Fragmented and incoherent: the UK’s sanctions policy Contents

Conclusions and recommendations

Lack of clear Government strategy

1.We welcome the FCO’s diligence in ensuring that there would not have been a gap in UK sanctions regimes if the UK had left the EU with no deal in March or April 2019. We also recognise the technical complexity of this process and the hard work of the FCO’s sanctions team in completing this task against a strict deadline. We are concerned, however, that vital elements of this work were completed mere days before that deadline. Given that the SI process has evidently taken up the vast majority of the FCO’s capacity on sanctions over the last year, we question whether sufficient resources have been allocated to a policy area that is essential to the UK’s role in upholding the rules-based international system. (Paragraph 10)

2.In oral evidence, the Minister of State noted that SAMLA requires the Government to lay before Parliament an annual report on human rights sanctions, “as soon as reasonably practicable after the end of each reporting period”. The first reporting period ended on 22 May 2019, a year after SAMLA received Royal Assent. In his follow up letter of 29 May, the Minister of State committed to laying this report in June. We expect him to do so. (Paragraph 16)

3.The Government has repeatedly failed to give the Committee clear answers about whether the UK can adopt and implement Magnitsky-style sanctions against individuals who have committed human rights abuse while it is still a member of the EU, and during any potential implementation period following UK withdrawal from the EU. We accept that there is legal debate around these questions and were somewhat reassured to learn that the Government’s incoherent responses to our questioning reflect the fact that it has not yet arrived at a settled legal position, rather than a deliberate political choice to delay the use of Magnitsky legislation. In our view, however, the Government’s obfuscation has damaged the UK’s credibility in the international community and risks signalling to human rights abusers that the UK is reluctant to use its powers to sanction them. (Paragraph 17)

4.The Government must rectify its mistakes as soon as possible by agreeing on a clear legal position regarding the UK’s ability to adopt and implement Magnitsky sanctions while still an EU member and during any possible post-Brexit implementation period. We call on the FCO to publish that position either in a letter to the Committee or in its response to this report. In any event it should do so before the end of June: the Government’s confusion in this area has dragged on for too long. (Paragraph 18)

5.The Home Office has not provided a list of people who are prevented from entering the UK as sanctioned individuals. In particular it has not published the names of those to whom entry visas are denied by virtue of their involvement in human rights abuses, money laundering and corruption. We believe it would be far more effective to publish this list so as to demonstrate beyond doubt the UK’s commitment to the rule of law. (Paragraph 19)

6.Sanctions are most effective when applied multilaterally. We therefore welcome the Government’s commitment to co-operate as closely as possible with the EU and other allied nations on sanctions policy after Brexit. We also accept in principle that there may be circumstances under which it would be appropriate for the UK to enact tougher sanctions on its own, particularly given the UK’s leverage as a global financial services hub. We are deeply concerned, however, that three years after the referendum so little high-level thought appears to have gone into considering the UK’s strategy and policy approach to these issues. What are the costs and benefits of divergence on key sanctions regimes? How can the UK make the most of its power in financial services? Where do UK interests most closely align with those of our key international partners? How will we influence their decision-making in future? We have seen no evidence that the FCO or wider Government have even begun to explore these questions. (Paragraph 22)

7.Sanctions are too essential to the preservation of the rules-based international system and the defence of our national interests to be treated as an afterthought. The National Security Council (NSC) must designate sanctions strategy to be an urgent priority and must allocate time and resources accordingly. We call on the NSC to begin an urgent review of UK sanctions strategy, consulting both internal Government stakeholders and external experts, and to report its findings to Parliament by the end of 2019. (Paragraph 23)

Cross-Government co-ordination

8.As economic tools of foreign policy, sanctions necessarily require the input of experts across several Government departments and close co-operation to ensure effective implementation. While we welcome the Government’s assurances that co-operation between departments is currently working well, we believe there is room for improvement, which should in turn support the development of a more coherent overall strategy on sanctions. In particular we believe it would benefit Government coherence to have a single senior civil servant primarily based in the FCO who is accountable for sanctions policy and implementation. The Government should appoint a Senior Responsible Officer (SRO) for sanctions policy who will be personally accountable to the National Security Council. (Paragraph 28)

9.Two years after the Office of Financial Sanctions Implementation (OFSI) became operational, reviews of its performance so far have been mixed at best. We agree with the Treasury Select Committee that the Government should now review the effectiveness of OFSI, and we regret that the Government has not yet taken up that Committee’s recommendation. That review should establish and assess the potential costs and benefits of placing responsibility for financial sanctions design and implementation within a single body, as opposed to the current bifurcated system, and should come to a judgment on whether that should be done. The review should also address as a matter of urgency how OFSI can improve its engagement with the private sector bodies on the front line of sanctions implementation, including through consultation with those bodies. We urge the Government to complete and publish this review before the end of 2019. (Paragraph 33)

Sanctions and stopping dirty money

10.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. (Paragraph 36)

11.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. (Paragraph 40)

12.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. (Paragraph 41)

13.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. (Paragraph 47)

14.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. (Paragraph 48)

Towards global leadership on sanctions

15.Sanctions will be more directly affected by the UK’s departure from the EU than almost any other foreign policy tool. As the UK prepares to take responsibility for designing, implementing and enforcing sanctions on its own, we hoped to discover that the FCO and wider Government had a strong sense of its goals and strategic priorities for the use of these tools. We also hoped to find that serious thought had gone into the best way to ensure co-ordination and coherence across Government given the number of departments and bodies involved in sanctions implementation. Instead, we have learned that the Government has spent the last two years running as fast as it can just to stay in the same place. (Paragraph 49)

16.We believe the time is right for a major review of the Government’s approach to sanctions at every stage: overall strategic goals, policy planning and formation, implementation and enforcement. As this report has set out, any sanctions strategy must be supported by coherent and co-ordinated Government structures, coupled with more effective engagement with the private sector bodies on the front lines of sanctions compliance. (Paragraph 50)

17.The centrality of sanctions to the preservation and functioning of the rules-based international system cannot be overstated. As a champion of that system, the UK cannot afford the risk of allowing its sanctions policy to be dictated by the decisions of others. Instead, the UK must seize the opportunity to become a global leader in sanctions policy and must aim to set the international gold standard for strategy, design and implementation. We hope the Government will take this warning to heart and look forward to following its progress closely. (Paragraph 51)

Published: 12 June 2019