WAR IN UKRAINE:UPDATE
UK ECONOMIC CRIME ACT FAST-TRACKED
Further evidence of the UK Government’s response to the Russian invasion of Ukraine can be found in the form of the recently passed Economic Crime (Transparency and Enforcement) Act 2022 (the “ECA”). The statute was fast-tracked into law and received the Royal Assent on 15 March 2022.
The Act is designed to demonstrate that “the UK will not be a home for corruption”. It makes reforms in three areas. It creates a register of overseas entities and their beneficial owners; it strengthens Unexplained Wealth Orders (UWOs); and it reforms the UK’s sanctions regime to let the UK Government move “harder and faster” on sanctions.
Overview of the Act
There are three main areas in the Act, as noted above. They are:
- Creation of a Register of Overseas Entities and their beneficial owners;
- Reforms to UWOs, by increasing the threshold for costs orders made against enforcement authorities thus giving those agencies enhanced protection;
- Reforms to the sanctions regime.
The most striking reforms are those to the UK sanctions regime.
Strict Liability for Breach of Sanctions
The Act creates a strict liability offence by amending section 146(1) of the Policing and Crime Act 2017 (the “PCA”). This section conferred upon HM Treasury the power to impose a monetary penalty on a person if it was satisfied, on a balance of probabilities, that (a) the person had 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 ECA removes the knowledge or reasonable cause requirement and, in its place, inserts a new section 146(1A) PCA which states: “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 be ignored”.
The strict liability test so introduced creates a significantly lower threshold for OFSI to impose civil monetary penalties for infringements of UK sanctions and has the potential to significantly impact the approach that companies and individuals take to compliance.
New “urgent procedure” to streamline sanction designation powers
Section 58 of the ECA introduces a new “urgent procedure” for designation where the “standard procedure” or involved person, test is not met (section 58). This section amends the Sanctions and Money Laundering Act 2018 (“SAMLA”).
Section 11 of SAMLA gives the 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 the person is appropriate. SAMLA maintains the involved person requirement (now referred to as Condition A) but removes the appropriateness requirement. In its place an alternative ground for designation is introduced. 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) SAMLA 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 regulation) applies to the person under the law of the USA, the EU, Australia, Canada or any other specified country.
Condition C requires the Minister to consider the public interest in making 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. This 56 day period can be renewed only once (section 11(2C) SAMLA) and will lapse at the end of the second 56-day period, unless the Minister certifies (within the second period) that Condition A is met.
This provision gives the UK Government the ability to mirror sanctions designations made by close allies and is a significant streamlining of the Government’s ability to designate persons by name. It is hoped that this will allow for a more co-ordinated approach to sanctions designations among the UK, USA, EU and other allies. Indeed, the UK Foreign Secretary, Liz Truss, announced the first use of these new powers on the same day as the Royal Assent, with 345 Russian individuals and 5 Russian entities being designated for the purposes of an asset freeze and travel ban.
New name and shame powers for OFSI
The ECA also lowers the threshold for OFSI to report on breaches of financial sanctions.
The Act amends the PCA by inserting 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 PCA, but where 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”.
This provision could significantly increase the scope for reputational damage for entities not penalised under sections 146 or 148 PCA but where OFSI is nonetheless satisfied that the entity has breached sanctions rules.
The UK has now designated over 1000 individuals and entities in response to Russia’s invasion of Ukraine. It remains to be seen how the Treasury will use its new reporting powers and the effect that this will have on compliance with UK sanctions regulations. It is likely that the impact of these changes will be felt across many industries. The UK Government is likely to continue to use the streamlined sanctions designation procedure in order to co-ordinate further measures with its allies.
A further Bill is expected with measures to prevent the abuse of limited partnerships and to give the Government new powers to seize crypto assets from criminals.
For further information please contact Lucy Keane (firstname.lastname@example.org).
21 March 2022