Joint Committee on Statutory Instruments Twenty-Eighth Report

Appendix 3

S.I. 2008/2668: voluntary memorandum from HM Treasury

Landsbanki Freezing Order 2008 (S.I. 2008/2668)

1.This voluntary memorandum is submitted by HM Treasury to the Joint Committee on Statutory Instruments in respect of the Landsbanki Freezing Order 2008 (S.I. 2008/2668) ("the Order"). Its purpose is to explain how the Treasury has used the enabling powers in Part 2 of the Anti-terrorism Crime and Security Act 2001 (c.24) ("the Act") to implement an effective asset freeze within the scope of those powers.

Circumstances in which the powers may be used

2.The long title of the Act confirms that (as well as matters mentioned in the short title) the Act is "to provide for the freezing of assets".

3.Section 4(1) of the Act provides that the Treasury may make a freezing Order if two conditions are satisfied.

4.Subsection (2) provides the first condition is that the Treasury reasonably believe that—

"(a) action to the detriment of the United Kingdom's economy (or part of it) has been or is likely to be taken by a person or persons, or

(b) action constituting a threat to the life or property of one or more nationals of the United Kingdom or residents of the United Kingdom has been or is likely to be taken by a person or persons."

5.The second condition, provided for in subsections (3) and (4) is that the person (or if persons, each of them) must be the government of or resident of a country or territory outside the United Kingdom.

6.The preamble to the Order confirms that limb (a) of the first condition and the second condition are satisfied.

7.During the passage of the Bill, Part 2 only received brief mention in the main debates on the Bill, together with Part 1 (terrorist property) and where mentioned, the focus was on its utility in relation to terrorist financing (the Bill was introduced in the aftermath of the events of 11th September 2001).

8.However, a fuller explanation of the circumstances in which it was envisaged that the power may be used was provided during the Committee debates. In the House of Lords, an opposition amendment was tabled which would have expressly limited the power only to the context of terrorism. This was rejected on the basis that the scope of the power was not limited to terrorism: it extends also to wartime situations, and other emergencies.[2][2]

9.In the debate, reference was made to the Emergency Laws (Re-enactment & Repeals) Act 1964, which is the predecessor of Part 2 of the Act and is revoked by Part 2. Such provisions have their origin in the Defence (Armed Forces) Regulations 1939.

10.It can be seen from the manner in which section 4 is worded and the legislative and Parliamentary history of Part 2 of the Act that it is not a power limited to terrorism. It is an emergency power available when the Treasury reasonably believe that the conditions in section 4 of the Act are satisfied.

Use of the power in relation to Landsbanki

11.The Order specifies that an asset freeze applies in relation to Landsbanki Islands hf. ("Landsbanki") an Icelandic bank with a branch in the UK; to Icelandic financial Authorities and the Government of Iceland (but only Landsbanki-related funds are frozen). The freezing of the UK funds of Landsbanki was deemed necessary because the emergency legislation passed in Iceland on 7th October 2008 meant that UK creditors' rights could be prejudiced compared with other creditors. The Icelandic government had been unable to clarify the position of UK creditors in the administration process of Landsbanki and there was therefore a threat to UK economic interests. Landsbanki, through its UK branch and the "Icesave" deposit line has built up a substantial level of UK retail and wholesale depositors. The Icelandic action was likely to have a particularly significant unsettling effect on consumer confidence at a time of unprecedented disturbance of the financial sector.

How the enabling powers have been exercised

12.The enabling powers allow for the possibility of complete economic sanctions against a foreign Government or residents who fulfill the conditions of section 4 of the Act. However, the Treasury consider that the power must be exercised in a proportionate manner as befits the circumstance of a particular case. In this case, the power to make a freezing order was used in circumstances where the primary concern was to prohibit the flow of funds held or controlled by Landsbanki's UK branch out of the UK and back to Iceland.

13.There are two aspects of the manner in which the powers have been used on this occasion which it may be useful to explain further. First, the powers have been used to apply a freezing order not in relation to all funds but only those funds which relate to Landsbanki. Secondly, the freezing order has been drafted in such a way as to ensure that the asset freeze applies to funds held or controlled by Landsbanki as well as those held or controlled by third parties.

1. Limitation to funds relating to Landsbanki

14.Section 5(1) of the Act provides as follows:

"(1) A freezing order is an order which prohibits persons from making funds available to or for the benefit of a person or persons specified in the order."

15.Paragraph (6) of that section provides that "Funds are financial assets and economic benefits of any kind" and paragraph 2 of Schedule 3 makes provision as to the sort of assets that can be included within the definition of "funds".

