Chapter 4: The future UK sanctions regime
The UK legislative framework for sanctions after Brexit
69.Two Bills have been introduced by the Government that have a bearing on the implementation of sanctions after Brexit.
70.The European Union (Withdrawal) Bill—introduced to the House of Commons on 13 July 2017—proposes to “freeze current sanctions regimes and designations in effect on the date of the UK’s withdrawal from the EU”.110
71.The Sanctions and Anti-Money Laundering Bill—introduced to the House of Lords on 18 October 2017—proposes a legislative framework to “enable the UK to continue to implement United Nations (UN) sanctions regimes and to use sanctions to meet national security and foreign policy objectives”.111 The Bill would also provide “temporary powers that apply for a two-year period after the UK has left the EU … [to] enable certain changes to be made to any EU sanctions regimes that have been retained by the EU (Withdrawal) Bill, and have not been replaced by a UK sanctions regime”.112 The FCO told us that the Bill “will not provide for an obligation to follow EU law. Legal jurisdiction will rest with the UK courts alone”.113
72.This report focuses on the formulation of sanctions regimes, including co-operation with international partners, in order to further the UK’s foreign policy and national security objectives. It does not give detailed consideration to the domestic legal framework for the implementation of sanctions.114
Future UK sanctions policy
73.As we have outlined, our witnesses emphasised the importance of maintaining co-ordination with the EU and other likeminded partners after Brexit. Dr Moret said that unless the UK and EU co-ordinated their sanctions regimes carefully after the UK’s departure, it could lead to “a less ambitious sanctions policy overall and a Western sanctions regime characterised by replication or gaps”.115
74.Sir Alan Duncan told us that once the Sanctions and Anti-Money Laundering Bill had been passed, the UK would have “an advantage” in having “the autonomy to impose sanctions of our own, should we ever so wish”.116 The UK “might conceivably do so on some occasions, but I cannot say that there are any plans to do so at the moment”.117 Sir Alan Duncan said that, after leaving the EU, it was “inconceivable that we will not be a strong and important part of collective governments’ action on sanctions, be it through the UN, in which we are a major player, the P5, et cetera, or replicating what the EU does”.118 Mr Findlay confirmed that the UK’s “aim will be to make sure that we have maximum alignment”.119
Third country alignment with EU sanctions
75.Countries in the vicinity of the EU often align themselves with EU sanctions on a case-by-case basis. This was explored by our witnesses as an option for the UK after leaving the EU.
76.Dr Portela explained the process: once the EU had decided on a sanctions regime, it would invite or “encourage” other countries to align with the measures. The list of categories of countries that were “eligible for official alignment” was closed, and only included:
- The European Economic Area (Iceland, Norway, and Liechtenstein);
- Eastern countries of the European Neighbourhood Policy (Armenia, Azerbaijan, Georgia, the Republic of Moldova, and Ukraine);120
- Signatories to Stability and Association Agreements (Albania, Bosnia and Herzegovina and Kosovo);121 and
- Potential candidate countries and candidates (Albania, the Former Yugoslav Republic of Macedonia, Montenegro, Serbia, Turkey, Bosnia and Herzegovina and Kosovo).122
77.Mr Findlay highlighted that it was “a political choice” for third countries to align with the EU’s sanctions regime, and “not a legal obligation”.123
78.Dr Portela said that it was not publicly known which of these countries had or had not been invited by the EU to align to each regime: “While any country could theoretically align itself with EU sanctions, the EU will only acknowledge in its press release those it has invited” and which had subsequently decided to align. The EU had “never acknowledged the alignment of any countries outside these categories [above] in its press releases”.124
79.Both Norway and Switzerland regularly align themselves with the EU’s sanctions policy.125 The Royal Norwegian Embassy in London told us that Norway “would normally translate the EU’s Council Regulation and include the Norwegian version of these EU Council Regulations as part of our regulation with certain modifications”.126 Switzerland had aligned itself with recent sanctions against Syria, Libya, Belarus and Burma, but it “decided to issue measures not identical with those of the EU” in the case of Iran and Russia (in view of the situation in Ukraine).127
80.Asked what influence these countries had over the design and implementation of EU sanctions, the Royal Norwegian Embassy in London told us that there was “no regular, formal consultation process covering EU restrictive measures”. Nevertheless, Norway had “different kinds of informal and formal contact with the EU, mostly with the European External Action Service (EEAS)”. Such contact could take place “before, during and/or after the EU’s decisions”, and “may include questions related to licensing and other implementation-related issues”.128
81.Switzerland stated, similarly, that it was “not involved in the policy dialogue and the decision-making process of EU sanctions”. The implementation and enforcement of sanctions, however, were co-ordinated “formally and informally” with the EU and third countries. Co-ordination with the EU was done “via diplomatic channels and direct exchanges between Swiss and EU sanctions experts”, in particular with the European Commission and the EEAS.129
82.Mr Matthews too told us that he was not “aware of a time when [aligning third countries] were able to exercise any significant influence at all” on the shape of an EU sanctions regime.130 This was also the view of Dr Giumelli and of Dr Portela, who said that “the aligning countries cannot negotiate the contents of the sanctions”.131 Dr Portela therefore concluded that “the model of third country alignment is unattractive as it would transform the UK in a mere recipient (or ‘taker’) of EU sanctions legislation”.132
83.In considering this as a model for the UK after Brexit, Mr Matthews posed the question of “whether the better analogy for the UK is Norway or the United States”. He concluded that “the honest answer is that we are probably somewhere between the two”.133 EU co-ordination with the US and other like-minded countries is discussed below.
