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Home EJIL Analysis UK Extraterritorial Financial Sanctions: Too Much, Too Little, Too Late?

UK Extraterritorial Financial Sanctions: Too Much, Too Little, Too Late?

Published on July 17, 2018        Author: 
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The US practice of the extraterritorial application of sanctions was criticised for years as, at best, the illegitimate abuse of its particular position in the world’s economy. Despite its fully comparable position in international finance, the United Kingdom was shielded from such criticism predominantly thanks to the transfer of respective decision-making to Brussels. The nature and scope of sanctions were delineated by EU laws. As the UK prepares its (financial) sanctions regime for Brexit, could it draw criticism similar to the US for both giving too broad discretionary powers to the government and preventing it from meeting UK international obligations at the same time? I suggest the new regime for the extraterritorial application of sanctions possibly opens the UK to international liability for, both, the lack of a legal basis for a legal restriction upon states as well as inevitable omissions to prevent gross violations of international law.

Since analysis of legal sanctions under international law is a very complex, multi-stage exercise, I focused on relatively easier cases of discretionary goals of foreign policy and extraterritorial sanctions, where the legal threshold for an internationally wrongful act is lower. Accordingly, I highlight the normative basis for adopting financial sanctions against third-state persons not covered by exceptions, British BITs, or the most relevant multilateral treaties. As for possible breaches of international law by omission, I focus on tolerating the provision of financial services contributing towards gross violations of international law. Because of length limitations, I do not discuss anti-money laundering per se, which is subject to yet another chapter of the law in question.

Financial Sanctions under SAMLA

As a part of preparations to leave the European Union, the UK recently adopted the Sanctions and Anti-Money Laundering Bill  (SAMLA), which will replace the European Communities Act 1972 in this respect. When the EU withdrawal Act acquires legal force, thus repealing the ECA, most sanctions regimes currently in force—including the UN sanctions and FATF recommendations implemented in the UK indirectly through the EU—will freeze and there will be no legal basis to review them or adopt new measures. The Act will also replace, inter alia, Part I of the  Terrorist Asset-Freezing etc. Act 2010, which was necessary to implement the UN asset-freeze resolutions, since the Supreme Court in HM Treasury v Ahmed [2010] UKSC struck down the relevant provisions of the United Nations Act 1946.

The SAMLA toolkit includes financial sanctions, immigration sanctions, trade sanctions, aircraft sanctions, shipping sanctions, and other restrictive measures for the purposes of UN obligations. Financial sanctions may include:

  • a freeze of, broadly defined, funds or other tangible or intangible, movable or immovable economic assets which are not funds but may be used to obtain them, including know-how (sect. 60(1, 2))—important both in terms of direct investment in the UK and well as international capital and current transactions to and from the UK (discussed below),
  • prohibition on financial services (including banking, insurances, sect. 61) being provided to or procured from the designated persons, as well as prohibition on financing, or a prohibition on transferring funds or assets to the “significant” benefit of targeted persons (sect. 3(1))—both sanctions possibly important to international capital and current transactions to and from the UK but also in servicing transactions between third-state parties and in a foreign jurisdiction (discussed below) ,
  • SAMLA also includes a novel sanction of prohibiting ownership, control, or having interests in treated entities.

Persons targeted under SAMLA (sect. 62(6)) with financial sanctions can be designated individually through their relation to a particular state or by a “prescribed description” of a person connected with a “prescribed country” (i.e., for the purposes of sectoral sanctions). Unless the designation was done by or under UN Security Council Resolutions, a person is designated by name or by description (sect. 9(2, 4)). When the identification and designation by name “is not practicable”, a person can be designated by description such that “a reasonable person would know whether that person fell within it” (sect. 12(3-4)); the latter is supposed to be employed against members of terrorist organisations who conceal their identities.  The designation can be effected if there are “reasonable grounds” to “suspect” that such a person is “involved” in the sanctioned activity (sect. 11(2-4), 12(2,5) and having regard to the purpose of sanctions and the “likely significant effects” of the designation. Designation must contain a “statement of reasons”, laying down premises of “reasonable suspicions” (sect. 11(7-9), 12(7-9)).  Regulation granting a designation power must impose a duty on the appropriate minister to inform the person concerned about the designation, variation or revocation of sanctions (sect. 10(3)). The appropriate minister who made the regulations is also obliged to issue guidance as to any applicable prohibitions and requirements (sect. 43(1)).

