HM Treasury has recently announced a change in policy concerning payments involving any persons designated under EU sanctions (“DPs“). The announcement, along with limited guidance, is set out here, and will take effect for all payments received after midnight 31 July. While this could be viewed as merely a technical change in policy, it is likely to have significant impacts in relation to transactions with countries subject to sanctions, particularly Iran and Russia.
Up to the announcement, HM Treasury had taken the view that funds received by a non-DP in the UK from a DP outside the UK did not need to be frozen, and so no authorization to release those funds was required.
HM Treasury has now taken the view that: (i) due to case law of the European Courts (most notably the judgement of the General Court in Europäisch-Iranische Handelsbank AG); and (ii) the need to bring UK policy into line with other EU Member States, the policy now should be that “funds arriving in the UK, or in a UK bank anywhere in the world, which have come from, or via, a DP based outside the EU, will be required to be frozen in a suspense account, or other separate account, on arrival in the UK bank”. It appears as if the obligation to freeze is only on a UK bank, and not on the payee. The payee of the funds will then need to apply to HM Treasury for authorization to release the funds to it. In respect of DPs under the Iran sanctions, the new policy operates over and above the “funds transfer provisions”.
The new policy is arguably consistent with the general wording of the EU sanctions in relation to freezing of DP funds. The language usually states that: “all funds (and economic resources) belonging to, owned, held or controlled by DPs shall be frozen”.
The usual language clearly covers a DP’s own funds, but the new UK policy covers all movements of funds “from, or via, a DP “, and so would, for example, cover funds that have been processed via a DP bank (of which there are many), even where, at the time of arrival in “the UK, or a UK bank outside the UK”, those funds may not belong to, or be owned, held or controlled by a DP.
The new policy leaves many questions unanswered which we expect HMT will be addressing in the course of the next few weeks, possibly through upgraded guidance.
First, how is “UK bank outside the UK” defined? Given branches of EU established entities located outside the EU are within EU jurisdiction, it seems clear that the UK policy will apply to branches. However, does “UK bank outside the UK” cover separately incorporated subsidiaries of UK established banks outside the UK, but only in the EU? Or does it cover separately incorporated subsidiaries of UK established banks anywhere outside the UK (including outside the EU)? If the latter, this appears to be a unilateral extension by the UK of the scope of EU sanctions. It will also be interesting to see whether a requirement on UK banks to freeze funds outside EU will cause any contractual or other issues in the country where the UK bank freezes the funds, but where EU or UK sanctions may not be recognized let alone enforced.
Second, if the funds passing via a DP bank are commingled with other “clean” funds before either entering the UK, or being paid to a UK bank outside the UK, how are those commingled funds to be dealt with on receipt? Are all the funds to be frozen? Does commingling with “clean” funds cleanse the whole payment? Or are the funds to be frozen according to some proportion?
Third, what obligation, if any, is the payee under to provide information on DPs to UK financial institutions? In some cases, the payee may be aware of the involvement of a DP bank in cases where a UK bank is not. If the payee does not provide that information to the UK financial institution, has the payee broken any law? Obviously given the heightened sensitivity around transactions with sanctioned entities and countries, banks will be extremely cautious where they know they are dealing with a DP in any way. However, we would recommend that where a payee is aware of a DP in the payment chain that it at least inform the receiving bank of that fact.
Fourth, what are the criteria for authorization by HM Treasury, and what is the process for authorization? HM Treasury notes that each EU sanctions regimes has its own licensing regime, but these processes are often limited to specific needs of DPs (and not normal commercial payees), and are not set up to deal with the likely significant increase in freezing of funds. It is possible that the usual provision for unfreezing of funds relating to pre-existing contractual obligations could be used by HM Treasury, but in many cases, DP banks will have been listed prior to any contract being entered into by a payee.
It is important to note that the EIH case appears to prohibit Member States from issuing “general approval to a certain category of transactions”, but requires them to “assess each intended transaction on a case-by-case basis in order to ascertain whether the conditions under which they may authorise a release are met”. Therefore, we would not expect HMT to issue some form of general licence to deal with any backlog of applications resulting from this change in policy.
Finally, it is also interesting to note that the usual EU freezing language also includes “economic resources” as well as funds, but the HMT policy apparently does not require those to be frozen upon receipt in the UK or by a UK person outside the UK even if shipped via a DP.
Therefore, you may see certain payments frozen unexpectedly where a UK bank believes that the funds have come via a DP. If this happens, you should immediately engage with the bank freezing the funds as to seeking authorization from HMT. If practicable, you should take the lead in any authorization process as the UK bank may have many such authorizations to deal with, and will not have all the relevant facts that you should have.