US-EU co-operation
84.Mr Findlay said the US was “the most important country on sanctions”.134 Ms Lester agreed that it was “hugely significant in shaping EU sanctions policy”.135 Dr Portela said the UK should replicate “the model of consultation” that existed between the EU and the US, which was “intensive and quasi-permanent”.136
85.Mr Williams told us that the EU was working “closely with US colleagues” and took account of existing US sanctions regimes when developing its own.137 Dr Portela described this contact as being “constantly on the phone talking about sanctions issues … in a very informal manner”.138
86.Mr Findlay said the US and EU were aligned in their sanctions policies in all but a few cases, such as Cuba.139 For example, Dr Giumelli said, sanctions against Russia, Iran, and Syria “were dealt with in strict co-ordination between the US and the EU”, even though they were “not members of the same organisation”. After Brexit, such co-ordination “might be [between] the US, the UK and the EU”.140 Mr Findlay told us that “all our diplomacy on Iran has been trying to preserve maximum transatlantic unity of approach, and that is very much what we are all about at the moment”.141
87.Mr Matthews explained that there was a formal aspect to this co-ordination: an annual “EU-US sanctions workshop”, where “experts from both sides sit down and share experiences”. This was “a useful opportunity for the EU to explain to the US side the ins and outs of the EU procedure, what was done at EU level, [and] what was done at Member State level”.142 But the US also regularly communicated its position on sanctions “through bilateral discussions with Member States and through the External Action Service”. This meant that once EU working groups met, they were aware of the US position, “certainly informally and very commonly formally”.143
88.Mr Findlay told us that the US was also a “very important partner” in the sharing of intelligence to underpin listings. It was both “very good at gathering open-source information”, and had “plenty of intelligence”. Where there were shared policy goals between the EU and the US it was “in our interest to share the information so that we can keep our sanctions as closely aligned as possible”.144 Sir John Sawers agreed that there was “a flow of information between the principal capitals in the European Union and with the United States to try to identify the right people and entities to target”.145 Mr Williams said: “Once a regime exists then US and EU colleagues will talk and can exchange information on the potential for individual designations within that regime”.146 Nonetheless, Sir John Sawers told us that while “the United States has some influence on the individuals and entities that are listed in EU sanctions regimes … it is more difficult to influence it from outside the room”.147
89.In evidence to the External Affairs Sub-Committee in July, former High Representative the Rt Hon Baroness Ashton of Upholland also stressed that US-EU dialogue was not a substitute for attending EU meetings:
“You can send as many briefing papers as you like, but if you are not in the room, you do not participate. Our colleagues in the US would send regular notes to ambassadors, Ministers and Governments about their views, which were always taken into account, but they were not in the room. Colleagues such as our friends from Norway, whose offices were very close by, would have very particular views on some issues and were important allies, but they were not in the room”.148
90.Although there was a large degree of similarity of objectives between EU and US sanctions, Mr Matthews explained that there were also differences in the framing of measures. First, as seen, for example in the case of Russia—where US and EU measures were “very closely aligned”—the US and EU lists of targeted entities were not the same.149 Second, the US’s “general approach” was to say “’US persons may not deal with this country’” and then to issue “a series of general licenses” providing exemptions from the sanctions regime. The EU approach, in contrast, was to say that “everything is allowed save where there is a prohibition or restriction saying that it is not allowed”. Even where the policy objectives were similar, this difference in structure and approach meant it was “not really workable, when framing or putting together a new EU sanctions regime, to look across to what the US does” as a template.150 Illustrating the variance in US and EU measures in the case of Iran, Sir John Sawers told us that the EU and the US had applied additional sanctions on top of the UN regime, “which were not the same”, guided by considerations about achieving the maximum effect on the targeted country and “a limited effect on the countries that were imposing sanctions”.151
The Government’s aspirations for co-operation with the EU
91.Sir Alan Duncan said that after Brexit, “we will be the UK. We will have our autonomous power”. His aspiration was for the UK to use its new legal powers to implement sanctions “in a way that invariably will replicate and work alongside EU sanctions, rather than just be a one-off power in addition to them”.152 We discuss the possible ways in which the UK could work with the EU on sanctions below.
