As shown by several enforcement cases in recent years, such as Societe Generale in 2018 and Standard Chartered Bank in April 2020, breaching those sanctions can bring significant monetary and reputational harm for any financial institution or professional adviser involved.
The UK has a long-standing problem with illicit finance, whether or not connected to RussiaUntil recently, the main programmes for compliance officers and relevant senior managers in companies regulated by the Financial Conduct Authority to worry about were those imposed by the EU, the UN Security Council and the US.
In early July 2020, however, the British government announced the Global Human Rights Sanctions Regulations 2020, brought under the Sanctions and Anti-Money Laundering Act 2018.
Key points
- The UK government has announced human rights sanctions, in the spirit of the US Magnitsky act
- British governments have struggled to make much headway with economic crime regulations
- Lawyers would like proper enforcement of economic crime laws
The Sanctions and Anti-Money Laundering Act itself is the statute that empowers the government, upon completion of the Brexit transition period, to impose its own sanctions programme.
Some analysts have suggested that the regulations are something of a precursor to how the UK will use the Sanctions and Anti-Money Laundering Act for a more robust approach to sanctions than was possible within the EU.
That will, of course, remain to be seen over the coming months and years, especially when set against countervailing pressures such as making ‘global Britain’ attractive to foreign investment, recovering from the Covid-19 economic shock, and ongoing institutional issues such as opaque corporate registries and under-resourced criminal enforcement.
The regulations
The new regulations are largely the result of a lengthy campaign in the name of the late Sergei Magnitsky.
The subsequent Magnitsky initiative lobbied countries to introduce targeted – as opposed to country-wide – economic sanctions, to penalise the people who perpetrate gross abuses of human rights.
The regulations’ purpose is to target those involved in violating an individual’s:
- Right to life;
- Right to live free of torture or cruel, inhumane or degrading treatment; or
- Right to be free from slavery or compulsory labour.
Significantly, the regulations also allow the targeting, or ‘designation’, of any person who provides financial services or funds to any such abuser of human rights.
Similarly, those who “profit financially or obtain any other benefit from” such abusive activity (including, for example, forced labour camps manufacturing certain components) would also risk designation under the regulations.
Breaching financial sanctions is a criminal offence; conviction for one of the principal offences could result in seven years’ imprisonment and/or a monetary fine.
These are headline-grabbing developments, especially for those who do business in, or advise clients from, high-risk markets.
Most of us will, of course, welcome any action that deters future gross abuses of human rights, and many will hope to see substantive cases follow in due course.
However, therein lies the rub: successive British governments have struggled to make meaningful progress in the economic crime field. While recent years saw positive measures such as the creation of the National Economic Crime Centre, the introduction of unexplained wealth orders through the Criminal Finances Act 2017, and some enforcement cases by the Office of Financial Sanctions Implementation, the UK remains a global centre for money laundering, and a haven for kleptocrats from around the world.
The London laundromat
The recently released parliamentary report on Russian influence notes the gradual development of “the London ‘laundromat’”, which is said to have had a corrosive effect upon British business and politics.
As many legal and compliance professionals knew already, the UK has a long-standing problem with illicit finance, whether or not connected to Russia.
This is a large, systemic issue and the regulations are one part of the multi-faceted solution that is needed. Some aspects of that solution are relatively anodyne but would, if implemented appropriately, have a significant effect.
The National Crime Agency has estimated that approximately £100bn of illicit finance affects the British economy each year.
The real figure is likely to be higher than that.
Broadly speaking, there are two key elements that help the flow of illicit finance:
- Corporate structures that permit obfuscation, or the complete concealment, of beneficial ownership; and
- ‘Professional enablers’, that is, the financial and legal advisers willing to serve without asking too many difficult questions.
As anybody who has investigated fraud will know, the devil is – invariably – in the detail.
Despite its importance as the UK’s public corporate registry, Companies House has long been open to abuse by those who file false or misleading documents.
In recent years, several episodes (for example, the Scottish limited partnerships central to the Azerbaijani Laundromat case in 2017) illustrated how UK-based companies and corporate service providers play important, and often pivotal, roles in large-scale money-laundering operations.
Those involved in tracking such illicit funds often note how Companies House simply does not have the resources to effectively monitor and verify documents filed.
Recently, in August2019, the Department for Business, Energy & Industrial Strategy completed a public consultation on corporate transparency and register reform.
The government is yet to publish its analysis of that consultation, the stated purposes of which included identifying measures to improve the accuracy of filings at Companies House and the sharing of relevant information with law enforcement.
Trouble with the tropics
Similarly, efforts have been made in recent years to improve transparency as to companies registered in the British overseas territories, such as the Cayman Islands and the British Virgin Islands, which have traditionally been the UK’s own offshore secrecy jurisdictions.
In May 2018 parliament approved the Sanctions and Anti-Money Laundering Act; section 51 of which compelled the UK government to effectively order, by December 2020, overseas territories to implement public corporate registries.
Unsurprisingly, the governments of those territories opposed this, acutely aware of the economic effect on their islands.
Nevertheless, in October 2019, the Cayman Islands announced that it would start making preparations for a public register, with legislation expected after 2022.
Similarly, the Turks and Caicos Islands also committed to transparency by 2022. However, the British Virgin Islands still resists the act, suggesting in 2019 that the islands may well renegotiate their constitutional relationship with the UK in order to avoid implementing a public register.
Similarly, Bermuda and Anguilla have refused to commit to timelines for implementing public registers. For now, therefore, those jurisdictions remain an important exception to the general trend towards transparency.
Under-fed guard dogs
Generally speaking, lawyers in the economic crime field do not actually want more laws. Instead, the issue is one of government enforcement of existing laws properly and fairly.
That requires appropriate and reasonable resourcing for both prosecutors and the criminal justice system more generally, the latter having suffered significant harm during the austerity years.
Parliament has provided what some may call world-beating laws (for example, the Bribery Act 2010,Proceeds of Crime Act 2002, and the Sanctions and Anti-Money Laundering Act 2018) for pursuing complex financial crime.
Credible enforcement is in the interests of all who wish to do business under the rule of law in a global Britain amid ongoing global uncertainties.
Anupreet Amole is a partner at Brown Rudnick
