post, the U.K. government announced a Sanctions and Anti-Money Laundering (AML) Bill to provide the U.K. with the necessary framework and powers to implement economic sanctions and AML regulations once it formally exits the European Union.

The Sanctions and AML Bill was introduced in the House of Lords in October 2017. Several matters were discussed and amended during the Report stage in the House of Lords:

Sanctions:
The government restricted the regulation-making powers of the executive branch to cases in which there is good and reasonable cause for action and where the Parliament has issued a report.
Designations require procedural fairness and proportionality. In addition, the power to designate by description is now limited to cases in which it is not practicable for the Minister to identify by name all the persons falling within the description, and the description is sufficiently precise that a reasonable person would know whether any person falls within it.
The licensing regime was also discussed and the U.K. government stated that an initial framework for exceptions and licenses will be published and the interested parties will continue to be consulted before the Sanctions and AML Bill enters into force.

 

AML:
The government did not establish a broad power to create new criminal offenses in the AML context.
The new Bill will not implement a beneficial owner registry in overseas territories or a register of beneficial ownership of U.K. property registered outside the U.K. However, Clause 44 of the report requires the Secretary of State to publish and lay before Parliament three reports on the progress that has been made to put in place a register of beneficial owners of overseas entities.

The review of the Sanctions and AML Bill in the House of Lords was completed on January 24. The Bill was then introduced in the House of Commons for first reading on January 25. The version of the Bill introduced in the House of Commons can be found here, along with Explanatory Notes.

No amendments were made during this first reading, and the Bill’s second reading is scheduled for February 20. Three more steps are still necessary within the House of Commons (Committee Stage, Report Stage, and Third Reading) before the Bill is ready to receive royal assent and be enacted into law. There is no set time period for the discussion of amendments and royal assent.

 

Companies are paying increased attention to the Transparency in Supply Chains provision contained in the U.K. MSA, which is aimed at requiring companies to root out modern slavery.  Those obligated to comply must prepare and publish a slavery and human trafficking statement for each financial year. 2017 is the first year when all organisations to which it applies must publish a statement.

The Transparency in Supply Chains provision in the U.K. MSA applies to any commercial organisation in any sector, which supplies goods or services, and carries on a business or part of a business in the U.K., with a total annual turnover of £36 million or more. As such, any company or partnership that does business in the U.K., even if established outside the U.K., must publish a compliant modern slavery and human trafficking statement this year.

The requirement to publish a statement commenced on 29 October 2015, however, pursuant to the MSA’s transitional provisions, businesses with a year-end between 29 October 2015 and 30 March 2016 were not required to publish a statement for that financial year. Businesses with a year-end of 31 March 2016 were the first businesses required to publish a statement for their 2015-16 financial year.

This year is the first year when all companies or partnerships to which the MSA applies must publish a statement, and while there is no specified deadline for publishing a statement within the MSA, the Government guidance states that it expects organisations to publish their statements “as soon as reasonably practicable after the end of each financial year in which they are producing the statement.”

What are the Legal Requirements?

The MSA requires that:

  1. Statements must be published on the organisation’s U.K. website with a link in a prominent place on the U.K. homepage.
  2. Statements should be approved by the board of directors (or equivalent management body) and signed by a director (or equivalent).

The statement must also include “the steps the organisation has taken during the financial year to ensure that slavery and human trafficking is not taking place in any of its supply chains, and in any part of its own business.” If the organisation has taken no steps, the statement should say so.

The MSA also states that the statement may include information about:

  1. The organisation’s structure, its business, and its supply chains.
  2. Its policies in relation to slavery and human trafficking.
  3. Its due diligence processes in relation to slavery and human trafficking in its business and supply chains.
  4. The parts of its business and supply chains where there is a risk of slavery and human trafficking taking place, and the steps it has taken to assess and manage that risk.
  5. Its effectiveness in ensuring that slavery and human trafficking is not taking place in its business or supply chains, measured against such performance indicators as it considers appropriate.
  6. The training about slavery and human trafficking available to its staff.