92.Sir Alan Duncan said that, after Brexit, “the question is what table we will be sitting around when it comes to sanctions”.153 The UK would “look for a tailored arrangement to work with the EU”.154 He acknowledged that the current structures for co-operation—set out in Chapter 3—might not be available to the UK.155
93.He was confident, however, that the EU would continue to take into account the UK’s approach before designing its own sanctions:
“The 27 will always want to say, ‘What is the UK going to do?’ before they shape their sanctions. In shaping their sanctions it will always be in their interest to work with us. Even when we are not in the EU, this is one of the areas in which we will still be in a very strong position in our dealings with the EU. I am optimistic that there will be a natural and instinctive wish to co-operate and work together on sanctions”.156
94.Mr Mortlock and Mr Nephew agreed that “common interests and threats will continue to drive EU and UK sanctions policies even after Brexit, at least in the near- to mid-terms”.157 Mr Matthews too thought that the UK’s co-operation would remain important to the EU: “Having the UK on board in an EU sanctions regime certainly amplifies the effectiveness of that regime”.158 Mr Findlay said that “feedback that we have had in all our discussions over the years” indicated that “our contribution on sanctions in particular is very clearly recognised”.159 The EU would therefore not only be interested in co-ordination after Brexit, but in getting “UK input and assistance on how those measures should be framed.” This offered a “real opportunity for the UK to continue to have a constructive role”, which the EU was “likely to welcome”.160
95.Mr Findlay told us that the Government’s ambition was for the partnership with the EU on sanctions to be “unprecedented”, and to go “beyond any arrangement the EU has now with other third countries”. There was “significant mutual interest” in such a partnership. Its final shape would depend on the exit negotiations.161
96.We note that the UK’s new, independent, legal framework might limit the extent to which the UK was able to enter into an unprecedented partnership of this kind—Mr Findlay said that “it might not always be possible for us to do exactly what the EU is doing”.162 The use of intelligence to underpin future UK sanctions could also limit UK-EU co-operation. Sir Alan Duncan said that:
“Our preference is always to invoke sanctions based on open-source material that can be disclosed … The Bill coming to your Lordships’ House will provide for some closed-material procedures in exceptional circumstances. It is something that we envisage being used very sparingly”.163
97.Dr Portela also said that “the necessary degree [of UK-EU27] co-operation on trade restrictions will be determined by the nature of British participation in the common market”.164 We note that this too will be subject to the exit negotiations, but that the Government has stated that the UK will leave the EU Single Market and customs union.
98.In evidence to the External Affairs Sub-Committee in July, as we noted in Chapter 2, Lord Hague of Richmond said that the UK would remain an important stakeholder for likeminded countries: “When the United States and the EU are looking at sanctions together they will absolutely need and want the co-operation of the UK, given the huge size of our financial sector”.165 Mr Keatinge and Dr Moret agreed.166 Lord Hague of Richmond said this was a “very good argument for … permanent structures” for EU-UK co-operation after Brexit.167 Also giving evidence in July, Baroness Ashton of Upholland too expected that sanctions would “be one of the easier areas” to co-operate on after Brexit. Therefore, she was sure, there would “be early engagement as if we were in the EU. It will be pretty much as it was before. That is one thing that I think we can be confident of”.168
Formal structures for co-operation with the EU
99.Our witnesses outlined two formal, and two informal, structures for possible UK-EU co-operation on sanctions. Mr Matthews advocated the creation of a formal structure for co-operation between the EU and the UK: “Merely sitting outside the room and trying to influence EU decision-making … cannot ever be a substitute for having a formal structure whereby the UK is around the table and able to influence the formal arguments.” He further noted that EU sanctions had often been “an amplification of the positions the UK wanted to see”—as discussed in Chapter 2. He therefore concluded that “the best way … would be to have a structure whereby it can sit around the table”.169
100.Dr Moret agreed that “the most beneficial arrangement would be one that mirrors the current arrangement as closely as possible.170 Mr Matthews told us that the intergovernmental nature of the EU’s CFSP was distinct from the “core EU operation”, which meant that it was “outside the reach of the European Court of Justice”, with only few exceptions. He suggested that this could be an opportunity: options “should be worked through as to whether it may be possible for the UK to have a formal position in CFSP even while otherwise sitting outside the EU”.171
101.In evidence in July, Baroness Ashton of Upholland said the way foreign policy was made at the EU level was “a mechanistic but important political way of operating that requires you to be in the room in order to be able to participate”.172
102.If this was not possible, Mr Matthews said a second option was that “there may be some room for a forum”, which would be “at a more political level, where the UK could have a seat at the table”. This might be offered under the CFSP, or within the Political and Security Committee. Having “a seat at the table in a political forum … would certainly be a massive advantage”.173 Similarly, Mr Mortlock and Mr Nephew suggested that, if the UK and EU-27 decided to have separate regimes, “establishing a body to co-ordinate the creation of sanctions rules and propose them to the separate political leaders would help to preserve at least some of the benefits that existed prior to Brexit, particularly balance and harmonization”.174
103.If such formal co-operation was not possible, there were two options for informal co-operation. One scenario was for the UK to be “in the same position as the US”, and make its views known via bilateral contacts with Member States and the EEAS.175 As discussed above, Dr Portela advocated replicating the US model.176 Sir John Sawers, however, said that while the UK could—like the US—expect some influence over EU-27 measures, it “will be in a different position”.177