Among the various grounds for the adoption of a sanction, SAMLA allows a government to adopt measures necessary to comply with UN obligations or stemming from membership in another international organisation (sect. 1(1)). Mindful of the experience of the overzealous implementation of international sanctions, where domestic implementation measures were struck down by the Supreme Court in HM Treasury v Ahmed [2010] UKSC 2 and Bank Mellat v Her Majesty’s Treasury (No. 2) [2013] UKSC 39 due to a lack of adequate procedural safeguards for the designated persons, SAMLA drafters included mechanisms of administrative and court review of such international sanctions (although from a domestic legal perspective, the Henry VIII transfer of powers upon the executive may raise parliamentary concerns).  The appropriate minister may also impose sanctions to, inter alia, prevent terrorism, contribute towards international peace and security, provide accountability for or be a deterrent to gross violations of human rights, or otherwise promote compliance with ILHR, or respect for human rights, promote compliance with international humanitarian law, or contribute to multilateral efforts to prevent the spread and use of weapons and material of mass destruction (sect. 1(2)(a, c, f-h).

Most interestingly, SAMLA regulates the extraterritorial application of sanctions (sect. 21). It limits the application of sanctions outside the UK or its territorial sea to “United Kingdom persons”. The latter meaning a UK national, or a body incorporated or constituted under the law of any part of the UK (sect. 21(1b, 2)). Her Majesty may broaden the sanction to include persons of the Channel Islands, the Isle of Man, or any British overseas territory, which may potentially play a considerable role given the notoriety of said territories for their tax-friendly laws.

Several observations are due at this point. In terms of designation by description, it may raise legal problems both for the persons concerned (due process) and for the financial sector in its compliance efforts. Also, despite the general presumption against designation, i.e., designation cannot be made unless the minister meets the statutory burden of proof, the grounds for designation—reasonableness of suspicion of involvement—are very vague and legal assessment of the process will hinge upon actual implantation of this provision (yet, to be fair, the EU Court of Justice standard of “sufficiently solid factual basis”, as adopted in Kadi II, is neither more specific, nor harmonised among the EU Member States)”.

Protracted Application of the UK Financial Sanctions

Adding to the above concerns, SAMLA also allows the government to adopt sanctions in the interests of national security, to further its foreign policy goals, as well as to promote respect for democracy, the rule of law and good governance. (sect. 1(2)(b, d, i). During the parliamentary debate, it was signalled, for instance, that sanctions could be used “to exert pressure to improve governance (…) for economic or regime change purposes”. Some member of the House of Lords signalled that the notion of foreign policy objectives is dangerously vague, a possibly arbitrary concept (e.g., a question was asked whether supporting trade with India as a foreign policy as a result would justify sanctions against transactions with Pakistan). In the case of a restrictive measure, one can hardly find a legal basis under international law for a positive action in this respect (with due awareness that the foreign policy goal is an attempt to replicate the scope of the EU sanctions capacity). Even, prima facie, a less controversial statutory basis for imposing sanctions, that is, democracy, the rule of law, and especially good governance, are by no means universal norms justifying economic sanctions against foreign investors in the UK, against international transactions and even less so with respect to overseas transactions between third-state parties with the involvement of a UK financial organisation.

In terms of economic presence within British jurisdiction, the UK is party or signatory to 105 Bilateral Investment Treaties (as well as a VCLT party, thus bound by Art. 18 on treaty obligation prior to its entry into force). Although it would be risky to draw some general conclusions concerning such a vast body of treaties, one can at very least acknowledge that by virtue of, for instance, the UK Model BIT, investment protection covers shares in and stock and debentures of a company and any other form of participation in a company, as well as money claims (art. 1(a)(ii, iii). Foreign investors are guaranteed Fair and Equitable treatment and protected from unreasonable impairment of management, maintenance, use, enjoyment, or disposal of investments (art. 2(2)). Investments and their return enjoy the MFN treatment (art. 3(1)). Some other substantive and procedural rights could be listed, to stress possible conflicts with SAMLA financial sanctions, but more importantly, exceptions under the Model BIT cover measures “necessary to protect national security, public security or public order” (art. 7(1)). This is definitely narrower than the SAMLA sanctions for “foreign policy goals”, not to mention the goal of promotion of democracy, the rule of law and good governance in a third state.