The U.K. Government has produced guidance to accompany the legislation, which provides further details on how it expects organisations to develop a credible and accurate slavery and human trafficking statement.

What are the Penalties for Non-Compliance?

If an organisation fails to publish a statement for the financial year, the U.K. Secretary of State may seek an injunction requiring compliance. Failure to comply with that injunction could result in an unlimited fine; however, the real purpose behind the Transparency in Supply Chains provision is to increase transparency by ensuring the public, consumers, employees, and investors know what steps an organisation is taking to tackle modern slavery. As such, the true impact of failing to comply is more likely to be reputational with the consequential adverse implications for consumer and investor goodwill.

Final Thoughts

Analysis of many of the Statements published pursuant to the MSA has revealed that a large number of companies are non-compliant. Some statements are not signed; some are not published in a prominent position on the organisation’s website, and others fail to state what steps have been taken to identify and eradicate modern slavery in its own organisation or supply chains. Most only provide information on the optional requirements that the MSA suggests might also be included.

It appears that some organisations have simply rushed to produce some sort of statement and have not carried out any particular due diligence on their supply chains or even on their own businesses. As the former Home Secretary, and now Prime Minister, Theresa May stated in the foreword to the Government guidance on the MSA “it is simply not acceptable for any organisation to say, in the twenty-first century, that they did not know.  It is not acceptable for organisations to ignore the issue because it is difficult or complex. And it is certainly not acceptable for organisations to put profit above the welfare and well-being of its employees and those working on its behalf.”

Recently, a bill sought to amend the MSA by proposing that companies that were not sufficiently transparent about their efforts to protect human rights and, in particular, failed to publish a compliant Statement, be barred from receiving Government business. This has stalled on its way through parliament. However, there remains a degree of government support for some form of amendment in this regard.

Given the potential reputational risks, our advice is that companies not only publish the legally required statements, but also ensure that they have taken concrete steps to assess and address the modern slavery risks within their own businesses and supply chains.

Crowell & Moring lawyers have experience in assisting companies with MSA compliance, and more broadly in auditing and reviewing supply chains for compliance with a range of legal obligations.

For more information contact: Michelle Linderman, Jeff Snyder, Jana del-Cerro, Gordon McAllister

On 21 June 2017, the U.K. Government announced through the Queen’s Speech an International Sanctions Bill intended, as part of other Brexit legislation, “to ensure that the United Kingdom makes a success of Brexit.” The bill will provide the U.K. with the legal framework and powers needed to enable it to impose and implement sanctions in order to comply with its obligations under the United Nations Charter and to support wider foreign policy and national security goals after the U.K.’s exit from the EU.

Main Benefits of the Bill

The government’s background briefing paper accompanying the Queen’s Speech identifies that the main benefits of the bill would be:

  • To ensure that, as a permanent member of the UN Security Council, the U.K. continues to play a central role in negotiating global sanctions to counter threats of terrorism, conflict and the proliferation of nuclear weapons, as well as bringing about changes in behavior.
  • To return decision-making powers on non-UN sanctions to the U.K.
  • To enable the U.K.’s continued compliance with international laws after the U.K.’s exit from the EU.

Key Elements of the Bill

The key elements of the bill are:

  • To provide a domestic legislative framework to allow the government to:
    • Impose sanctions to ensure compliance with obligations under international law after the U.K.’s exit from the EU. These include asset freezes, travel bans, and trade and market restrictions.
    • Ensure individuals and organisations can challenge or request a review of the sanctions imposed on them.
    • Exempt or license certain types of activity, such as payments for food and medicine, which otherwise would be restricted by sanctions.
    • Amend regulations for anti-money laundering and counter-terrorist financing and to pass new ones after the U.K.’s exit from the EU.

Jurisdiction

In terms of jurisdiction the Briefing Paper states that the bill would apply to the whole of the U.K. and would also contain provisions to extend its reach to the U.K.’s Overseas Territories and Crown Dependencies as appropriate.

