On 5 February 2019, the HM Treasury and the Office of Financial Sanctions Implementation (OFSI) published general guidance on financial sanctions (available here). While the guidance is not yet in force (the March 2018 guidance, available here, is still currently in force), it will apply if the UK leaves the EU on a no-deal basis. A recurring theme in the newly published guidance has been the removal of general references to EU sanctions and listings, and their replacement with references to autonomous UK sanctions and listings. Please see below for a summary of the main updates contained within the guidance.
- The guidance provides for the new inclusion of the Department for Transport as a UK Government department involved in sanctions, in respect to controlling the movement of ships and aircraft in UK waters and airspace. The National Crime Agency has been elevated as being an agency which both investigates and “enforces” breaches of financial sanctions. Furthermore, the guidance has expanded the jurisdiction of UK financial sanctions to include the “territorial sea” of the UK, in addition to its territory and persons.
- In respect to its list of sanctioned entities and individuals, OFSI has stated its intent to update the consolidated list within one working day for all new UN and UK listings (please note that reference to EU listings has been removed). Where the name/target entity or individual is even a potential target match for financial sanctions, the guidance states that you should contact OFSI immediately.
- OFSI continues to interpret prohibitions broadly, but the guidance has removed the wording: “which is in keeping with the way in which the EU courts and other member states have approached them“. Additionally, the definition of ‘economic resources’ has been amended to state that it “includes but is not limited to: precious metals or stones; antiques; vehicles; property“, and ‘funds’ has been expanded to include the example of “any other instrument of export financing“.
- In particular, the guidance explains that the statutory definitions of funds and economic resources includes ‘crypto assets’. The guidance has included the following definition of ‘crypto assets’: “Statutory definitions of “funds” and “economic resources” are wide and include financial assets and benefits of every kind (funds), as well as assets of every kind tangible or intangible, movable or immovable – which are not funds, but can be used to obtain funds, goods or services (economic resources). Crypto assets are considered to be covered by these definitions and are therefore caught by the financial sanctions restrictions.”
Ownership and Control:
- The guidance has substantially amended the test as to whether an entity is owned or controlled directly or indirectly by another person. The guidance states that the ownership or control test will be satisfied where:
- A person holds (directly or indirectly) more than 50% of the shares or voting rights in an entity.
- NB – the previous sections stating that 50% ownership is “the key criterion” regarding ownership (in line with EU guidance) has been removed.
- The person “has the right (directly or indirectly) to appoint or remove a majority of the board of directors of the entity”
- NB – the wording regarding ability to appoint members of the administrative, management or supervisory body has been removed.
- “It is reasonable to expect that the person would be able to ensure the affairs of the entity are conducted in accordance with the person’s wishes“. This then provides as examples slightly amended versions of previous paragraphs: (i) appointing majority of members of administrative, management or supervisory bodies of entity; (ii) controlling majority of voting rights in entity; (iii) right to exercise dominant influence over entity pursuant to agreement with entity or subject to provision in entity’s Memorandum or Articles of Association; (iv) having right to exercise dominant influence referred to above without being the holder of that right.
- “Having the ability to direct another entity in accordance with one’s wishes. This can be through any means, directly or indirectly.” This then uses as an example the wording from the previous guidance of a DP controlling someone else’s bank accounts or economic resources.
- A person holds (directly or indirectly) more than 50% of the shares or voting rights in an entity.
- The guidance states that the UK government will “look to designate owned and controlled entities/individuals in their own right where possible“.
- OFSI’s aggressive ownership and control analysis is further demonstrated through the retention of a paragraph on “Minority interests”, stating that control can still be established with a minority interest. The guidance states that control might be established “because the affairs of the entity are conducted in accordance with the designated person’s wishes.“
- An additional section on “Joint Interests”, states inter alia: “For the purposes of the asset freeze a designated person will be taken to own funds/economic resources even if they are owned jointly with another person, or where the designated person only owns part of them. Additionally, a designated person is taken to own funds/economic resources where the designated person’s ownership consists of any interest (whether legal or equitable).”
- The guidance has removed the wording of the EU in respect to general reporting obligations on all persons. The reporting obligation now only applies to relevant entities set out in regulations under the Sanctions and Anti Money Laundering Act (essentially financial institutions under FSMA, currency exchanges, and the entities added on 8 August 2017 under the European Union Financial Sanctions (Amendment of Information Provisions) Regulations 2017 (auditors, casinos, makers of / dealers in precious metals and stones, estate agents, accountants, legal professionals, tax advisers, and trust or company services providers)).
- OFSI’s powers in respect of obtaining information has been updated: the guidance provides OFSI the statutory power to require the production of “specific documents” as well as information, for a wide ranging purpose.
- A new section based on “onward disclosure” has been added, stating that: “Information received by OFSI shall be disclosed to third parties in accordance with provisions set out in the Information and Records part of regulations pursuant to the disclosure of information regulation. Any such disclosure must be in compliance with applicable data protection laws.”
Exporting and Licensing:
- This guidance will be “updated in due course” to reflect the position for some of the sectoral regimes where additional provisions may apply.
- A new section has been added noting that if the following four criteria are met immediately before transfer, independent persons may transfer their legal or equitable interest in frozen funds or economic resources to another person:
- The independent person is not a designated person
- The independent person holds the interest in the funds or economic resources
- The independent person does not hold the interest jointly with a designated person
- The independent person is not owned or controlled, directly or indirectly by a designated person
- A new section has been added regarding ring-fencing. From 1 January 2019, each large bank must separate core retail banking from the rest of its business. UK sanctions regimes contain an exception permitting banks subject to the ring-fencing legislation to transfer funds from Account A in a non ring-fenced body to account B in a ring-fenced body where accounts are (directly/indirectly) held/controlled by a designated person.
- OFSI’s approach to licensing grounds has been significantly expanded. Some key updates to this section include:
- Basic needs – regarding individuals, the approach is to “not imperil” the basic needs of a designated person or anyone financially dependent on them. Regarding entities, basic needs include, but are not limited to: paying remuneration/pensions, paying tax, paying mortgage/rent, paying utilities, paying insurance premiums.
- Fees for the provision of legal services – legal fees and disbursements “must be reasonable” and there is a positive obligation on the applicant to demonstrate that to OFSI. OFSI recommends the Supreme Court Cost Guides as “a useful starting point for assessing reasonableness”
- Routine maintenance of frozen funds and economic resources – “fees or service charges must be reasonable”
- Extraordinary expenses – relating to expenses “not recurring or easily anticipated.” This ground “cannot be used where other licensing grounds are more suitable”
- There are five other licensing grounds covered in the updated guidance: (i) pre-existing judicial decisions; (ii) humanitarian activity; (iii) diplomatic mission; (iv) extraordinary situations; and (v) prior obligations
- The General Licenses section has been significantly expanded. The section sets out the process for registering with OFSI if a General License is conditionally granted. The guidance also makes clear that OFSI does not accept applications for General Licenses and HM Treasury will create the General Licences under such conditions as they deem appropriate (usually in relation to unforeseeable circumstances where the license can be used to support the government’s policy priorities). Each General License may also include reporting conditions and/or requirements to keep records of activity undertaken by registered users under the General License. From table 6.B, of the guidance, it appears that General Licenses will continue to be linked to areas such as legal aid and provision of insurance under the following financial sanctions regimes: (i) Terrorism and Terrorist Financing; and (ii) Terrorism and Terrorist-Financing, and ISIL (Da’esh) and Al-Qaida organisations.
- Guidance on how to request a review of a UK listing will be published by the Foreign and Commonwealth Office “in due course”.