Sanctions Update: Further measures taken by UK, EU and US in response to Russia's invasion of Ukraine, including the UK's new Economic Crime (Transparency and Enforcement) Act

Overview

On 15 March 2022, the UK's new Economic Crime (Transparency and Enforcement) Act (the "ECA") received Royal Assent. The legislation contains a number of important provisions, including the introduction of a new 'Register of Overseas Entities' and reforms to unexplained wealth orders. In addition, the ECA is intended to ensure that the UK can respond more quickly to sanctions designations imposed by its allies and enhances existing civil sanctions enforcement powers.

Please see our briefing available here for information relating to the Register of Overseas Entities.

As the war in Ukraine approaches its third week, in this briefing we provide a general update on some of the key sanctions and other trade restrictions that have been imposed by the UK, EU and US in recent days and consider the impact of the UK's ECA on sanctions enforcement more broadly.

This article reflects the position at the time of publication and may be subject to further updates. Our previous articles on the Ukrainian conflict are available here, here and here.

What are some of the key restrictions that have been announced recently?

In recent days a number of new announcements have been made and measures implemented, including:

  • the UK's enactment of the ECA;
  • a notable increase in the number of individuals and entities subject to UK and EU sanctions;
  • the G7 removing Russia's Most-Favoured-Nation status under World Trade Organisation rules;
  • a total US ban on the import of Russian oil; and
  • a ban on the export of luxury goods to Russia from the UK and EU.

The following is a short summary of these announcements and some other recent sanctions and trade control restrictions and statements that have been made by the UK, EU and US:

UK

  • On 15 March 2022 the ECA received Royal Assent, following an expedited passage through Parliament. Please see below for further details of specific provisions relating to sanctions.

    Shortly after, the UK announced sanctions against 370 more Russian and Belarusian individuals and entities. This follows a large number of additional individuals and entities being added to the UK list of sanctions in the last week – including 386 members of the Russian Duma for their support for the Ukrainian breakaway regions of Luhansk and Donetsk.

    As of the date of publication, the list of Russian entities and individuals now subject to UK sanctions is over 1,000.
  • On the 13 March the UK's Chancellor of the Exchequer, Rishi Sunak, stated that he urged "firms to think very carefully about their investments in Russia and how they may aid the Putin regime" and that he was clear "that there is no case for new investment in Russia."

    Such broad statements add reputational and commercial pressure to businesses considering what steps they should take in connection with their existing and future business in Russia.
  • On the 11 March, in a joint statement from leaders of the G7, it was announced that Russia's Most-Favoured-Nation ("MFN") status would be removed under World Trade Organisation ("WTO") rules by the US, UK, Canada, France, Germany, Italy and Japan.

    MFN status is a principle whereby the WTO's 164 member countries agree to treat other members equally so that they can provide concessions, privileges and immunity in trade agreements.

  • In a widely anticipated move, it was announced by the UK Government that the businessman Roman Abramovich's assets would be frozen (including a prohibition on transactions with UK individuals and businesses) due to his close ties to Russian President Vladmir Putin. The EU has also imposed restrictions on Roman Abramovich.

    It was made clear that as a result of the UK sanctions, Chelsea Football Club would also be subject to an asset freeze and accordingly a General Licence was issued by the Treasury to enable Chelsea to undertake certain activities which might otherwise be prohibited from a sanctions perspective.

  • On the 8 March the UK Government announced that it would, by the end of the year, phase out imports of Russian oil in response to the invasion of Ukraine.

EU

  • On 15 March, the EU adopted its fourth package of sanctions on Russia. As part of this package of restrictions, 15 additional individuals and 9 entities were added to the EU's sanctions list, and further trade restrictions were introduced on new investments in the Russia energy sector, and a prohibition on the import of specified iron and steel products. The package was initially announced on the 11 March.

  • In addition to revoking Russia's MFN status on the 11 March, the EU also announced restrictions on the export of luxury goods from the EU to Russia. This luxury ban targets a broad range of EU-made products worth over €300 and includes, among other items, jewellery, gold, diamonds, clothing, footwear, leather, fashion accessories, handbags, purses, skincare, perfumes, as well as works of art, antiques, china, cutlery and fine pottery. Champagne, caviar, truffles, wine, vermouth and cigars over €300 are also being banned. The UK has also announced a ban on the export of luxury goods (although the details of what goods will be covered have not been published in full).

US

  • An executive order was signed by the US President, Joe Biden, on 8 March prohibiting new investment in the energy sector in Russia. A prohibition on the import into the US of energy products – including oil, gas and coal was also announced.

    The announcement followed a well-publicised push by the US to encourage the UK and the EU to take further steps to isolate Russia, although notably the EU, which relies more heavily on Russian oil, has not announced a similar phase out to the UK.
  • The US has added a number of new individuals and entities to its sanctions list over the last week.