Background to the Bill – Government Consultation on Sanctions Post-Brexit

On 21 April 2017, the Foreign and Commonwealth office, HM Treasury and Department for International Trade, launched a ‘Public Consultation on the United Kingdom’s future legal framework for imposing and implementing sanctions’ to seek views on the legal powers the Government will need upon the U.K.’s withdrawal from the.

The U.K. needs to be able to impose and implement sanctions in order to comply with international obligations and to support foreign policy and national security goals. However, like other members of the EU, many of the U.K.’s powers to implement sanctions flow from the European Communities Act 1972, requiring new legal powers post-Brexit to replace these.

The consultation puts forward proposed powers to designate individuals and impose financial and trade restrictions including primary legislation (which requires an Act of Parliament) to create a framework containing powers to impose sanctions regimes, the details of which will be laid out in the secondary legislation made using those powers.

The legislation will also include provisions relating to the processes which will apply when sanctions are created, such as provisions for reviews, challenges, and enforcement. The secondary legislation will put in place measures for specific sanctions regimes and because it can be made without an Act of Parliament it enables a rapid and flexible response to evolving international issues allowing for targets to be listed, thus preventing asset flight or other sanctions evasion.

The consultation sets out the government’s expectation that the powers included in the new primary legislation will:

  • Complement existing powers in the Immigration Act 1971 to deport or exclude a person from the U.K.
  • Enable application of asset freezes to designated persons.
  • Expedite the freezing of assets.
  • Allow adoption of financial and trade restrictions, preventing U.K. persons and operators from engaging in specified trade or financial activities with a target country or regime, or to trade arms with a target country, part of a country, or a target regime.
  • Complement existing powers in the transport sector to control use of ports, ships, aircraft, and other transport vehicles used in relation to sanctions targets.

Comment

Until negotiations on the U.K.’s exit from the EU are concluded, the U.K. remains a full member of the EU. During this period the U.K. Government will continue to implement and apply existing EU sanctions legislation.

It is, however, clear from the consultation and the bill that the government’s current intention is to try to ensure that the U.K.’s new sanctions powers enable it to impose and implement sanctions legislation consistent with the EU sanctions regime while also potentially allowing it to respond more rapidly than the EU to emerging risks to national and international security.

The consultation also states that the U.K. will continue its robust approach to the enforcement of sanctions which was augmented in April of this year by the introduction of new monetary penalties. It remains to be seen precisely what form the new legislation will take and government is currently analyzing the feedback to the consultation which ended on 23 June 2017.

For more information, contact: Michelle Linderman, Carlton Greene, Cari Stinebower, Dj Wolff

On April 1, the United Kingdom’s Office of Financial Sanctions Implementation (OFSI) acquired new civil enforcement powers, including the ability to impose civil monetary penalties. These authorities come from implementation of portions of the Policing and Crime Act 2017 (the Act).

OFSI has issued finalized guidance of its compliance and enforcement approach, including how it will assess whether to apply a monetary penalty (the Guidance).

The office is now authorized to impose civil monetary penalties if it is “satisfied, on the balance or probabilities, that—

“(a) The person has breached a prohibition, or failed to comply with an obligation that is imposed by or under financial sanctions legislation, and

(b) The person knew, or had reasonable cause to suspect, that the person was in breach of the prohibition or (as the case may be) had failed to comply with the obligation.”

In contrast to the strict liability sanctions regime in the U.S., the U.K. explicitly focuses its enforcement authority on persons with knowledge or reason to suspect a potential violation. In a case where the breach or failure relates to particular funds or economic resources, the Act authorizes the imposition of penalties of up to £1,000,000 or 50 percent of the estimated value of the funds or economic resources, whichever is greater.

Scope of Jurisdiction and Individual Liability

OFSI’s guidance, a draft of which we summarized in January, includes:

  • Scope of Jurisdiction: Its authority covers all transactions with a “U.K. nexus,” even those outside the U.K. This includes, but is not limited to:
    • “Transactions using clearing services in the U.K.”
    • Transactions involving “financial products or insurance bought on U.K. markets but held or used overseas.”
    • Transactions “taking place overseas but directed from within the U.K.” OFSI notes that it will “not artificially bring something within U.K. authority that does not clearly and naturally come under it,” but it can and will refer potential violations to other authorities.
  • Individual Liability: The Guidance highlights OFSI has jurisdiction to impose penalties on entities, but can also pursue a penalty against an officer of that entity if the activity:
    • “Occurred with the “consent or connivance of the officer;” or
    • Was “attributable to any neglect on the part of the officer.”

