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INSIGHT: Watch Brexit and Big Changes in U.K. Economic Sanctions

Oct. 21, 2019, 8:00 AM

At this time, the only certainty around Brexit is that uncertainty abounds. Approaching late October, it remains to be seen whether the government under Prime Minister Boris Johnson will deliver on its promise to leave the EU “do or die” on Oct. 31; whether the U.K. will ratify a withdrawal agreement, or exit the EU without a deal; or whether the U.K. will ever leave at all.

What is becoming clear, however, is that in the event of Brexit of any kind, the U.K. will have the freedom to impose economic sanctions against designated countries, entities, and individuals as it sees fit. While the U.K. technically has the ability to do so now, it rarely wields this power unilaterally.

Post-Brexit, the U.K. seems poised to resort to unilateral economic sanctions as a key tool of its foreign policy, and given the current position of London as a global financial center, could wield significant influence geopolitically by doing so. Indeed, the Royal United Services Institute (RUSI) assessed these factors in a recent paper, and as discussed below, the U.K. government has taken steps to prepare for the post-Brexit sanctions environment.

Current U.K. Sanctions Framework

Currently, the U.K. implements all sanctions passed by the UN Security Council, as well as sanctions enacted by the Council of the European Union, which are adopted by unanimous decision of EU Member states and are directly applicable (i.e., require no national implementation) to Member States. The RUSI paper notes that the U.K. is “widely viewed as being highly influential” on the EU sanctions process. The U.K. also maintains a limited set of its own sanctions, mainly with respect to terrorism.

The EU and all Member States (including the U.K.) maintain economic sanctions of varying degrees of severity with respect to Afghanistan, Belarus, Bosnia and Herzegovina, Burma, Burundi, Central African Republic, Democratic Republic of the Congo, Egypt, Guinea, Guinea-Bissau, Iran, Iraq, Lebanon, Libya, Maldives, Mali, North Korea, Russia, Somalia, South Sudan, Syria, Tunisia, Ukraine, Venezuela, Yemen, and Zimbabwe.

Additionally, EU sanctions target individuals and entities involved in terrorism, chemical weapons proliferation, and cyber attacks. Such sanctions can take the form of asset freezes targeted at specific individuals or entities, or broader financial and trade restrictions targeted at certain countries.

Within this paradigm, HM Treasury’s Office of Financial Sanctions Implementation (OFSI) administers U.K. sanctions, and has authority to impose civil penalties of up to the greater of £1 million or 50% of the value of the relevant transaction.

Post-Brexit Sanctions Framework

Brexit will not immediately upend the order described above. The European Union (Withdrawal) Act 2018 provides that a vast range of EU law, including sanctions measures, will be “retained” upon the U.K.’s exit from the EU. This retention will occur upon exit on Dec. 31, 2020, pursuant to a withdrawal agreement negotiated between the U.K. government and the EU, or upon a no-deal exit (which could occur on Oct. 31).

The Withdrawal Act permits the U.K. government to issue regulations to remedy certain “deficiencies” in retained EU law, such as provisions that have no practical application post-exit or references to EU entities or institutions.

Consistent with this, and to enable the U.K. government to effectively respond to geopolitical developments, Parliament passed the Sanctions and Money Laundering Act 2018 (SAMLA), which empowers the U.K. government to issue sanctions regulations (as described below).

Pursuant to SAMLA, the U.K. has issued the following sanctions regulations, which track pre-existing EU sanctions, and take effect the day the U.K. leaves the EU: the Iran (Sanctions) (Human Rights) (EU Exit) Regulations 2019; the Venezuela (Sanctions) (EU Exit) Regulations 2019; the Burma (Sanctions) (EU Exit) Regulations 2019; the Russia (Sanctions) (EU Exit) Regulations 2019; the Burundi (Sanctions) (EU Exit) Regulations 2019; and the Guinea (Sanctions) (EU Exit) Regulations 2019.

SAMLA and Dawning of New U.K. Sanctions Powers

SAMLA authorizes the U.K. government to issue sanctions regulations where it “considers that it is appropriate” to do so for the following reasons:

  • to further the prevention of terrorism, in the U.K. or elsewhere;
  • in the interests of national security;
  • in the interests of international peace and security;
  • to further a foreign policy objective of the U.K. government;
  • to promote the resolution of armed conflicts or the protection of civilians in conflict zones;
  • to provide accountability for or be a deterrent to gross violations of human rights;
  • to promote compliance with international humanitarian law;
  • to contribute to multilateral efforts to prevent the spread and use of weapons and materials of mass destruction, or
  • to promote respect for democracy, the rule of law, and good governance.

As noted above, the U.K. government has promulgated several sets of sanctions regulations pursuant to SAMLA, although to date these have covered existing EU sanctions regulations.

