This article was first published by Law360 on March 7, 2024.

Almost six years have passed since the introduction of the UK Sanctions and Money Laundering Act, and two years since Russia's invasion of Ukraine, which was a watershed moment for the UK sanctions regime.

Against the background of these developments, the Foreign Commonwealth and Development Office's strategy paper, "Deter, disrupt and demonstrate — UK sanctions in a contested world," published on Feb. 22, reflects on some of the successes, challenges and future developments of the UK sanctions regime.

The key takeaways from the paper are that:

• International cooperation is a key focus for the FCDO, both in coordinating sanctions and combating potential paths for circumvention in third countries;
• Firms must strike a balance in implementing robust and effective sanctions compliance procedures and controls, while also avoiding overcompliance;
• The government may introduce a new humanitarian exception for financial sanctions;
• Designated persons may soon be able to apply for the release of frozen funds to pay for the reconstruction of Ukraine; and
• The government is closely monitoring the judiciary's interpretation of the UK sanctions regulations, which are still in their relative infancy.

UK Government Focus

One of the most prominent themes of the strategy is cooperation. It underscores the importance of international coordination in imposing sanctions, and notes that cooperation with the G7 and Five Eyes is particularly important "when agreement at the UN Security Council has not been possible".¹This is especially significant in the context of the Russia (Sanctions) (EU Exit) Regulations 2019, as Russia is a permanent member of the U.N. Security Council.

The strategy discusses the difficulties associated with the fact that many third countries do not implement sanctions against Russia, and that Russia has been able to reroute its supply chains through these countries to bypass sanctions.² The government's direct response has involved diplomacy in high-risk regions and targeting sanctions against some of the key actors in these supply chains, such as military suppliers.

It also underlines the importance of the private sector in monitoring supply chains for evidence of circumvention, especially in the context of the common high-priority items list, i.e., goods with battlefield and military applications. Firms that do not already have an in-depth understanding of their own supply chains should quickly develop one as an essential guard not just against sanctions breaches, but also other regulatory hazards such as anti-money laundering and environmental, social and corporate governance risks.

The strategy also highlights the importance of cooperation and compliance by the private sector in the context of financial sanctions. It warns that businesses should comply with sanctions without unnecessarily stopping legitimate activity.³

However, there are numerous areas of ambiguity in the UK sanctions regime, such as the ownership and control test and circumvention, which undoubtedly result in instances of overcompliance. Indeed, in October 2023, the Court of Appeal of England and Wales found in Mints v. PJSC National Bank Trust that the government itself seems to have been unable to accurately interpret the Russia (Sanctions) (EU Exit) Regulations 2019, which is discussed below.

Firms are required to conduct their own analysis of whether or not an entity is sanctioned and, in the event of a breach, the Office of Financial Sanctions Implementation can issue fines on a strict liability basis. OFSI issued guidance, most recently updated in August 2023, showing that, when assessing sanctions breaches, it will take into account due diligence efforts made by firms.⁴ But it is difficult to see how nonbinding guidance and government warnings regarding overcompliance can outweigh the serious legal risks presented by the ambiguity of UK sanctions when combined with its strict liability regime.

Annex 2 of the strategy lists some of the entities involved in UK sanctions policy and enforcement. It is a useful guide for anyone that is familiar with the largely omnipotent U.S. Office of Foreign Assets Control but is struggling to get to grips with the alphabet soup of agencies and departments that shape the UK's sanctions landscape.

However, the annex omits a number of key government entities including the Crown Prosecution Service, which may conduct prosecutions for sanctions breaches, as well as regulators such as the Financial Conduct Authority and Solicitors Regulation Authority, which are taking an increasingly active interest in firms' sanctions policies and procedures.

While the strategy trumpets cross-departmental coordination in sanctions implementation and enforcement,⁵ it is far from clear that this fragmented regulatory landscape is an advantage. Indeed, the director of the National Economic Crime Centre commented in February that the landscape is complicated and that "consolidation generally helps."⁶ With the announcement of the new Office of Trade Sanctions Implementation in December 2023, the signs point to proliferation rather than consolidation.

Judicial Interpretation of the UK Sanctions Regime

Within the strategy is an oblique reference to the most interesting development in UK sanctions in 2023, and one that the government would doubtless rather forget: the Court of Appeal's October 2023 judgment in Mints v. PJSC National Bank Trust.⁷

In that case, the court found, obiter, that Vladmir Putin, who is subject to an asset freeze, is at the apex of a command economy and could be deemed to control everything in Russia. Justice Julian Flaux wrote that the government had failed to think through the absurd consequences of Putin's designation, i.e., that his designation could indirectly apply to the whole of Russia. If this interpretation were correct, it would have seismic consequences for all the UK sanctions regimes. For instance, the same reasoning could apply to Aleksandr Lukashenko in Belarus.