In terms of international transactions with a UK person (in SAMLA terms), the UK is bound by a number of multilateral treaties, including the OECD Codes of Liberalisation of Capital Movements and of Current Invisible Operations, the IMF Articles of Agreement, as well as WTO GATS, and the Understanding on Commitments in Financial Services (although this regime may change as a result of Brexit). Without going into the details of relevant provisions on the liberalisation of current and capital flows, the right to impose unilateral restrictions is largely limited to public security and serious difficulties for monetary policy or exchange rate policy (also included in the UK Model BIT, art. 7(2)). The same regime would likely apply to obstructing UK settlement of foreign transactions (between foreigners).

While considering protection of foreign investors’ acquired rights in such legally problematic cases, one should also pay attention to governmental capacity to adopt new sanctions that are not explicitly stipulated under SAMLA yet are necessary to meet UK international obligations (by virtue of sect. 47 in relation to sect. 8 and 1(5)(f)), which again entails the risk of arbitrariness in innovative crafting of new restrictive measures.

Finally, unless the UK falls into the “no-deal Brexit” scenario, there will be some form of an arrangement concerning commercial relations with the EU and its Member States and one could hardly imagine a financial-sanctions carve-out for both questioned scenarios.

Beyond treaty restraints on the use of financial coercion against a third state (persons), whether in the case of contributing towards “foreign policy goals” or the promotion in a third state of democracy, the rule of law, and good governance, none seems likely to fall under countermeasures or reprisals. Accordingly, they could be considered an unlawful breach of sovereignty. Furthermore, beyond a certain threshold of efficiency, economic sanctions could amount to a breach of the prohibition on the use of force. These issues cannot be resolved in abstracto in a concise manner. Thus, let us just acknowledge the problem of the proportionality of financial sanctions. SAMLA does not impose any obligation in this respect. Although public authorities would be bound by the proportionality principle (sect. 6(1) of the Human Rights Act 1998), this would imply a relatively narrow notion of proportionality.

Finally, as compliance with sanctions can result in a breach of contractual obligations, SAMLA shields persons from adverse consequences in civil proceedings with respect to omissions in the “reasonable belief” of complying with regulations made under the Act (sect. 44). Obviously this provision does not protect UK persons abroad, notably if such sanctions will be declared unlawful in another jurisdictions (e.g., by virtue of the EU “blocking statute” (Council Regulation (EC) No 2271/96)).

The Scarce Extraterritoriality of the UK Financial Sanction

Taken together, the provisions on financial sanctions and the extraterritorial application of sanctions mean that under the new English and Welsh UK sanctions law, the measures could be binding not only on foreign financial institutions present in the City but also British financial institutions acting abroad.

Now, alongside a sanction adopted in compliance with the UN or other international organisation law (sect. 1(1)) may overlap broader measures adopted autonomously in pursuit of the same objective (under sect. 1(2)). In the Parliamentary debate over SAMLA, the situation was presented in which, for instance, the EU decides to top up the UN sanction, referred to as hybrid sanctions. SAMLA also explicitly reserves the government’s right to adopt measures for a “discretionary purpose”, that is, measures whose purpose is not (limited to) compliance with a UN obligation or other international obligation (sect. 2(1)). This could also be the case when international organisations are unable to adopt a sanctions resolution in response to a violation of fundamental norms of public international law. For instance, when a political stalemate amongst members of the Security Council prevents it from adopting a sanctions resolution (as the Minister of State, Foreign and Commonwealth Office, Lord Ahmad of Wimbledon, acknowledged “as a permanent member of the Security Council … we have agreed to [sanctions] regimes in that forum before they become international law under the UN charter”). The most obvious examples of such violations would involve ius cogens norms: prohibition on genocide, maritime piracy, slavery, torture, and prohibition of aggression. But one could also think of terrorism (e.g., the UK is party to the International Convention for the Suppression of the Financing of Terrorism), and the proliferation and use of WMDs (e.g., Treaty on the Non-Proliferation of Nuclear Weapons), all included among purposes of UK sanctions.

Obviously SAMLA comprises part of domestic law and so in itself it neither engages international responsibility (assuming that its provisions are contrary to UK international obligations) nor is shielded from it (VCLT art. 27). And yet, states are obliged to cooperate through lawful means to bring to an end to any serious breach of a peremptory norm of general international law (art. 40 of the Draft Articles on State Responsibility). States shall not render aid or assistance in maintaining that situation (art. 41 Draft Articles). Furthermore, a state is responsible for the international wrongful acts of another state if it knowledgeably aids or assists in such an act (art. 16, Draft Articles).