104.He therefore thought that a second informal scenario was more likely: “By and large, we will be in a position whereby we are expected to go along with sanctions that the European Union has drawn up.” The UK would be in a position to have a bigger impact on “the information that leads to the individual listings” than on the design of the regimes.178 Dr Moret too considered it to be “highly unlikely” that the UK could continue to influence the design of EU sanctions once it had left the bloc. She said that, if the UK was not able to participate actively in a forum with the EU, it “would most probably need to accept a passive role, following EU leadership on the subject”.179
Sanctions policy implications of the UK’s departure from the EU
105.Our witnesses suggested two possible UK policy approaches that might result from the UK’s departure. On the one hand, Mr Matthews said there was “more of a risk that on occasion” the UK might not agree with an EU sanctions regime, or “perhaps more likely particular elements within it”, and would therefore not go along with the regime. In such a case, the UK could still align with the broad measures of an EU regime and the overall policy approach without including all of its elements, for example omitting carve-outs for particular industries that could be hard hit in other EU countries, but not in the UK.180
106.On the other hand, there might be a more fundamental divergence. Mr Mortlock and Mr Nephew said there was “a serious risk that British and EU respective interests will diminish their willingness to reach common decisions”.181 Dr Eriksson agreed.182 Mr Mortlock and Mr Nephew noted the important balancing role that agreement between 28 Member States played, and suggested that it was “entirely plausible that, even if … [they] maintain some formal relationship after Brexit, the United Kingdom and the European Union will look more to their economic self-interests when making decisions on the scope and nature of sanctions decisions”.183
107.Witnesses had differing views on the direction EU-27 sanctions policy might take after Brexit. Dr Portela said that—as discussed in Chapter 3—the UK had been “one of the most important promoters of the use of sanctions at the EU level”, and “few Member States would support the use of these measures” after Brexit. “A large number of Member States” were “unhappy about the use of sanctions, particularly when the regimes are quite protracted”.184 Dr Moret shared this view: “numerous” Member States “have a more conciliatory, ambiguous, or disinterested stance” on current EU sanctions.185
108.Dr Portela expected that, as a result, the EU-27 might “become less active” in their use of restrictive measures after Brexit.186 Dr Moret thought that the EU would also be less willing to support UK-sponsored regimes focused on “UK-specific concerns”, such as “former British colonies, or in relation to threats deemed more serious to the UK government than to some other EU Member States”.187
109.On the other hand, Dr Portela thought that “certain countries will try to step forward” on sanctions policy in the absence of the UK, such as Denmark and The Netherlands.188 Dr Giumelli added that, while the UK was a significant actor, it was not the only EU country that had advocated the use of sanctions. For example, restrictive measures on Russia were “imposed after the MH17 crash, not before, and that was because of The Netherlands, not the UK”.189 We note in this regard that—as discussed in Chapter 3—EU sanctions on Russia were led by France and Germany, and not by the UK.
110.Finally, Dr Portela noted the overall importance of the US to the current EU approach. She said that “in many cases”, both the UK and the EU “follow Washington’s lead”; this reduced the potential for future divergence between the UK and the EU-27.190
Co-operation internationally
111.While EU measures represent the majority of the sanctions regimes in which the UK participates, co-operation on restrictive measures takes place not only between EU Member States, or between the EU and third countries, but also between smaller informal groups of states. Mr Mortlock and Mr Nephew recommended that, “at a minimum”, to “help to smooth the transition as Brexit takes place”, the UK should “work with the United States to formalize various efforts at sanctions co-ordination through the creation of ‘likeminded’ coalitions on particular issues”.191
112.Mr Findlay said that in the case of Russia’s annexation of Crimea and invasion of Ukraine, “there was a response that involved the United States, the European Union, Canada and Japan”, a group known as the G7+. For the UK, it was “the crucial thing” to remain “part of the wider foreign policy strategy”, because it “set the scene for the use of sanctions”.192 Norway, for example, had been “a participant in that informal group, so it also had a role in the wider strategy that then shaped the final sanctions”.193
113.In addition to Japan and Canada, the grouping on sanctions against the Democratic People’s Republic of Korea (DPRK) also included Australia. With these countries, Mr Findlay told us, “we often share similar strategic goals, and they would therefore have an interest in keeping the UK involved in those strategic discussions.” He noted that “Canada, Japan and Australia in particular” were “very important partners”.194
114.Another grouping in which the UK co-operated with third countries—specifically on money laundering and terrorist financing—was the Financial Action Task Force.195
115.Mr Keatinge said that, while the new relationship with the EU was important, “we should put much more emphasis on these broader alliances”. Co-operation with states which were host to significant financial centres, such as Singapore, was needed for sanctions to have an impact. He explained that “we no longer operate in a unipolar financial world. There is a whole world out to the East that has no interest in what is going on in the UK as it relates to sanctions, or the EU, or the United States.” Engagement with these countries was needed, to encourage such states to “comply with the sanctions and the ethos we would like to promulgate”.196
