UK government introduces important changes to UK sanctions framework

On 14 November 2024, the UK government introduced a number of changes to its sanctions regulations through the Sanctions (EU Exit) (Miscellaneous Amendments) (No.2) Regulations 2024 (the “Amending Regulation”). See here for the Amending Regulation and here for the blog post from the Office of Financial Sanctions Implementation (“OFSI“) summarising the changes.

The Amending Regulation introduces several important changes to existing UK sanctions legislation, primarily in respect of the UK’s financial sanctions framework. The UK government has stated that these changes will improve its intelligence on industry’s compliance with UK sanctions, strengthen its enforcement powers, enable it to conduct its licensing responsibilities more efficiently, and clarify existing legislation.

These changes will come into force on 5 December 2024, except for the expanded definition of “relevant firms” (as further described below) which will take effect from 14 May 2025.

Key Changes

The Amending Regulation introduces the following key changes to the UK’s sanctions framework:

• Expanded definition of “relevant firms”: The group of “relevant firms” who are subject to mandatory reporting obligations will be expanded to additionally include (i) high-value art dealers, (ii) art market participants, (iii) insolvency practitioners and (iv) letting agencies. This extension comes after suspected breaches of sanctions within these sectors were not proactively reported to OFSI. Alongside these changes, OFSI has also published new financial sanctions guidance in relation to letting agents (see here) and insolvency practitioners (see here), and updated its guidance in relation to high value dealers and art market participants (see here).
  
  • As a reminder, the current definition of “relevant firms” includes:
    • a person that has permission under Part 4A of the Financial Services and Markets Act 2000 (permission to carry on regulated activity);
    • an undertaking that, by way of business, operates a currency exchange office, or transmits money (or any representation of monetary value) by any means, or cashes cheques that are made payable to customers;
    • a firm or sole practitioner that is a statutory auditor within the meaning of Part 42 of the Companies Act 2006, or a local auditor within the meaning of section 4(1) of the Local Audit and Accountability Act 2014;
    • a firm or sole practitioner that provides, by way of business: accountancy services; legal or notarial services; advice about tax affairs; company services; or trust services;
    • a firm or sole practitioner that carries out, or whose employees carry out, estate agency work;
    • the holder of a casino operating licence within the meaning given by section 65(2)(a) of the Gambling Act 2005;
    • a person engaged in the business of making, supplying, selling (including selling by auction) or exchanging articles made from gold, silver, platinum or palladium, or precious stones or pearls;
    • a crypto asset exchange provider; 
    • a custodian wallet provider.

• Lower threshold for reporting: Relevant firms will be required to report conduct to OFSI that they know or have reasonable cause to suspect was contrary to a prohibition or requirement under relevant UK sanctions legislation, rather than where a person has committedan offence. This removes consideration of whether the conduct amounts to a criminal offence and aligns these reporting obligations with OFSI’s civil enforcement powers.   

• Additional licensing grounds: The Amending Regulation introduces two changes to the licensing grounds available under the UK’s financial sanctions regimes. These changes address OFSI’s concerns that existing licensing grounds are insufficient in enabling OFSI to meet its licensing responsibilities, particularly where the lack of specific licensing grounds in these scenarios has created adverse consequences for non-designated parties.
  
  • Judicial decisions: The judicial decisions licensing ground will be extended to enable the implementation of court decisions made post-designation of a designated person (“DP“) in addition to pre-designation court decisions.
  • Insolvency: The creation of a new insolvency licensing ground, which will allow for the issuance of licenses in respect of insolvency, restructuring and related proceedings, provided that any payments made directly or indirectly to a DP are credited to a frozen bank account.  

• Codification of Annual Frozen Asset reporting requirements: The Amending Regulation has codified the obligation for UK persons holding frozen assets owned held or controlled by DPs to report those assets to OFSI on an annual basis. Such UK persons will now be required to provide an annual report by 30 November each year, and failure to do so without reasonable excuse will be an offence. According to the Explanatory Memorandum for the Amending Regulation, the codification of the annual frozen asset review as a proactive reporting requirement “will provide certainty and clarity to the persons that must comply, while also providing a robust basis for OFSI to take enforcement action where persons fail to report“.

Key Clarifications

The Amending Regulation has also reinforced existing sanctions practice and clarified areas of uncertainty in relation to the following: 

• Owned and controlled entities: The Amending Regulation explicitly clarifies that the UK’s financial sanctions restrictions on DPs also apply to persons owned or controlled by named DPs from the point that DP is listed. This is not a change in approach towards ownership and control but rather appears intended to eradicate any existing uncertainty as to the scope of these measures.

• Prohibited trust services: The Amending Regulation clarifies that acting as a nominee shareholder for a DP when that involves the use of a trust or similar arrangement will constitute a prohibited trust service.

For further information on these changes and clarifications, as well as other amendments introduced by the Amending Regulation, please see here for the Explanatory Memorandum.  

Key Impacts

Businesses should consider assessing how these legislative changes may affect them going forwards, particularly given the broadening of the UK’s mandatory reporting requirements. These changes are another indication of OFSI’s focus on its ability to monitor and enforce compliance with UK financial sanctions. As of 14 November 2024, OFSI has also updated various guidance documents to reflect these changes.