    In response, it was announced by Russia on 16 March that it would impose sanctions on a range of US officials, including Joe Biden.
Economic Crime (Transparency and Enforcement) Act: Impact on sanctions and unexplained wealth orders

As set out above, the ECA received Royal Assent on 15 March. Key measures include:

  • Enhancing the UK's ability to move faster to impose sanctions as well as increasing civil enforcement powers;

  • The introduction of a new 'Register of Overseas Entities'; and

  • Reforms to unexplained wealth orders, which remove certain barriers to their use.

The UK's Home Secretary, Priti Patel, said as part of the announcement that "this government has moved quickly to strengthen our response to Putin’s cronies and ensure that corrupt elites have nowhere to hide their dirty money in the UK".

Please see our briefing available here for details of the new Register of Overseas Entities.

ECA impact on the UK's sanctions regime

Enhanced enforcement regime

Back in 2017, the UK's Office of Financial Sanctions Implementation ("OFSI") was provided with a power, under the Policing and Crime Act 2017, to impose civil monetary penalties for breaches of trade sanctions based on the balance of probabilities (in addition to existing criminal penalties).

The value of the civil penalties can range from 50% of the total breach up to £1 million. Prior to the introduction of the ECA, the power to impose civil monetary penalties was subject to a requirement that the person "knew, or had reasonable cause to suspect, that the person was in breach of the prohibition or (as the case may be) had failed to comply with the obligation" (i.e. a knowledge qualifier).  

The ECA has removed this knowledge qualifier and has replaced it with a strict liability test. This means that the person's intent/knowledge in connection with the breach is no longer relevant to whether or not the OFSI has the requisite power to impose the relevant civil monetary penalty. This position is more similar to what is already in place in the US and, while it will still remain a defence to a criminal sanctions offence that entity/individual did not know, nor did they have reasonable cause to suspect, that they were in breach of the relevant prohibition, this can no longer be relied on in relation to the OFSI's civil monetary penalty regime.

This materially expands the ability of the OFSI to bring enforcement action against entities/individuals and increases the likelihood of civil enforcement penalties, however it is yet to be seen how the OFSI will use this new power in practice.


Streamlined designation powers

In addition to changes to the civil enforcement regime, the ECA enables the UK to designate individuals and entities as subject to sanctions more quickly, especially where they have already been sanctioned by the US, EU, Australia and Canada (or any other country specified in regulations made by a Minister). The introduction of the "urgent" procedure under the Sanctions and Money Laundering Act 2018 (which is subject to certain other tests) is designed to make the process of implementing sanctions more efficient – and was used immediately on the 15 March by the UK to sanction 370 individuals already sanctioned by the EU.


Naming and shaming

Finally, the ECA enables the OFSI to publish a report where a monetary penalty has not been imposed but "the Treasury is satisfied, on the balance of probabilities, that a person has breached a prohibition, or failed to comply with an obligation, that is imposed by or under financial sanctions legislation.” While the OFSI already has a power to make public statements where a monetary penalty provision has been imposed, this naming and shaming provision is likely to enhance existing sensitivities around businesses carrying out operations in actual or potential breach of sanctions.

 

Unexplained Wealth Order ("UWOs") amendments

UWOs are investigatory orders that are available to organisations including the Serious Fraud Office, the National Crime Agency, HM Revenue and Customs, the Crown Prosecution Service and the Financial Conduct Authority. UWOs are placed on respondents whose assets appear disproportionate to their income to explain the origins of their wealth.

  • UWOs require a Politically Exposed Person (PEP) or a person who is reasonably suspected of involvement in, or of being connected to a person involved in, serious crime to explain the origin of assets (minimum combined value of £50,000) that appear to be disproportionate to their known lawfully obtained income. It does not matter where in the world the property is situated, or where the respondent is based.

  • A UWO is not (by itself) a power to recover assets. However, any response from a UWO can be used in subsequent civil recovery proceedings and a failure to respond means that the assets can be made subject to recovery action under the Proceeds of Crime Act 2002.

UWOs were introduced in the UK in January 2018, following the implementation of the Criminal Finances Act 2017.

The reforms under the ECA enable UWOs to be sought against property held in trust and other complex ownership structures. They also increase time available to law enforcement to review material provided in response to a UWO and reform cost rules, to reduce the impact of legal costs on law enforcement where there is an adverse finding. Taken together, these changes are expected to make their overall use more likely.

What further measures might be taken?

On 16 March the Ukrainian President, Volodymyr Zelenskiy, stated that meetings with Russia continue and that he had been informed "the positions during the negotiations already sound more realistic. But time is still needed for the decisions to be in the interests of Ukraine.” This was the strongest signal to date that a ceasefire might be able to be agreed, however, the terms of any ceasefire are likely to be incredibly difficult to negotiate and there are no guarantees that, in particular, Russia would keep to the terms of any ceasefire arrangement – although statements have been made by Russia's foreign minister that "neutral status is now being seriously discussed" with certain "security guarantees" on the table.

It is anticipated that the UK, EU and US will continue to announce further sanctions and additional trade controls. There are also likely to be a number of additional diplomatic efforts to further isolate Russia from international financial markets and from access to military support.

It remains the case that businesses, projects and transactions that are connected with either Russia, Ukraine and/or the Donetsk and Luhansk regions of Ukraine should carefully monitor developments.

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