UK “Magnitsky” sanctions: The dawning of a brave new world?
14 July 2020
The individuals initially targeted are from Myanmar, Russia and Saudi Arabia and include persons allegedly connected to the deaths of Jamal Khashoggi and Sergei Magnitsky, as well as individuals linked to the mistreatment of the Rohingya. Two entities from North Korea are also targeted. There is no doubt that further sanctions designations under the Regulation will follow in the short to medium term. We set out below the background to the Regulation and discuss its impact on UK companies and financial institutions.
The UK’s Sanctions and Anti-Money Laundering Act 2018 includes specific powers that enable the UK Government to create sanctions “in the interests of international peace and security” and to “provide accountability for or be a deterrent to gross violations of human rights”. The Regulation has been created using these powers and provides a framework under which individuals and entities can be designated by the UK Government if they are involved in activities that would amount to a serious violation of an individual’s right to life; their right to not be subjected to torture or cruel, inhuman or degrading treatment or punishment; or their right to be free from slavery, not to be held in servitude or required to perform forced or compulsory labour. Under the Regulation, being “involved in an activity” is very broadly defined and includes providing financial services to, or profiting from, the targeted activities and/or being owned or controlled by a person so involved.
The Regulation is modelled on the sanctions imposed by the U.S. Government pursuant to the Global Magnitsky Act (the Act). The Act was enacted in 2016, as a follow-on to the separate Magnitsky Act of 2012, which was executed to sanction Russian officials allegedly responsible for the death in 2009 of Sergei Magnitsky, a Russian tax lawyer who died in prison after exposing alleged corruption connected to the Kremlin valued at USD230 million. The Act enables the U.S. Government to sanction individuals alleged to be involved in human rights abuses anywhere in the world, rather than only those complicit with Sergei Magnitsky’s death.
Most recently, on 9 July 2020, the U.S. Government targeted one Chinese government entity and four current or former government officials in connection with alleged serious rights abuses against ethnic minorities in the Xinjiang Uyghur Autonomous Region.1 A number of other jurisdictions, including Canada,2 the EU3 and Australia4 have or are intending to follow suit by enacting legislation similar to the Act.
The UK Government, in enacting the Regulation, has emphasised that it will enable the UK to “work with international partners, including the US and Canada”, “to demonstrate leadership and ambition on human rights values after we leave the EU” and to provide “agility to respond autonomously to serious human rights violations wherever in the world they occur”.5 Indeed, when assessing whether to target a particular individual, one factor that the UK will consider is whether the UK’s international partners have adopted, or propose to adopt, similar sanctions.6
The UK Government has also signalled that the number of individuals designated is expected to increase over time, perhaps to a rate of around 100 individuals per year. Furthermore, the UK Government has assumed that there will be some degree of alignment between the UK’s sanctions and those of the U.S. and Canada with approximately 60% of the UK’s sanctions targets already being designated under the equivalent U.S. or Canadian sanctions regimes.7
The effect of the Regulation is that the individuals targeted are subject to travel bans and asset freezes and the entities targeted are subject to asset freezes. Additionally, the Regulation imposes discrete reporting related obligations on certain UK entities. The Regulation also allows for the issuance of licences by the UK Government in a range of different circumstances and provides for certain exceptions. It is a criminal offence to breach the prohibitions and requirements in the Regulation.
The Regulation applies to conduct in the United Kingdom and by a “United Kingdom person”, including UK incorporated companies, wholly or partly outside of the UK. So, by way of example, all UK citizens and UK companies, as well as any persons who are contractually obliged to comply with the UK’s sanctions, will need to ensure that they comply with the terms of the UK’s new asset freezes if they deal, directly or indirectly, with the persons or entities who are targeted.
Furthermore, it would be prudent for UK companies, particularly financial institutions, to ensure that their broader sanctions compliance “tool kit” is updated to reflect this development. For example, sanctions policies and checklists, as well as relevant contracts should be checked to ensure that they cover the new UK sanctions designations.8 Training materials should also be updated.
Moreover, going forward it is clear that the UK Government’s emphasis on the importance of “agility” when targeting individuals under the Regulation increases the risk associated with doing business in certain “high-risk” jurisdictions and individuals and entities associated with them. Consequently, when dealing with such jurisdictions and their associated persons, companies subject to the Regulation will need to conduct thorough diligence to understand the sanctions risks associated with their prospective counterparties and consider very carefully whether they should include bespoke sanctions-related exit rights in their contracts.
As the UK Government’s first substantive step in bringing into force a sanctions policy that is fully independent of the EU’s, the Regulation is notable in a number of respects. First, the UK Government’s anticipation that its human rights sanctions will be broadly aligned with those of Canada and the U.S. could signal a broader movement of the UK’s sanctions policy away from that of the EU. If this were to occur, it could have a significant impact on the UK’s relations with the EU and reduce the ability of businesses to transact seamlessly across the UK and the EU. However, all of the current signals are that the UK’s other sanctions regimes will remain aligned with the EU’s sanctions regimes, at least in the short term. Second, as matters stand, the UK’s designations are relatively modest and, at least domestically, uncontroversial as, for example, no Chinese officials linked to the alleged mistreatment of the Uighurs or the changing political situation in Hong Kong are named.9 As it is expected that NGOs and other third parties will now assert considerable pressure on the UK to target more individuals allegedly linked to human rights abuses, the UK Government will no doubt face many unpalatable policy choices when deciding whom it targets, as well as the potential for increased litigation. Finally, the Regulation may only be the start of “values-based” sanctioning by the UK, as it is likely that the UK will decide to add individuals linked to corruption to its sanctions regimes, as is currently the case under the Act, later in the year.10 There is no doubt that fascinating and potentially challenging times lie ahead for the UK’s sanctions policy and the businesses that must navigate it.
3The EU’s High Representative/Vice-President Josep Borrell announced in December 2019 that the European External Action Service would begin work on an “EU equivalent of the so-called Magnitsky Act of the United States” following the request of several EU member states (see here). As recently as April 2020, MEPs wrote to High Representative/Vice-President Josep Borrell in relation to this proposal and urged that Mr Magnitsky’s name should be included in the legislation’s title (see here).
4A Parliamentary inquiry into whether Australia should examine the use of targeted sanctions to address human rights abuses is ongoing (see here). It is widely expected that some form of “Magnitsky” sanctions will be introduced by Australia, perhaps as early as later this year.
7See the UK Government’s “Impact assessment for Global Human Rights” (available here). The UK has initially targeted 49 individuals and entities. In contrast, the U.S. had targeted, as of 10 July 2020, 200 individuals and entities.
8In this respect, we note that the new UK list (available here) is incorporated into the “Consolidated List of Financial Sanctions Targets in the UK” (available here). This should minimise the administrative burden in terms of updating contracts and sanctions screening tools.