Overview of the Act
The Act is split into three main areas:
Registration of overseas entities – creating a register of overseas entities and their beneficial owners;
Reforms to UWOs – protecting enforcement agencies from legal costs by increasing the threshold for costs orders to be made against enforcement authorities; and
Reforms to various aspects of the UK’s sanctions regime.
While much attention has gone to the provisions of the Act creating a register of overseas entities and their beneficial owners, it is the sanctions reforms that are most striking. These are discussed below.
Strict liability test for breach of sanctions
Section 146(1) of the Policing and Crime Act 2017 (the “PCA”) confers upon HM Treasury the power to impose a monetary penalty on a person if it is satisfied, on a balance of probabilities, that (a) the person has breached a prohibition imposed by financial sanction legislation and (b) that the person knew, or had reasonable cause to suspect, that the person was in breach of the prohibition.
The Act removes the knowledge or reasonable cause requirement and, in its place, inserts as section 146(1A) PCA: “In determining for the purposes of subsection (1) whether a person has breached a prohibition, or failed to comply with an obligation, imposed by or under financial sanctions legislation, any requirement imposed by or under that legislation for the person to have known, suspected or believed any matter is to ignored”.
The introduction of a strict liability test creates a significantly lower threshold for OFSI to impose civil monetary penalties for infringements of UK sanctions and has the potential to have a significant impact on how companies and individuals approach compliance.
New ‘urgent procedure’ to streamline sanction designation powers
Section 58 of the Act amends the Sanctions and Anti-Money Laundering Act 2018 (the “SAML Act”) to introduce a new ‘urgent procedure’ for designation where the ‘standard procedure’ (involved person) test is not met.
Section 11 of the SAML Act confers upon an appropriate Minister the right to designate persons by name where the Minister has (a) reasonable grounds to suspect that the person is an involved person and (b) considers that the designation of that person is appropriate.
The Act maintains the involved person requirement (now termed condition A) but removes the appropriateness requirement and introduces as an alternative ground for designation: under the urgent procedure, a Minister may designate a person by name where condition A is not met but conditions B and C are met.
Condition B requires that a relevant provision (defined in section 11(2F) SAML Act as a provision that the Minister considers corresponds or is similar to, or is made for a similar purpose of the type of sanction or sanctions in the regulations) applies to the person under the law of the USA, the EU, Australia, Canada or any other specified country.
Condition C requires that the Minister “considers that it is in the public interest to make designations under the urgent procedure”.
A designation under conditions B and C will lapse after 56 days (starting the day after the designation) unless the Minister certifies, within the 56 day period, that condition A is met or that conditions B and C continue to be met. Section 11(2C) of the SAML Act provides that this 56 day period can only be renewed once, and will then lapse at the end of the second 56-day period unless the Minister certifies (within the second period) that condition A is met.
This effectively confers upon the Government the ability to mirror sanctions designations of close allies and represents a significant streamlining of the Government’s ability to designate persons by name. This should help to ensure a more co-ordinated approach to sanctions designations among the UK, USA, EU and other allies.
Foreign Secretary Liz Truss announced the first use of these new designation powers on the same day, with 345 Russian individuals and 5 Russian entities being designated for the purposes of an asset freeze (and travel ban) in a “historic” round of sanctions.
Name and shame powers for OFSI
In addition, the Act loosens the threshold for OFSI to report on breaches of financial sanctions.
The Act amends the Policing and Crime Act 2017 (the “PCA”) to insert a new section 149(3) which provides that the Treasury may “publish reports at such intervals as it considers appropriate” where a monetary penalty has not been imposed under sections 146 or 148 of the PCA but the Treasury is nonetheless satisfied, on a balance of probabilities, that “a person has breached a prohibition, or failed to comply with an obligation, that is imposed by or under financial sanctions legislation”.
If utilised by OFSI, this could significantly increase the scope for reputational damage for entities not penalised under sections 146 or 148 of the PCA where OFSI is nonetheless satisfied that the entity has breached sanctions rules.
Today’s raft of new sanctions mean that the UK has now designated over 1,000 individuals and entities in response to Russia’s invasion of Ukraine. The impact of the lowering of the threshold for sanctions liability is likely to be felt across many industries, although it remains to be seen how the Treasury will utilise their widened reporting powers and the effect this will have on compliance with UK sanctions regulations. The streamlined procedure for sanctions designations via the urgent procedure has already been used to designate a significant number of Russian individuals and entities and is likely to see further usage as the Government co-ordinates further measures with its allies.
The Home Secretary has promised that a second “follow-on” bill “with further measures” is being drafted to “prevent the abuse of limited partnerships” and give the Government “new powers to seize crypto assets from criminals”. We will follow-up with a comprehensive summary of the new measures once further information is published by the UK Government and OFSI.
In the meantime, Hogan Lovells is available to assist you in assessing your exposure and in ensuring compliance with UK sanctions measures in your transactions.
In the current, rapidly changing landscape, keeping on top of international sanctions regimes is more challenging than ever. Our comprehensive Sanctions Navigator collates sanctions regimes from the European Union, France, the United Kingdom, United Nations, and United States in one place, to help our clients answer any questions or address any sanctions-related issues they may have. Explore the Sanctions Navigator here.
Authored by Aline Doussin and Mez Azizi.