Elina Karpacheva

Elina Karpacheva

Chair of the European Compliance Centre based in Sofia, Bulgaria

Brexit and its Effect on the UK Sanctions Regime

05 February 2020

by Elina Karpacheva

Countries’ sanctions regimes are always closely related to politics and foreign policy. Hence, international sanctions will be one of the areas where U.K. will exercise its post-Brexit sovereignty to the fullest. The British government has already prepared the grounds for its autonomous sanctions regime by adopting the Sanctions and Anti-money Laundering Act in 2018.

Currently, the U.K. sanctions policy is largely determined by the EU sanctions regime. During the transition period ending December 31, 2020 the situation will remain the same. This will give time for the British government to enact its own detailed autonomous sanctions regulations. If some aspects of the EU sanctions regime have not been addressed explicitly through regulations by 31 December 2020, they would continue as retained EU law under the EU (Withdrawal) Act 2018. The government will directly implement UN sanctions in UK domestic law after the transition period.

Foreign Policy and Legal uncertainty 

It is true that as an EU member, the UK already had the ability to enact autonomous measures like any other member state. So far, the U.K was one of the drivers of the EU sanctions policy. For example, the UK, France and Germany were attempting to keep the 2015 Iranian nuclear deal alive. However, after Brexit without the peer pressure and scrutiny by the other Member States and EU institutions, the post-Brexit sanction regime will mirror the orientation of the UK foreign policy choices; policy choices that still remain unclear or at least closely aligned with Trump’s politics.

What’s more, having in mind recent English court decisions that allow extraterritorial effect of US secondary sanctions (Lamesa Investments Ltd v. Cynergy Bank Ltd [2019] EWHC 1877 (Comm), it can be presumed that the UK regime will cling to the US one, especially on countries such as Iran and Russia. Since January 2021, companies should pay attention not only to the US and EU sanctions, but also to the emerging U.K. regime. The interplay of many legal regimes always causes grey areas that result in legal uncertainty, free-riding and an increase in compliance risks and costs for business. The challenge will come from inevitable discrepancies in application and enforcement, which will surely keep compliance teams busy.

Case study examples of Iran and Russia

An international company trading with Iran will now be in a very complex situation to determine whether transactions are allowed and under what circumstances under at least three different jurisdictions – the US, the U.K. and the EU.

The extraterritorial application of US sanctions regime will become stronger in transactions with U.K. modus. After the transition period, the UK will be no longer be subject to the EU Blocking Statute, meaning that the stance on Iran, Cuba or Libya will become stricter, even without the imposition of explicit U.K. sanctions by new regulations. Currently, it is a criminal offence for U.K entities and nationals to breach the EU Blocking statute; at least since January 2021, British companies will be alleviated from the risk to be heavily fined either for non-compliance with the US sanctions regime or for breaching the EU Blocking statute. Until then, they will remain between the ”hammer and the anvil” as their EU peers.

Currently, the EU sanctions regime provides an exemption for EU-based subsidiaries of Russian banks as long as they are not funnelling funds they raise back to their Russian-based parent. It is probable that this exemption will no longer exist after the transition period, resulting in EU businesses and individuals being prohibited to transact with UK-based ones and vice versa. One area where the U.K. will actively enact sanctions is the prevention of human rights abuse. This will result in adoption of travel bans and asset freezes on Russian citizens similar to the US Global Magnitsky Act.

What should companies beware of?

In the first place, companies should review and re-set their sanction risk assessment and compliance process with the new U.K. regulations in mind. Secondly, they have to adapt the terms and conditions in their contracts to reflect the U.K requirements (or extra – territorially applicable US ones). The complexity of being compliant both with the EU and U.K. sanctions regime could arise from the differences in what each of these jurisdictions considers as ownership and control (remember that the 50 OFAC rule is different from the EU definition of control). The exemptions, exceptions and conditions of granting licenses between the two regimes will diverge. As a result, some companies might be able to benefit from a EU license for specific goods, but may not get one in the U.K.

The author, Dr. Elina Karpecheva is the Chair of the European Compliance Centre based in Sofia, Bulgaria. She is also the Content Director of the Bulgarian website of the Risk & Compliance Platform Europe, which will launch very soon.

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