Fragmented and incoherent: the UK’s sanctions policy Contents

3Sanctions and stopping dirty money

Sanctions and Anti-Money Laundering: closing the gap

34.As we stated in our report on Moscow’s Gold: Russian corruption in the UK, money laundering is a foreign policy issue: it allows those who would do harm to the UK to hide their ill-gotten wealth and obscure their sources of financial support.47 These individuals use increasingly sophisticated and untraceable methods to launder their dirty money and to evade the attention of UK law enforcement agencies. Carefully targeted sanctions against individuals who are known associates of corrupt regimes can therefore provide one tool in the Government’s overall toolbox for combatting dirty money, although as Maya Lester QC warned the Committee, individuals should not be sanctioned on the basis of “untested, uncorroborated” allegations that would not meet standards of evidence for criminal prosecution.48

35.We were therefore surprised by the FCO’s insistence that sanctions and anti-money laundering (AML) policies are strictly separate and should be kept that way. Qudsi Rasheed told us that “at the moment we draw quite a distinction between sanctions policy and AML dirty money policy in Government”.49 Sir Alan Duncan confirmed Mr Rasheed’s assessment, stating that

if you were asking me about war criminals or something, I could give you a much clearer Foreign Office view. When you are asking me about people who are financial criminals, or who have ill-gotten gains, or something like that, it’s not quite our patch.50

36.We recognise that sanctions and anti-money laundering are two distinct policy areas, but there is greater overlap between them than the Government is willing to acknowledge. As our report on Moscow’s Gold: Russian corruption in the UK argued, the assets laundered in London by hostile and corrupt regimes are used to subvert the rules-based international system, undermine our allies, and erode the mutually-reinforcing international networks that support UK foreign policy. While sanctions should not be used to criminalise individuals against whom there is no evidence of criminal activity, it is simply not good enough for the Minister of State to assert that financial crime is “not quite” the Foreign Office’s “patch”. The FCO should be able to see that it has a vital role to play in helping to keep the UK and our allies safe by cracking down on the laundering of dirty money.

Oleg Deripaska’s companies: a test case in designing effective sanctions

Listing on the London Stock Exchange

37.En+ Group is an energy firm that, at the time of its initial public offering (IPO) on the London Stock Exchange in November 2017, was controlled by Kremlin associate Oleg Deripaska. En+, in turn, held a controlling stake in Rusal, a major Russian aluminium firm. VTB Capital and Gazprombank—both subject to sanctions since 2014—were among the banks involved in the listing.51 In our Moscow’s Gold: Russian corruption in the UK report, we raised questions regarding the appropriateness of the listing, and how it was permitted to go ahead.52

38.The Treasury Select Committee also explored the listing of En+ on the London Stock Exchange (LSE) in its recent report on Economic Crime.53 In evidence to that Committee, the Director of OFSI, the Director of Specialist Supervision at the Financial Conduct Authority and the Economic Secretary to the Treasury all emphasised that the FCA (which was ultimately responsible for allowing the listing) acted correctly within its remit and followed all proper procedures.54 The Committee concluded that the listing occurred “due to a weakness in sanctions policy, not implementation”, because “while the proposed listing was carefully analysed given its sensitivities, the narrowness of the sanctions regime meant that the listing could not be blocked”.55

39.The Economic Secretary to the Treasury also told the Treasury Committee that there should be a power for the Government to block a listing on national security grounds.56 The Government confirmed in its response to the Committee’s report that it is currently investigating whether such a power would be appropriate, and promised to undertake a full consultation.57

40.The listing of En+ on the London Stock Exchange in 2017 is a clear example of the risks inherent in the Government’s fragmented approach to sanctions design and implementation. Although the involvement of an individual such as Oleg Deripaska may have raised red flags at the FCO and elsewhere, there was evidently no mechanism for those concerns to be conveyed, and no requirement for the Financial Conduct Authority to consult national security experts. Nor would it be reasonable to expect a body such as the FCA to recognise a potential national security threat on its own and act to block a listing accordingly, even if it had the power to do so.

41.We welcome the Government’s confirmation that it is exploring the possibility of introducing a way to block a listing on national security grounds, and that it intends to set out a robust justification for the power, the scenarios in which it could be used, how the power would work in practice, and the timing of the new legislation. As part of this work, we call on the Government to consider what role the National Security Council and its secretariat should play in the use of this power, and how best to formalise links between the Government departments responsible for sanctions and arms-length bodies including the FCA. We will follow this process closely and we ask the Government to update us on its progress in its response to this report.

De-listing in the USA

42.On 6 April 2018, the US used the Countering America’s Adversaries Through Sanctions Act (CAATSA) to impose sanctions on seven Russian oligarchs and their associated companies, and seventeen Russian officials. These included Oleg Deripaska and En+ Group, in which Deripaska held a controlling stake. Between April 2018 and December 2019, the then non-executive Chair of the Board of En+, Lord Barker of Battle, led efforts to conclude a framework agreement with OFAC that would enable En+ Group to be de-listed from sanctions in exchange for major restructuring and corporate governance changes that would reduce Deripaska’s ownership stake and influence.58 OFAC notified Congress of its intention to lift the sanctions on En+ Group on 19 December 2018, and formally did so on 27 January 2019.

