Authors: Doug Bryden, Ophelia Chan, Rachel Wilson, Annabelle Witte
Overview of recent developments in the UK sanctions regime
Following Brexit, the UK established an autonomous sanctions regime by implementing the Sanctions and Anti-Money Laundering Act 2018 ("SAMLA 2018"), with the stated intention of enabling the UK to depart from EU sanctions regulations and react faster to geopolitical events. Following Russia's invasion of Ukraine, The Russia (Sanctions) (EU Exit) Regulations 2019 ("the Russia Regulations") made under SAMLA 2018 have been amended on no fewer than seventeen occasions to introduce a broad range of additional restrictions on carrying out business in Russia and with Russian persons.
In March 2022, the Economic Crime (Transparency and Enforcement) Act ("ECA") was expedited through Parliament. The key measures implemented by the ECA include:
Against a background of ever-changing and increasingly complex international sanctions, those working across multiple jurisdictions (both in a transactional and operational context) need to stay alert to political and legislative changes. Failure to adequately manage these risks can result in serious penalties, commercial and operational issues and damage to reputation.
Doug Bryden, Head of Operational Risk & Regulatory
1. Enhanced strict-liability enforcement regime:
Prior to the ECA, the UK's Office of Financial Sanctions Implementation ("OFSI"), which is part of HM Treasury, had to establish that a person "knew, or had reasonable cause to suspect" that they were in breach of the relevant sanction in order to impose civil monetary penalties for breaches of trade sanctions. This "knowledge qualifier" was removed by the ECA, and replaced with a strict liability test, which came into force for all offences from 15 June 2022. In other words, a person's intent, knowledge or suspicion is now irrelevant to whether a civil penalty may be imposed by OFSI, bringing the UK's approach closer in line with the US sanctions regime.
On 8 June 2022, the Director of OFSI, Giles Thomson, clarified in a post on OFSI's blog that this change does not mean that a monetary penalty will be imposed in every case – only where "it is appropriate, proportionate and in the public interest to do so". The OFSI emphasised that the updated guidance on enforcement and monetary penalties "does not represent a change to OFSI’s overall enforcement approach and continues to emphasise the importance of self-disclosure as a potential mitigating factor", which was hailed at the time as welcome relief for businesses who might have innocently breached the regime.
2. Streamlined designation powers:
The ECA introduced an "urgent" procedure under SAMLA 2018, pursuant to which the UK may sanction individuals and entities already subject to designations by another regime (including the regimes of the US, EU, Australia, Canada, or any other country specified in regulations made by a Minister).
This urgent procedure implemented by the ECA was used immediately by the UK on 15 March 2022 to sanction 370 individuals who were already sanctioned by the EU.
3. Ability to name and shame:
The ECA introduced a new power whereby the OFSI may publish a report even where no monetary penalty has been imposed, but nevertheless "the Treasury is satisfied, on the 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 has heightened sensitivities for businesses carrying out higher-risk operations (in the sanctions context), on the basis of the reputational risks which may arise, even if such operations do not attract a fine.
These changes signal that UK regulators are increasingly focused on compliance with sanctions, potential enforcement actions for non-compliance, and businesses' internal control policies. Indeed, the Financial Conduct Authority has recently introduced a new reporting platform, which allows authorised firms and industry practitioners voluntarily to report sanctions evasions or weaknesses in internal sanction controls.
For further information on the changes introduced by the ECA, please see briefings published by our Risk & Operational Regulatory team here and here.
Uptick in disputes in the English courts related to the war in Ukraine and sanctions against Russia
The invasion of Ukraine and escalation of sanctions against Russia has precipitated an increase in disputes in the English courts related to, and caused by, both of these events.
One focus of this developing seam of litigation is the insurance and reinsurance sector. The Russia Regulations prohibit the export of aircraft to Russia, making aircraft available to Russian entities and supplying or delivering aircraft from a third country to Russia. These prohibitions cover both leasing and sales and there are equivalent provisions under EU sanctions. Following the termination by aircraft lessors of leasing arrangements with Russian airlines, in accordance with these new sanction provisions, many lessees failed to return aircraft to lessors, whilst some re-registered the aircraft in Russia. With their aircraft stranded in Russia, lessors naturally turned to claims against insurers (either their own or that of the airline).
One such case is Dubai Aerospace Enterprises (DAE) Ltd v Lloyd's Insurance Company SA. In these proceedings in the High Court, Dubai Aerospace Enterprises ("DAE") is seeking compensation from 11 insurance companies for the money that it had to write-off after lessees failed to return 19 of its aircraft from Russia following the termination of leasing contracts. In order to make good its claim against the defendant insurers and reinsurers, DAE will be required to successfully establish that there has been a "total loss" of the aircraft, resulting from, for example, theft, confiscation, nationalisation, seizure, restraint or detention of the aircraft.
The war in Ukraine has also led to a number of commercial contractual disputes. These disputes have arisen as a result of parties' non-performance of their contractual obligations in circumstances where businesses have either withdrawn from Russia in accordance with sanctions measures, or have been physically unable to perform their contractual obligations. One possible defence that a non-performing party may seek to rely on is a force majeure clause, designed to excuse a non-performing party to the extent that its failure to perform is due to certain specified extreme circumstances that are beyond its control.
The progression of this burgeoning field of disputes will be watched closely by lawyers, financial institutions and businesses alike, both in the UK and beyond.
Looking ahead: potential areas for disputes following the updated UK sanctions regime
Beyond the disputes seen to date, we might expect to see an increase in disputes relating to the following issues:
Russia's invasion of Ukraine in February 2022 has led to a series of fast-tracked changes to sanctions regimes, enforcement and investigations across the world, including in the UK, EU and US. In this article, we review the recent UK developments – highlighting the importance for businesses and financial institutions of keeping abreast of updates in this arena – and also discuss the uptick in litigation in the English courts that is linked to the war in Ukraine and escalation of sanctions against Russia.