116.Mr Findlay expected the UK’s wider international engagement and involvement in small groups on sanctions to continue after Brexit: “We will also have smaller informal groups, such as the G7, what we call the Quad of France, Germany, the US and the UK, and others—which will provide us with opportunities to feed in our strategic views on the value of sanctions as part of the political discussion.”197
117.Sir John Sawers described the maintenance of such wider UK influence as the UK’s main foreign policy challenge after Brexit: “How can we have the relevance and engagement to continue to be part of these small groupings, which essentially form the strategy that is the basis on which international policy is founded?”198 He drew attention to the important link between economic strength and international influence, suggesting that “the default outcome is that the United Kingdom is poorer and weaker as a result of Brexit”. Recovering from this was “possible … but it will be a major national challenge for us”.199
118.He outlined three requirements for the UK to maintain its influence in the world:
- a “strong and effective economy”,
- “dynamic political leadership at home”, and
- “the commitment and investment in diplomacy, intelligence, the armed forces and development in order to make an impact”.200
It was “vital that we sustain, and in many ways enhance, our investments in diplomacy, defence and intelligence”.201
Impact on businesses
119.Mr Giles Thomson, Deputy Director, Sanctions and Illicit Finance, HM Treasury, told us that the UK considered carefully the impact of restrictive measures on UK businesses:
“Ultimately it is a judgment that the Government make that that cost is necessary to meet the foreign policy objectives behind the sanctions. Having said that, we are equally committed to ensuring that those costs are kept to an absolute minimum and are proportionate, and we engage with industry to help us to achieve that”.202
120.In developing the framework for the UK’s new sanctions regime, as set out in the Sanctions and Anti-Money Laundering Bill, Mr Thomson said the Government had held “an exhaustive consultation with industry and others through the White Paper process”. This included “a number of round tables with business as well as our ongoing dialogue with them”.203 Sir Alan Duncan highlighted the Government’s impact assessment for the Sanctions and Anti-Money Laundering Bill, which looked at the impact on “relevant private sector organisations, civil society organisations and public services”, concluding that the impact would be “very low”.204
121.Mr Williams told us that the Government was “already thinking about a mixture of foreign policy, business and other interests. That will continue after we exit”.205 Ongoing co-operation with other major countries in the design and implementation of sanctions—as discussed earlier in this chapter—would “minimise the burdens on business”.206
122.The Government, said Mr Thomson, also had “the ambition of reducing burdens on business where we can with any additional flexibility that we may have once we exit the EU”.207 The Government could design “sanctions that are more tailored to UK concerns, including UK businesses’ concerns”.208 We were given four examples: business influence, access to legal remedies, licencing, and guidance.
123.First, Dr Portela told us that “it will be much easier [for businesses] to lobby for the modification of a unilateral sanctions regime, given that it is in the hands of a single government to modify or lift the regime”.209 Second, Ms Lester said that she hoped that it would be easier for listed individuals and companies to access legal remedies in the UK than in the Court of Justice of the European Union. She cautioned, however, that it might be necessary for listed entities to appeal both to the EU and UK courts.210
124.Third, Mr Thomson told us the UK wanted to explore “whether we can have a slightly more flexible system for licensing transactions” after Brexit.211 For example, UK Finance suggested the Government could “make greater use of general licences to authorise certain activity currently requiring a specific licence”, which would reduce the administrative burden both on OFSI and on financial institutions.212 Ms Lester also hoped that the UK “could be less restrictive” with its own licencing regime.213 Mr Denton urged the Government should “try to align” the licencing system “with the export control regime”.214
125.On the other hand, Ms Lester stated that the “uniformity of approach and consistency in having one regime” was of value to businesses, NGOs, individuals and other organisations. Currently, businesses only needed to apply for one licence “for it to be valid across all EU Member States”.215 Mr Matthews agreed, and explained that if the UK and EU were no longer to operate within the same licensing framework, this could lead to additional costs for export licences. For UK businesses exporting via the EU to a third country, there would be “a need to apply to two separate authorities for licences”, which would be “an operational burden”.216
126.Fourth, Mr Thomson and Ms Rena Lalgie, Head, OFSI, HM Treasury, highlighted the opportunity for the UK to produce clearer guidance on implementation, as this would no longer need to be agreed between 28 Member States.217 Ms Lester described the possibility of “a greater provision of guidance, FAQs, policy documents and so on by the UK authorities” as an “advantage”;218 the Law Society of Scotland in particular advocated the development of sector-specific guidance.219
127.That said, Mr Matthews said that “if the UK and the EU have the same sanctions, it obviously makes things operationally easier” for businesses.220 Mr Denton agreed that “a multiplicity of sanctions regimes definitely increases the cost to business”.221 Although the current system was not perfect, Mr Matthews said businesses were used to the status quo, and “switching to any different system … is going to bring some transitional issues”.222
128.Mr Matthews continued: “It is not as if a business is going to say, ‘Maybe the UK sanctions will be better than the EU ones or maybe they will be worse. We will switch to comply with the UK ones’. They will have to do both”.223 In this regard, the Embassy of Switzerland in the United Kingdom told us that many Swiss companies took the EU’s sanctions regimes into consideration, due to Switzerland’s geographical location, the legally binding nature of EU sanctions for EU citizens living in Switzerland, and Swiss business interests in the EU.224
