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Rapid Response Team: 0800 559 3500
Switchboard: +44 (0)203 947 1539
Rapid Response Team: 0800 559 3500
Switchboard: +44 (0)203 947 1539

UK Sanctions Explained

Sanctions are an economic weapon used by governments to punish individuals, organisations and even whole countries for behaviour that is considered to be politically unacceptable.

Video: Sanctions in the UK - Syedur Rahman - Partner, Rahman Ravelli.

Recently, sanctions have been increasingly in the news. The UK has imposed probably the largest set of sanctions on those with links to Vladimir Putin’s regime following Russia’s invasion of Ukraine. Here we explain what sanctions are and outline the UK’s approach to using them.

What are sanctions?

Sanctions are an economic weapon used by governments to punish individuals, organisations and even whole countries for behaviour that is considered to be politically unacceptable.

They work by imposing restrictions on how businesses can interact with the individuals, organisations or countries that are the target of those sanctions. 

Sanctions can involve:

  • Freezing of assets targeting the funds or economic resources of a designated person.
  • Restricting access to financial markets and services, so that the designated person cannot, for example, seek or make investments or continue with banking and other financial relationships.
  • Financial sanctions are imposed on those who are on the UK sanctions list.
  • Certain trade restrictions.
  • Or Creating orders to stop all business of a specified type with a sanctions target.
  • Travel bans and also sectoral-related restrictive measures.

Anyone who defies these restrictions can face large financial penalties and criminal prosecution.

For this reason, any person or organisation involved in a business that crosses borders has to be aware of the sanctions regime regarding where they do business and who they do business with, including those at various stages in the supply chain.

Sanctions and the UK

For the purpose of this video, I’ll only discuss the present position.

Pursuant to the Sanctions and Anti-Money Laundering Act 2018 (better known as SAMLA), the UK has the authority to impose sanctions on entities and individuals. Since Brexit, it can impose such sanctions independently from the EU. Learn about sanctions in the European Union.

You’ll appreciate that The UK sanctions regulator is the Office of Financial Sanctions Implementation (better known as “OFSI”).

OFSI takes the position that UK sanctions will apply to foreign subsidiaries of UK companies, transactions going through a UK bank, and foreign activity directed from within the UK. Read more about OFSI enforcement.

Let us look at financial sanctions within the Russia Regulations, as a quick example.

The scope of these sanctions prohibits any party required to comply with UK sanctions from “dealing with” funds of a designated person or entity. 

This essentially means that UK Persons and entities must prevent funds and economic resources from being provided to, or procured from, designated persons. There can be no dealings which will benefit designated persons.

Further, SAMLA prohibits “financial services from being provided, where the services relate to financial products, issued by designated persons.

All individuals and entities who are within or undertake activities within the UK territory must comply with sanctions.

This also relates to UK nationals and legal entities established under UK law, including their branches, irrespective of whether they are or where their activities take place.

And so, when you are trying to assess whether you are affected by this, be it directly or indirectly, it will be important to understand the full structure of your business. 

You will need to forensically examine whether the ownership and control criteria set by the regulations, affect your business or not. It may be that a sanctioned person or entity may have a minority interest within your business structure.

You will appreciate If a designated person has a minority interest in another entity, this does not necessarily mean that financial sanctions apply to the entity.

There may be trust structures where there is evidence that the designated person has divested themselves from being a beneficiary and so sanctions shouldn’t apply. All of this in my view needs careful consideration. 

Recent UK sanctions developments

There have been many developments here, and I’ll only go through a couple.

Earlier I mentioned that sanctions have been imposed on Russia due to its invasion of Ukraine. The invasion has led to fast-paced changes to the UK’s sanctions regime. And you will appreciate it’s constantly evolving.

The government’s passing of the Economic Crime (Transparency and Enforcement) Act 2022 represents a targeting of those with Kremlin links. 

Much of the Act indicates that the UK government is looking to move quickly and more effectively when it comes to sanctions. 

The most notable sanctions-related aspect of the Act is that it removes the need to show that a corporate or individual knew or had reasonable cause to suspect that their conduct breached a sanction, in order for them to be penalised by OFSI.

OFSI no longer has to show that the corporate or individual knew or suspected they were breaching a sanction the fact that the breach was committed is enough for a penalty to be imposed. This change could lead to more civil enforcement action against companies and individuals. 

We’ve also seen developments which introduced new trade sanctions. This is known as Amendment 14 to the RussiaRegulations 2022.

Amendment 14 Regulations entered into force on 22 July 2022. They impose new trade restrictions prohibiting the provision of certain services to Russian individuals and entities.

This can include professional and business services, miscellaneous essential goods required for the functioning of the Russian economy, oil and oil products, and gold, coal and coal-related products.

This means there are now certain services which are prohibited if it is provided to any person connected with Russia. 

There are some exceptions and defences available which will not be covered in this video, but to conclude the new amendments to these regulations have a wide scope and therefore it is imperative for individuals and entities to assess and stress test how these regulations – may affect them.  

What should businesses do to avoid falling foul of sanctions? 

As I said earlier, companies and individuals have to be aware of the sanctions risks when they are doing business or carrying out certain activities.

Such awareness can only be gained by a commitment to understanding your business in accordance with the sanctions regime.

We’ve seen scenarios where matters need to be assessed on a case-by-case basis; we’ve seen scenarios where companies are allowed to trade within a certain activity, but due to the way the sanctions legislation is framed, they’re having to conduct business effectively with their hands tied behind their back and so robust submissions are having to be made to the regulator.

To put it in the plainest terms, that means taking all possible steps to keep abreast of all sanctions that have been or may be about to be - imposed on either those you do business with or the territories where you carry out that business activity.

For example, a key component to answer when assessing the impact of a designated person who is on the UK sanctions list is to determine whether the designated person “owns or controls” the other entities.

When assessing Ownership: this is governed by regulation 7. There is also guidance within OFSI. In short, ownership can only be determined if you:

  • Hold directly or indirectly 50% of shares of the entity. It's more commonly known as the 50% rule.

When assessing control: this can be more complex. the key question to answer is whether the designated persons can achieve the results of an entity in accordance with its wishes. 

And so you need to look at control by way of influence.

You need to assess what voting rights the designated person has; whether they can remove or appoint directors etc. you need to consider whether there is any dominant influence within an entity, be it directly or indirectly. If the control criteria are met then regulation 11 applies and all of the assets within the entity should be treated as frozen. 

International sanctions can be complex and subject to change. It’s constantly evolving. This is why it can be necessary to consult specialists who are up to speed with the current situation. Specialists who can:

  • Devise compliance procedures for a company to ensure any sanctions risks are identified and minimised.
  • Assess corporate structures and have a good understanding of Trusts Law. 
  • Consider whether licence applications should be made to the regulators.

Just managing communications with the authorities is extremely important:

  • You need an in-depth understanding of sanctions challenges.
  • And of course, should the worst happen, construct a swift, strategic response to any allegations that sanctions have been breached.

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Syedur Rahman is known for his in-depth experience of serious fraud, white-collar crime and serious crime cases, as well as his expertise in worldwide asset tracing and recovery, international arbitration, civil recovery, cryptocurrency and high-stakes commercial disputes.

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