Hence, the question concerning one of the world’s most important financial hubs and issuer of one of the world’s five most important currencies is whether SAMLA isn’t falling short of the UK’s international obligations while signalling its capacity to do more?

The sanctions will not cover foreign institutions present in the City for their activity abroad, including their possible commercial presence in the targeted state. The sanctions may not cover British financial institutions dealing with the intermediaries of targeted persons. The sanctions may even be spared foreign subsidiaries of British financial institutions who enter into transactions prohibited back home. Finally, there is no mention of—as tested by the US in often controversial circumstances—a sanction against British Pound transactions. According to the SAMLA White Paper, a “UK nexus” might be created with respect to a “sterling transaction overseas that clears in the UK”, yet even under such circumstances it will be an ad hoc decision in order not to “artificially bring something within UK authority that does not clearly and naturally come under it”; in case of breaches of financial sanctions in another jurisdiction, the government “may use our information-sharing powers to pass details to relevant authorities if this is appropriate (sic!) and possible under UK law”. In course of public consultations, the government confirmed that it does not plan to expand UK sanctions beyond the UK’s current reach of sanctions.

It seems necessary to draw here a clear distinction between finance and the real economy. In the “real world”, vicious regimes can obtain supplies from many sources; even the know-how and assets necessary for WMD programmes are dispersed and relatively available, so it would be practically impossible and legally highly questionable to prohibit all transactions possibly relating to, for instance, dual-use goods. On the contrary, there is only a handful of currencies whose stability, liquidity, and substitutability are sufficient for high-value transactions with huge information asymmetries and inherent problems of trust (due to the lack of legitimate contract enforcement measures), which renders the use of traditional financial services almost indispensable. Additionally, according to the Financial Stability Board and the Basel Committee on Banking Supervision, all 30 global systemically important banks and eight out of nine global systemically important insurers conduct business in the UK, while interconnectedness between these institutions remains high (according to the IMF, worryingly so from the perspective of global financial stability).

On top of London’s financial leverage, SAMLA provides the basis to impose a reporting duty when one becomes aware of or has reasonable grounds to suspect that a designated person is a party to a transaction or that financial sanctions have been violated (sect. 16). The government may, for instance, request information from a designated person on the funds or economic resources they hold, own or control, or that someone else does on their behalf, and how those funds are disposed of.

All that is to say that the UK’s Financial Services Authority, in cooperation with other governmental authorities, is: 1) in a position of putting an end to any serious breach of a peremptory norm of general international law involving substantial funding or repetitive financial flows; 2) in a position to prohibit financial flows necessary for the maintenance of such a situation and for financing criminal regimes; and, 3) able to acquire information concerning such financial activity in third states and exert pressure upon the private sector to abstain from such transactions.

Although anti-money laundering (AML) measures are not per se covered by this article, it should be noted that SAMLA allows the government to adopt AML measures (sect. 49(1)) that concern actions with respect to criminal property (Proceeds of Crime Act 2002, sect. 340(11) in relation to sect. 327-329), i.e., benefits from criminal activity (PCA, sect. 340(3)). Accordingly, this gives grounds for some expansive interpretation of SAMLA applicability, in line with the current considerations.  Obviously the unilateral extraterritoriality of (financial) sanctions does not guarantee the compliance of foreign financial institutions with the UK measures nor the effectiveness  of sanctions. However, this does not undermine London’s substantial role in not rendering the crimes impossible.

Rights come with responsibilities. Together with reclaiming full sovereignty over its sanctions regimes, as well as regulation and supervision of one of the world’s top two financial centres, the UK must also answer some crucial questions concerning its international obligations. In terms of the extraterritorial application of financial sanctions, it seems advisable to prevent SAMLA from doing both too much and too little, before it’s too late.  Finally, it is worth noticing that while the major motivation behind Brexit was to cut red tape and reduce bureaucracy, the practical effect of SAMLA will be increased compliance costs for business, as well as increased law-making, administrative, and judicial costs for the UK, most likely matched with deceased efficiency of the system, which by default will not be fully streamlined with foreign partners, notably the EU.

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