129.Mr Keatinge said that, in any case, UK companies trading across borders already had to consider different regimes. He gave an example: a UK company wanting to deal with Syria would “have one eye on the [US] Office of Foreign Assets Control (OFAC) listing”. Thus an independent UK sanctions regime would not make things “hugely more complicated”, but would make compliance “somewhat more administratively burdensome, because there will be other lists to check”. He would therefore not “necessarily overemphasise” the challenge of complying with different sanctions regimes.225
130.Mr Findlay also raised US sanctions as something that “businesses that operate internationally also have to worry about”. There was therefore “already familiarity among compliance officers” with complying with different regimes.226 Mr Matthews agreed that businesses’ “biggest concern” was US sanctions, “because they know that OFAC is very aggressive, the fines are very high and the public censure is very serious”. EU action was not comparable to this—he was not aware of “any significant enforcement actions in any EU Member State for breaches of the financial sanctions”.227 Dr Giumelli agreed and explained that, compared to the US, “companies do not care too much about [sanctions of] the EU, Switzerland and Norway”.228 In the case of Syria, for example, companies “were so scared, especially by the US, that they stopped any transactions with Syria”.229 Dr Portela agreed: “Basically they are afraid of OFAC”.230 Some companies, for example, implemented US sanctions whether or not they had subsidiaries in the US.231
131.While acknowledging that many firms already complied with multiple jurisdictions, Ms Lester was nonetheless concerned that this “can be extremely costly and complex for businesses and others”. It was “generally advantageous for businesses, NGOs, and others to have one EU-wide sanctions regime to comply with rather than different legal regimes in the UK and the rest of the EU (as well as regimes imposed by the United Nations, the USA, and other countries including Australia, Canada and Japan)”.232 Dr Moret agreed: an independent UK regime “would add another complex layer of bureaucracy to an already highly confusing environment for businesses, when facing multiple autonomous sanctions regimes”.233 UK Finance similarly raised concerns: “Excessive EU-UK divergence would present financial institutions with considerable practical challenges for compliance, resulting in increased costs and uncertainty for UK based financial institutions and EU institutions with UK exposure”.234
132.UK Finance added that, given the role of the City of London as an international financial centre, significant divergence would “have an adverse effect on both UK and EU financial markets”, and “differences in sanctions law between the UK and EU would likely impact on wider global correspondent banking relationships and trade finance”.235
133.We note that, ultimately, the impact on businesses will to a large extent depend on whether the UK’s new sanctions policy aligns with, or differs significantly from, that of the EU. Mr Matthews said that if UK and EU sanctions were “anything other than very closely aligned, the compliance implications of that are an added cost for business”.236 Mr Findlay acknowledged that if the UK was to “dramatically diverge from the EU, it would become more complicated”. This was, however, “not the current thinking”, and if the UK was to “do a 100% cut and paste of everything that is happening now, there would be no change to business. There would be no additional costs in any way”.237
134.Mr Denton suggested businesses should be “consulted about the mechanics of how the regimes work” (rather than their development).238 Ms Lester agreed: there was “no well-established exchange of ideas or consultation, particularly between the EU institutions and business but also between competent authorities and business, as well as charities, NGOs, and individuals affected by sanctions”. She “would certainly reflect Mr Denton’s hopes that that could be improved, at least in the case of the UK regime”.239
Resourcing of UK sanctions design and implementation
135.As discussed in Chapter 3, the UK currently plays a leading role in the development of sanctions policy within the EU, and already has significant expertise in this regard. Mr Williams considered that the UK currently made “quite a significant contribution within the EU and at the UN on sanctions regimes and designations, so we have that base there”.240 As Mr Denton said: “Happily in this instance, and it is potentially a narrow instance, the UK is in a good position and might not need too many new resources to operate an independent sanctions regime”.241 A number of other witnesses agreed.242
136.Leaving the EU would, nonetheless, have some resource implications for the FCO in designing sanctions. Currently, responsibility for sanctions is only part of a broader role in the Directorate. Mr Williams had “already beefed up my sanctions team” in the Multilateral Policy Directorate, and he was now “planning to have a dedicated head of sanctions”, who would lead “an autonomous sanctions unit”.243
137.Mr Williams added that “diplomacy and talking to other countries” was also an important part of sanctions policy, and “we will probably need to do a little more of that on the sanctions side when we are not actually in the EU meetings”. After Brexit, he expected that the new head of sanctions would therefore do “a bit more diplomacy with other countries as well”. Consideration of the issue was underway, but “I am sure that process will continue to evolve”.244
138.Some of our witnesses thought the task more significant: the Royal Norwegian Embassy in London said that while the UK was currently active in EU and the UN, “In our view, it will require considerable resources to develop an autonomous sanctions regime that does not base itself on regulations from the EU”.245 Mr Keatinge said the Government would “need to relearn skills and capabilities that have in recent decades been outsourced to Brussels”, which would “require further hiring of appropriately qualified staff” across Whitehall.246