16.Article 2 of the Order provides a broad definition of funds, but article 4(1) provides a limitation, namely to provide that the prohibitions in the Order apply only in relation to funds owned held or controlled by Landsbanki or funds relating to Landsbanki owned held or controlled by the Authorities or Government of Iceland.

17.This provision has the effect of limiting the scope of the Order so that it applies not to all funds but only to a particular subset of funds, namely those relating to Landsbanki.

18.Section 14(1) of the Act (Orders: supplementary) provides for the enabling power to be used flexibly

"(1) Where this Part confers power to make provision, different provision may be made for different purposes."

19.Additionally, in the context of an enabling power which inevitably leads to interference with the enjoyment of property the Treasury consider that the power must be read so as to enable a more limited approach, i.e. applying to a subset of funds, rather than applying to all funds.

2. Provision to apply to funds held by Lansbanki

20.The second point meriting consideration is the nature of the prohibitions, in particular, how the Order applies the asset freeze to funds held or controlled by Landsbanki, not just those held or controlled by third parties.

21.In the majority of circumstances where it may be envisaged the power in Part 2 of the Act being used, the person specified in the Order is unlikely to have a direct presence in or direct control of funds in the UK. However, a foreign bank with a branch in the UK has not only a direct presence in the UK but also the direct means to control the movement of funds. In such circumstances, it is doubtful that a prohibition simply mirroring the language of section 5(1) of the Act would provide a fully effective asset freeze.

22.For example it is not clear whether a specified bank would be prohibited from making an internal transfer, nor is it clear whether the bank would be prohibited from directing others to make transfers of funds to the benefit of certain customers.

23.Paragraph 3(2)(g) of Schedule 3 to the Act envisages that when making provision as to the meaning (in relation to funds) of making available to or for the benefit of a person, an order may provide that the expression includes "such other acts as the order may specify".

24.However, rather than adopting this approach, the Order relies on the section 14 supplementary powers, which provide

"(2) An order under this Part may include supplementary, incidental, saving or transitional provisions.

(3) Nothing in this Part affects the generality of subsection (2)."

25.Article 4(2) creates a prohibition as follows:

"A person must not make frozen funds available to or for the benefit of a specified person."

26.This mirrors section 5(1) of the Act, except that it only relates to "frozen funds" as outlined above.

27.Article 4(3) creates the following prohibition:

"A person must not make frozen funds available at the direction or instruction of a specified person."

28.This supplements article 4(2) by addressing the issue of specified person directing or instructing others transferring frozen funds, for example, making them available to third parties, and caters for the possibility of circumstances in which there is doubt as to whether a transfer could be said to be for the benefit of the specified person.

29.Article 4(4) creates the following prohibition

"A person must not deal with frozen funds."

30.Paragraph (6) of the article specifies the activities which constitute dealing with the funds, in effect, any use, movement or transfer of the funds.

31.Primarily, this provision implements an asset freeze in relation to funds held or controlled by the specified person. Article 4(4) is therefore supplementary to 4(2) and is within the envisaged use of the provisions, namely providing an effective asset freeze.

32.This provision is drafted in general terms and, as such, it also applies to third parties. However, in their case, there are only likely to be a few occasions where article 4(4) applies and where articles 4(2) and 4(3) do not apply.

33.Whilst the provisions are made under different enabling powers, the Committee may be interested to note that the provisions in this Order, in particular in article 4(2) and 4(4) are very similar to those recognised as providing an effective asset freeze in statutory instruments giving effect to UN and EC financial sanctions. See, for example, the Iran (Financial Sanctions) Order 2007 (S.I. 2007/281) made under the United Nations Act 1946.

Amending Order

34.The Treasury would also like to draw the Committee's attention to the fact the Treasury has made an amendment Order, which the Committee is asked to consider together with the Order, to address some clarificatory and drafting points. The Treasury would like to thank the adviser to the Committee for kindly bringing these points to their attention.

HM Treasury

20 October 2008

Further correspondence from HM Treasury

We understand that the Joint Committee on Statutory Instruments is due to consider the above Orders on 22 October 2008. As you know, the House of Commons and the House of Lords are due to debate the Orders on 27 and 28 October 2008 respectively.

Ordinarily, in the event that the Joint Committee has questions arising on an instrument, we would expect and welcome the opportunity to respond before the two Houses consider the instrument.

In this case, however, we have submitted a voluntary memorandum in addition to the usual explanatory memoranda. So, to enable both Houses to consider the matter as arranged on 27 and 28 October, the Treasury confirms that it does not wish to be afforded an opportunity to make any further representations.

HM Treasury

21 October 2008

2   2   See Lords' Hansard 28 Nov 2001 : Column 353, Lord McIntosh of Haringey. Back


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