43.Lord Barker and lawyer William McGlone, who assisted with the restructring effort, stressed to us in oral evidence that the de-listing of En+ was the result of “a regulatory process and a legal process”, and that OFAC was “a very rigid, rigorous and careful office” that “looked at this in great detail and imposed very strict requirements”.59 They also emphasised that the de-listing of En+ Group might serve as a model for the future, since it demonstrated how to remove a designated individual from control of a company to the point where that company would no longer need to be subject to sanctions.60

44.Maya Lester QC echoed this view, stating:

OFAC are very aggressive in this field. I do not use that word pejoratively, but if there were ever an agency that was interested in enforcing sanctions and making sure there was no level of ownership or control, it would be OFAC. On the level of detail in the agreement and the ongoing monitoring by which they try to ensure that what you have said is the case is not the case, I have never seen anything like it before. Of course, it could be the case that the wool has absolutely been pulled over OFAC’s eyes, and that even though every phone call and meeting is reported to them, something entirely different is going on. I have no knowledge of whether that is true or not. All I am saying is that the most aggressive agency is looking at it. There is a separate firm of auditors looking at this on an ongoing basis. That level of detailed scrutiny has never happened before as far as I know.61

45.We asked Sir Alan Duncan and Qudsi Rasheed for their views on the OFAC process. Mr Rasheed told us:

The way we saw it was that the fact that the US system had in place such stringent conditions on Deripaska’s shareholding of those companies and the supervision that OFAC had over them showed that it was a positive outcome. From our perspective, we simply take what the US have said about it, which is, “We are going after Oleg Deripaska for his behaviour and we are going after En+ and Rusal because of their association with Oleg Deripaska.” So the US were obviously satisfied, according to their standards, which are quite high, that those two companies were no longer sufficiently associated with Oleg Deripaska.62

There was no indication, however, that UK policymakers had followed the En+ Group case very closely or had learned any lessons from it with respect to the design of future sanctions.

46.We also asked Sir Alan to share with us the guidelines that OFSI uses to determine that a legal person or entity is “controlled” by another legal person or entity. He did so in a letter of 29 May.63 The criteria are broadly legalistic in nature, focusing on the formal rights that any legal person or entity may have over another. As Dr Justine Walker of UK Finance noted in oral evidence to this inquiry, however:

If you are talking about a regime such as Russia, we have found that defining ownership is incredibly complex—ownership is the 50% threshold—but control is even more so. Somebody may sell their shares and step away from their ownership, but are they really still pulling the strings on decision making?64

The current criteria are based on EU guidelines, but the Government has not indicated, including in oral evidence to this inquiry, that it is considering making any changes after the UK leaves the EU.

47.The listing and subsequent de-listing of En+ Group by OFAC highlights several issues that the UK must consider carefully in redesigning and implementing future sanctions. We are not certain that the outcome of the de-listing process takes sufficient account of the nature of the relationship between oligarchs such as Oleg Deripaska and the Russian state as we outlined in our 2018 Moscow’s Gold report. Nor are we convinced that the UK’s current definition of “control” over a company or legal entity can encompass the informal and non-transparent relationship networks underpinning the Kremlin’s activities.

48.Combating the activities of autocratic and hostile regimes such as Russia, without compromising our own adherence to the rule of law, constitutes one of the most complex and daunting challenges that we face in our efforts to preserve the rules-based international system. This is precisely the type of difficult problem with which the Government should be grappling in its efforts to develop a clear and coherent strategy for sanctions policy after the UK leaves the EU, especially given the importance of London to the international financial system. It is disheartening that we have seen no evidence that any such efforts have yet taken place.

47 Foreign Affairs Committee, Eighth Report of Session 2017–19, Moscow’s Gold: Russian Corruption in the UK, HC 932, para 45

51 For more information see Qq114–121

52 Foreign Affairs Committee, Eighth Report of Session 2017–19, Moscow’s Gold: Russian Corruption in the UK, HC 932, paras 15-21

53 Treasury Committee, Twenty-Seventh Report of Session 2017–19, Economic Crime – Anti-money laundering supervision and sanctions implementation, HC 2010, paras 214-223

54 Treasury Committee, Twenty-Seventh Report of Session 2017–19, Economic Crime – Anti-money laundering supervision and sanctions implementation, HC 2010, paras 218-220

55 Treasury Committee, Twenty-Seventh Report of Session 2017–19, Economic Crime –Anti-money laundering supervision and sanctions implementation, HC 2010, para 222

56 Treasury Committee, Twenty-Seventh Report of Session 2017–19, Economic Crime – Anti-money laundering supervision and sanctions implementation, HC 2010, para 223

58 For details of the corporate restructuring, please see the written submission by Lord Barker of Battle, Executive Chairman of En+ Group (FSP0017) and the Committee’s oral evidence session with Lord Barker, Qq88–361

63 Foreign and Commonwealth Office (FSP0020)

Published: 12 June 2019