139.A second aspect of resourcing related to the new domestic regime. Mr Denton noted that “a lot of time and effort” would be needed to develop the new regime “from a statutory point of view”, including “getting the powers in place”.247 Mr Williams told us that the FCO had created a Bill team to work on the Sanctions and Anti-Money Laundering Bill. He noted that discussions during the passage of the Bill through Parliament might also have further resource implications for the FCO.248 Sir Alan Duncan assured us that his “confident judgment as the Minister is that that unit is fully on top of the task and has grasped the detail and the administrative processes very capably”.249
140.So far as the legal resources needed to assess and review listings were concerned, Mr Andrew Murdoch, Legal Director, FCO, told us that “the skill sets are there”, but “the amount of resource that we put into it may depend on the final legal framework and the legal risks that we face”.250 Mr Findlay added that there was a “substantial team of legal experts on sanctions” in the FCO and said he was “confident that we are looking at all the angles”.251 Dr Portela noted that an independent UK sanctions regime would also “increase litigation in UK courts”, as cases currently heard by the Court of Justice of the EU would be heard nationally.252 Mr Findlay acknowledged that this was a “fundamental point”, which “we have to prepare for”.253
141.A fourth aspect was implementation and enforcement, tasks which Ms Lalgie reminded the Committee were already undertaken at a national, rather than EU, level. The establishment of OFSI in March 2016 had meant that “the number of staff who work in the Treasury on the implementation of sanctions doubled”.254 Ms Lester, though, thought there was room for improvement. While OFSI was “relatively well resourced”,255 it would be “helpful in any event for more resources and expertise to be devoted to” it.256 UK Finance identified an “opportunity to significantly improve implementation matters”. This would, however, “require suitable expertise, staffing and policy direction”.257 Mr Keatinge suggested a greater expansion: the Government should “considerably expand its remit and capabilities to become a full-service sanctions agency”.258
Resourcing of EU-27 sanctions design
142.A number of our witnesses addressed the impact of the UK’s departure on the EU-27’s approach to sanctions. As discussed in Chapter 3, the UK plays a significant role in the current design of EU sanctions. Mr Mortlock and Mr Nephew said that there was a risk that expertise and knowledge embedded in the current system could be “lost as a result of the separation”.259 Dr Portela agreed: “most Member States have very small, understaffed sanctions units”, and the “bureaucratic capacity at the level of the institutions is also quite weak”.260 Dr Giumelli said that, at present, “a lot is provided by the UK through seconded personnel”,261 and Dr Moret agreed that “the EU would be left in a weaker position” through the loss of the UK’s expertise.262 Dr Portela summarised the risk as follows:
“The expected effect of Brexit is not that the UK will lose access to capacities and expertise at EU level. On the contrary, it is the EU that is rather understaffed and has to rely on a handful of Member States (first and foremost the UK and the Netherlands) for seconded experts”.263
143.That said, Mr Mortlock and Mr Nephew said Member States were “well practiced at sanctions design and implementation”, and there were “many governments in the EU that can play an enhanced role in this work going forward (such as France, Germany and the Netherlands)”.264 Mr Denton said that the EU would “have to develop an infrastructure” to address the loss of the UK;265 Mr Mortlock and Mr Nephew said in this regard that “the EU bureaucracy in Brussels” could “take on a greater role”.266 Dr Giumelli suggested that Brexit “might create an incentive for other EU Member States to centralise”; for example, enforcement might be done in Brussels. If that were to be the case, there would be “a lot of capacity in Brussels compared with the other 27 Member States”.267
Conclusions and recommendations
144.While the Sanctions and Anti-Money Laundering Bill would allow the UK to implement unilateral sanctions regimes, sanctions are most effective when imposed in concert with international partners. We therefore welcome the Government’s intention to continue to work in close partnership with the EU and other international partners after Brexit.
145.Although the UK will leave the common EU framework for designing and imposing sanctions, the common interests and threats facing the UK and the EU-27 will not change fundamentally.
146.The US and the EU already co-ordinate closely on the design of sanctions. It would be desirable for the UK, the US and the EU to maintain a broadly similar approach to sanctions policy after Brexit.
147.The UK could choose to align itself with EU sanctions after Brexit. This would preserve the current unity of approach by the 28 countries, but would require the UK to implement decisions taken by the EU-27, without having any influence over their design, or voting rights.
148.Informal engagement with the EU on sanctions—as undertaken by the US—can be very valuable, and should be pursued by the UK. Informal dialogue is, however, no substitute for the influence that can be exercised through formal inclusion in the EU meetings where the bloc’s sanctions policy is agreed.
149.It is not yet clear what the “tailored arrangement” proposed by the Minister for co-operation between the UK and EU on sanctions would involve. The Government’s ambition is for an “unprecedented” level of co-operation, which is an untested approach.
150.The UK’s new legal framework for sanctions, and position outside the Single Market and EU customs union, could limit the extent to which the UK is able to enter into such a partnership on sanctions with the EU.
151.If participation in the Common Foreign and Security Policy after Brexit is not possible—or not sought by the UK—then the Government should propose that a political forum be established between the UK and the EU, for regular discussion and co-ordination of sanctions policy.
152.The extent to which businesses operating in the UK are affected by the change to an independent sanctions regime will depend on how closely the UK continues to align with the EU’s restrictive measures. Should the UK choose to diverge from the EU-27’s measures, this could lead to additional administrative burdens for businesses.