With SAMLA now in effect, one cannot help but notice the developing similarities to the U.S. system of sanctions, in which the president broadly is empowered under the International Emergency Economic Powers Act to impose sanctions to promote U.S. foreign policy objectives. Furthermore, under the U.K. system, OFSI within HM Treasury—similar to the Office of Foreign Assets Control within the U.S. Treasury Department—has authority to issue large civil penalties with respect to sanctions regulations.

While the U.K. may still be far from the point of imposing wide-ranging, U.S.-style sanctions, it is clear that SAMLA sets the stage for the U.K. to take unilateral sanctions actions on the world stage.

Three potential use cases, set out below, delineate how the U.K. may go about doing so: (1) sanctions against Russia; (2) “Magnitsky”-type sanctions relating to human rights abuses; and (3) sanctions pertaining to Iran’s nuclear program.

Use Case #1: Russia Sanctions

Russia appropriately tops the list in this context, as the U.K. already is highly motivated to impose sanctions against Russia. The current rift in U.K.-Russia relations mainly relates to the March 2018 poisoning in the U.K. of Sergei Skripal, a former Russian military intelligence officer, through the use of a nerve agent, an act which the U.K. government has attributed to Russia. The United States has echoed this position, and in response has imposed two rounds of sanctions on Russia under the Chemical and Biological Weapons Control and Warfare Elimination Act of 1991.

Notably, the U.K. recently took unilateral action against Russia that could provide a preview of other anti-Russia measures to come in the SAMLA age.

Specifically, in August, the U.K. Department for International Trade somewhat unexpectedly imposed a licensing requirement regarding the export to Russia of submersible vehicles and related equipment, software, and technology. In doing so, the U.K. government noted that the licensing requirement: “is a consequence of Russia developing certain capabilities—including the ability to track, access and disrupt undersea communication cables. These activities represent a risk to our national security and the new control is intended to mitigate this risk.”

In light of the Skripal poisoning and other national security risks that the U.K. perceives with respect to Russia, it is not difficult to imagine the U.K. implementing restrictive measures against Russia under SAMLA. These could take the form of sanctions designations of specified entities or individuals, or broader financial and export restrictions targeted at Russia.

Use Case #2: ‘Magnitsky'-Type Sanctions

The U.K. government consistently has demonstrated an interest in issuing “Magnitsky”-type sanctions relating to human rights abuses. The term is taken from U.S. parlance, which relates to OFAC’s imposition of sanctions against persons involved in the extrajudicial killing of Russian lawyer Sergei Magnitsky and later, pursuant to “Global Magnitsky” sanctions legislation, against any person worldwide determined to have engaged in human rights abuses.

Notably, a “Magnitsky amendment” was added to SAMLA in 2018, and as recently as Sept. 29, U.K. Foreign Minister Dominic Raab stated that the U.K. government would introduce Magnitsky-type sanctions legislation after the U.K leaves the EU.

Implementation of Magnitsky-type sanctions would enable the U.K. to vigorously promote human rights on the world stage, and could take the form of asset freezes and visa bans directed at designated persons.

Use Case #3: Iran Sanctions

To date, the U.K. has stood firmly with the EU (in particular, Germany and France) in upholding the Joint Comprehensive Plan of Action Agreement (JCPOA) regarding Iran’s nuclear program, from which the U.S. withdrew in May 2018. Indeed, pursuant to this, the U.K. implements the EU Blocking Regulation, which prohibits U.K. persons from complying with certain U.S. sanctions against Iran.

However, Prime Minister Johnson recently signaled a potential shift in this approach, remarking in an interview that there should be a Trump-led renegotiation of the agreement in light of the deal’s “many defects”. The remarks perhaps were reflective of the U.K.’s position regarding the recent drone attack on Saudi Arabia’s oil infrastructure, along with the seizure by Iran of a British oil tanker (since released).

While there do not appear to be any concrete proposals for new U.K. sanctions against Iran, it is important to observe that a post-Brexit U.K. could wield significant influence in this context. The U.K. could impose additional sanctions against Iran, or withdraw from the JCPOA entirely.

Pay Attention to More Assertive U.K.

As the U.K. approaches its potential exit from the EU (whether pursuant to an agreement or without a deal), it is in the early stages of redefining how it can unilaterally promote its foreign policy and national security objectives through the use of sanctions.

Given the position of London as one of the world’s preeminent financial centers, this could have a significant impact on global trade, as parties both within and outside the U.K. would have to assess the potential impact of U.K. sanctions—just as parties around the world currently must account for U.S. sanctions.

The unmistakable trend towards a more assertive U.K. in the sanctions context is worthy of close attention, even as the many twists and turns of Brexit work themselves out in the weeks and (potentially) months to come.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Anthony Rapa, a partner in Kirkland & Ellis, LLP’s Washington, D.C., office and a U.S./U.K.-qualified lawyer, counsels companies and private equity sponsors worldwide regarding U.S., U.K., and EU economic sanctions and export control issues. .