Other Key Points

  • Actions OFSI Can Take: OFSI identifies four actions it can take in response to a sanctions breach: (1) issuing correspondence requiring details of how a party will improve its compliance practice; (2) referring a regulated professional to its relevant professional body; (3) imposing civil monetary penalties; or (4) referring the case to law enforcement agencies for criminal investigation and prosecution.
  • Enforcement Focus: OFSI intends to be “proportionate” in its response and that it will assess a number of mitigating and aggravating circumstances when assessing a case. Generally speaking, “the more aggravating factors [OFSI] see[s], the more likely [it is] to impose a monetary penalty.”
  • Factors OFSI Considers: OFSI will look at a number of factors in considering enforcement, including: (1) whether there is a direct provision of funds or economic resources to a designated person; (2) whether there is circumvention of sanctions; (3) the value of the breach; (4) the harm or risk of harm to the sanction regime’s objectives; (5) the knowledge and sophistication of the actor involved; (6) the behavior of the persons involved; (7) whether a license was sought; (8) whether a transaction was disclosed; (9) whether there were repeated, persistent, or extended breaches; (10) the public interest; and (11) other case-specific factors.
  • Voluntary Self-Disclosure: Voluntary self-disclosures are encouraged and treated as a mitigating factor. In contrast to the U.S. where only the first disclosure is considered voluntary, OFSI notes “the mere fact that another party has disclosed first will not necessarily lead to the conclusion that later disclosure has any lesser value.” OFSI encourages early disclosures and notes that it is willing – as is common before the Office of Foreign Assets Control (OFAC) in the U.S. – to consider an initial and further disclosure as facts are supplemented.
  • Penalty Calculation: OFSI published a matrix to show how it calculates penalties. This penalty matrix is very similar to that published by OFAC. OFSI assesses the ‘seriousness’ of a penalty, while OFAC assesses ‘egregiousness’, and both consider whether a voluntary disclosure was made. For serious violations in which a disclosure was made, the penalty would be reduced by at least 50 percent. For “most serious” violations, the base penalty will be reduced “up to 30%”.
  • Publication: In a departure from typical European practice and as required by the Act, OFSI notes it will “normally publish details of all monetary penalties it imposes [.]” This summary will include: (a) identifying the person subject to penalty; (b) the summary facts of the case; (c) the value of the violation; (d) the value of the penalty; (e) the “compliance lessons OFSI wishes to highlight”; and (f) any other relevant information. OFSI does note that there may be circumstances in which it will not publish a summary including where “a reasonable person would consider it disproportionate.”

Companies need to be aware of the new penalties and that the standard of proof required to impose them is lower than that required for criminal prosecution. Although breach of sanctions has always risked adverse media coverage, the publication by OFSI of all monetary penalties it imposes means this risk has increased.

These factors, together with the size of the fines and the added risk of referral to regulators who may impose additional fines, means that sanctions compliance issues will remain at the top of the compliance agenda for all businesses.

For more information, contact: Carlton Greene, Cari Stinebower, Dj Wolff, Charles De Jager, Gordon McAllister, Edward Norman

Her Majesty’s Treasury (HM Treasury) will soon publish its final policy decisions in advance of the June 26, 2017 implementation of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (2017 MLRs).

The 2017 MLRs are intended to transpose the EU’s fourth directive on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing (4MLD). The Fund Transfer Regulation (FTR) which accompanied will also be effective on June 26.

Comments received from HM Treasury’s initial request for public consultation on transposing the 4MLD in UK Regulation have already been incorporated into the regulations. Treasury officials provided a summary of the consultation as well as a summary of the interventions and opinions for stakeholders.