153.The UK has the expertise and capacity to develop and implement sanctions outside the EU. The Foreign and Commonwealth Office is developing a dedicated sanctions unit, and depending on the UK’s sanctions policy decisions outside the EU, further resources might be needed.
154.Sanctions policy is one subset of wider foreign policy. The influence of the UK on the sanctions policy of its international partners will depend on the extent to which it is able to retain its authority and leadership on key foreign policy dossiers after Brexit. Further consideration of the impact of leaving the EU on the UK’s ability to pursue and achieve its foreign policy objectives will be urgently required.
110 Foreign and Commonwealth Office, Sanctions and Anti-Money Laundering Bill [HL] Explanatory Notes (18 October 2017), p 5: https://publications.parliament.uk/pa/bills/lbill/2017–2019/0069/18069en.pdf [accessed 12 December 2017]
111 Ibid., p 3
112 Ibid., p 17
114 The Constitution Committee has recently reported on the proposed domestic regime. Constitution Committee, Sanctions and Anti-Money Laundering Bill [HL] (8th Report, Session 2017–19, HL Paper 39)
116 Q 65. As detailed in Chapter 2, the UK currently has limited national powers to implement autonomous sanctions; the Sanctions and Anti-Money Laundering Bill will extend these powers.
120 EEAS, ‘European Neighbourhood Policy (ENP)’: https://eeas.europa.eu/headquarters/headquarters-homepage/330/european-neighbourhood-policy-enp_en [accessed 12 December 2017]
121 European Commission, ‘European Neighbourhood Police and Enlargement Negotiations—Potential candidate countries’: https://ec.europa.eu/neighbourhood-enlargement/policy/glossary/termspotential-candidate-countries_en [accessed 12 December 2017]
125 We note that neither country imposes unilateral sanctions; all measures follow the decisions of the UN or EU. Written evidence from the Royal Norwegian Embassy in London (BSP0011) and written evidence from the Embassy of Switzerland in the UK (BSP0009)
129 Written evidence from the Embassy of Switzerland in the UK (BSP0009). We note that, as discussed in Chapter 2, implementation and enforcement are a Member State competence for EU countries.
148 Oral evidence taken before the EU External Affairs Sub-Committee on 6 July 2017 (Session 2017–19), Q 11
162 Q 23. The FCO gave an example: “If UK law restricted the purposes for which sanctions could be imposed, or required a higher legal threshold for designation, the UK might find it difficult to follow EU sanctions.” Written evidence from the Foreign and Commonwealth Office (BSP0012)
165 Oral evidence taken before the EU External Affairs Sub-Committee on 6 July 2017 (Session 2017–19), Q 15
167 Oral evidence taken before the EU External Affairs Sub-Committee on 6 July 2017 (Session 2017–19), Q 15
168 Oral evidence taken before the EU External Affairs Sub-Committee on 6 July 2017 (Session 2017–19), Q 15
172 Oral evidence taken before the EU External Affairs Sub-Committee on 6 July 2017 (Session 2017–19), Q 11
182 Dr Mikael Eriksson told us that it was “very probable” that the UK would “drift away from the EU’s sanctions agenda in the future”, as it began to “formulate its own distinct foreign and defence policy priorities”. Written evidence from Dr Mikael Eriksson (BSP0005)
189 Q 11. Flight MH17 from Amsterdam to Kuala Lumpur disappeared from radar over Ukraine on 17 July 2014. 283 passengers were on board. 15 crew were also on board. An investigation by the Dutch Safety Board found that the plane crashed after being hit by a Russian-made Buk missile. An international criminal investigations team concluded that the missile was originally from Russian territory, and fired from a location controlled by pro-Russian forces. ‘MH17 Ukraine plane crash: What we know’, BBC News (28 September 2016): http://www.bbc.co.uk/news/world-europe-28357880 [accessed 12 December 2017]
192 Q 22. The Group of Seven (G7) is an informal bloc of industrialised democracies, which meets annually. It consists of Canada, France, Germany, Italy, Japan, the UK, and the US.
195 Q 36 (Matthew Findlay). The Financial Action Task Force (FATF) is an inter-governmental body. The objectives of the FATF are to set standards and promote effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and other related threats to the integrity of the international financial system. Financial Action Task Force, ‘Who we are’: http://www.fatf-gafi.org/about/ [accessed 12 December 2017]
204 Q 72 and Foreign and Commonwealth Office, Impact assessment—Sanctions and Anti-Money Laundering Bill (18 October 2017): https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/653271/Sanctions_and_Anti-Money_Laundering_Bill_Impact_Assessment_18102017.pdf [accessed 12 December 2017]; We note that the impact assessment related to the Bill, and did not take account of possible changes in UK foreign policy, such as future divergence from the EU.
226 Q 72. Dr Francesco Giumelli told us there was a difference in the burden for smaller and larger companies: big corporations had “the resources to comply with [sanctions], they have the resources to pay for offices, and for the capacity to make sure that they do not violate them”. Q 14
234 Written evidence from UK Finance (BSP0007); These challenges would include uncertainty on designations and implications for cross border business.