The FCDO and OFSI subsequently issued a statement to the effect that they disagreed with the Court of Appeal's interpretation. Furthermore, the subsequent High Court of Justice of England and Wales 2023 decision in Litasco SA v. Der Mond Oil and Gas Africa SA reached a different conclusion regarding the control test in relation to Putin's designation. However, the legal position is still unsettled.⁸

The strategy states that the judgments provide helpful clarification of how the courts will approach the legal tests set out in the legislation, "which [the FCDO] will incorporate in our approach to future sanctions decisions." This section rather cautiously concludes that "the SAMLA framework is relatively new and our domestic law in relation to sanctions continues to evolve."

Indeed, sanctions may undergo something of an evolutionary jump in 2024, as the claimants in Mints have obtained permission to appeal to the UK Supreme Court.⁹ If the Supreme Court finds that Putin does control everything in Russia, the FCDO may need to overhaul the sanctions list or seek to amend the ownership and control test itself.

Upcoming Developments

The strategy unveils some new developments that will be introduced as part of the UK sanctions regime this year.

Designated persons may be able to apply for frozen funds to be released for the purpose of supporting Ukraine's recovery and reconstruction.¹⁰ This may be an appealing option in itself for some designated persons, but they may also ask themselves whether making significant financial contributions to the reconstruction of Ukraine could be prayed in aid of a legal challenge to their designation.

It's doubtless that this calculation will be influenced by the fact that, although designations are a temporary measure, the war in Ukraine sadly shows no sign of abating, and it seems likely that, for many people on the list, being designated by the UK government is effectively a life term. Although the wording of the designation criteria under Section 7 of the regulations and the Feb. 20 High Court decision in Khan v. Secretary of State for Foreign, Commonwealth, and Development Affairs suggest that this would not assist in a legal challenge, it may change the policy calculus for the designation in the eyes of the FCDO.¹¹

The FCDO is also hoping to introduce a humanitarian exception across all financial sanctions.¹² This would be a most welcome development and a significant improvement from requiring nongovernmental organizations and financial institutions to apply for a specific license from OFSI on humanitarian grounds. Notwithstanding the fact that OFSI prioritizes humanitarian cases, the urgency and financial constraints associated with humanitarian work are unsuited to the license application process, which was recently described by the High Court as having "sometimes Kafkaesque manifestations".¹³

Finally, a new type of prohibition will prevent designated persons from acting as a director of a UK company.¹⁴ The relatively minor nature of this proposal suggests that we are unlikely to see the introduction of significant new categories of sanctions in the immediate future, and that the UK government's focus is likely to be on refining existing restrictions, such as the oil price cap, and enforcement.

The UK sanctions landscape has undergone significant and rapid transformation since the introduction of the Sanctions and Money Laundering Act six years ago. New and upcoming developments flagged in the strategy, such as the introduction of a new trade regulator and potential clarification of the ownership and control test, show that that landscape will continue to evolve in 2024.

¹ Paragraph 28.

² Paragraphs 15 and 16.

³ Paragraph 30.

⁴ OFSI enforcement and monetary penalties for breaches of financial sanctions, pages 12-16.

⁵ Paragraphs 35-36.

⁶ Business and Trade Committee, Oral evidence: Implementation of Economic Crime and Corporate Transparency Act 2023, HC 522, 6 February 2024.

⁷ Mints & Ors v PJSC National Bank Trust & Anor [2023] EWCA Civ 1132.  See our client alert wilmerhale.com/en/insights/client-alerts/20231010-court-judgment-regarding-scope-of-the-ownership-and-control-test-under-the-uk-sanctions-regime.

⁸ gov.uk/government/publications/ownership-and-control-public-officials-and-control-guidance/ownership-and-control-public-officials-and-control-guidance; Litasco SA v Der Mond Oil and Gas Africa SA & Anor (Rev1) [2023] EWHC 2866 (Comm).

⁹ www.supremecourt.uk/pta/permission-to-appeal-2024-01.html.

¹⁰ Paragraph 18.

¹¹ Khan v Secretary of State for Foreign, Commonwealth, and Development Affairs [2024] EWHC 361 (Admin).

¹² Paragraph 26.

¹³ Khan at 147.  The Court also found that OFSI is "perhaps more burdened than was originally anticipated," and "does not operate at high speed."

¹⁴ Paragraph 12.