Coming Soon: New U.K. Office for AML Supervision of Professional Bodies

In parallel, the U.K. announced it would create a new Office for Professional Body Anti-Money Laundering Supervision (OPBAS).

Currently, there are more than 22 professional bodies that supervise accounting and legal service providers. OPBAS will coordinate and align the risk-based approaches taken by each of the 22 bodies.

In particular, OPBAS aims to publish standard AML guidance for each business sector, reducing the number of guidance documents and easing the regulatory burden on firms.

For more information, contact: Carlton Greene, Cari Stinebower, Charles De Jager; Gordon McAllister, Edward Norman, Mariana Pendas

On December 1, 2016, the U.K. Office of Financial Sanctions Implementation (OFSI) published its draft guidance on the process of imposing monetary penalties for breaches of financial sanctions. The draft guidance is now open for comments from stakeholders in the context of a public consultation launched by OFSI.

By way of background, OFSI was established on March 31, 2016 within Her Majesty’s Treasury, with a remit to help “ensure that financial sanctions are properly understood, implemented and enforced in the United Kingdom.” The Policing and Crime Bill, which has been working its way through the UK Parliament, is likely to receive royal assent in 2017. Once enacted, the Policing and Crime Act 2017 (the Act) will confer on OFSI the power to impose monetary penalties under civil law for financial sanctions violations. Information on the Policing and Crime Bill, and its passage through parliament is available here.

The draft guidance provides detailed information in order for stakeholders to comment on the powers to be granted to OFSI by the Act, the amount of monetary penalties that can be imposed, and the procedure for their imposition and the rights of interested parties. Below is a summary of some key elements of the draft guidance and of the Act:

  • Circumstances in which monetary penalties can be imposed – pursuant to the Act, OFSI may impose penalties “if it is satisfied, on the balance of probabilities, that — (a) the person has breached a prohibition, or failed to comply with an obligation, that is imposed by or under financial sanctions legislation, and (b) the person knew, or had reasonable cause to suspect, that the person was in breach of the prohibition or (as the case may be) had failed to comply with the obligation.”
  • Maximum amount of monetary penalties permitted – if the breach relates to funds or economic resources the value of which can be estimated precisely, the maximum penalty will be the greater of £1 million or 50% of the estimated value of the funds or resources. In all other cases the maximum penalty permitted will be £1 million.
  • Serious violations – OFSI will enjoy some discretion in deciding whether or not to impose a monetary penalty. The imposition of a penalty is thus more likely for serious violations. According to OFSI, examples of violations likely to lead to a penalty are: (a) cases in which the breach has involved funds or economic resources being made available directly to a designated person; (b) circumvention of financial sanctions; (c) cases in which aggravating factors are present (e.g., repeated, persistent or extended breaches, violations involving large sums of money, or the existence of professional facilitation by advisors of financial institutions); and (d) failures to comply with OFSI requests to provide information. In the event of very serious violations, OFSI may decide to refer a case for criminal investigation to the National Crime Agency.
  • Advantages of voluntary disclosure – voluntary disclosure of financial sanctions violations may lead to a reduction of up to 50 percent of the monetary penalty (or up to 30 percent in the event of very serious violations). Voluntary disclosures must be made in good faith, be complete and made within a reasonable period of time from the discovery of the breach. The submission of an incomplete disclosure, for reasons other than simple error or the emergence of new facts, will normally lead to the imposition of a penalty.
  • Procedure and rights of defense – before imposing a monetary penalty, OFSI will have to inform the individual concerned of its intention to do so. That person will then be able to make legal and factual representations responsive to the determination made by OFSI, and any relevant aspect of the case. OFSI’s final decision will follow a review of such representations. This decision will be appealable before the competent Minister and subsequently before the Upper Tribunal.

All stakeholders are invited to participate in the public consultation by replying to a set of questions on the draft guidance. The replies must be received by OFSIConsultation@HMTreasury.gsi.gov.uk no later than January 26, 2016.

For more information, contact: Charles De Jager, Gordon McAllister, Lorenzo Di Masi