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The Ukraine Effect: The impact of Russia’s invasion of Ukraine on the UK–EU relationship Contents

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Chapter 2: Cooperation on sanctions

18.The use of sanctions has been an important element of the respective policy responses of the EU, the UK, the US, and other allies following the Russian invasion of Ukraine. Sanctions have targeted Russia’s financial, aviation and shipping sectors as well as strategic sectors of the economy such as defence, aerospace, and energy. Sanctions have also targeted individuals close to Vladimir Putin’s regime and those facilitating Russia’s invasion of Ukraine, including actors in third countries.

19.To date, the EU has imposed twelve packages of sanctions, while the UK has also regularly announced new sanctions designations.9 There has been considerable international cooperation on the rollout of sanctions, in particular through the G7. The G7 countries announced plans to establish an Enforcement Coordination Mechanism in February 2023.10

20.This chapter discusses UK-EU cooperation in relation to the imposition and implementation of sanctions following the Russian invasion of Ukraine. It briefly discusses the new, post-Brexit UK sanctions regime and differences between the three critical global sanctions regimes—the UK, the EU and the US. Finally, it considers the potential use of sanctioned assets to support reconstruction in Ukraine. Cooperation on reconstruction of Ukraine is further discussed in Chapter 4.

Coordination of sanctions policy

21.The Rt Hon Baroness Ashton of Upholland told us that in her experience of sanctions, from the time when she was responsible for sanctions coordination as the EU’s High Representative for Foreign and Security Policy, “it is a constant learning process”. Although the ambition is to sanction “the right people and do it quickly”, all restrictions have to be drafted in a way that will stand up in court. The basis for sanctions is to “either stop something getting worse, stop something happening or throw it into reverse”. From her experience, “coordination is everything”—”the heavier the sanctions, the more it is co-ordinated, the more it has an impact, the better”.11 HE Pedro Serrano, the EU Ambassador to the UK, similarly emphasised that “a bigger number” of countries imposing sanctions “is certainly much more useful than just one state or a couple of states doing it on their own”.12

22.Spotlight on Corruption described the global sanctions response as “unprecedented”, including in the “extent of international coordination and cooperation that this has entailed”.13 The current structures of cooperation in relation to sanctions against Russia and Belarus involving the UK, as outlined by the Foreign, Commonwealth and Development Office (FCDO), include “regular, informal engagement with the EU institutions and Member States”, discussions with other G7 countries, and cooperation through the “attaché network of sanctions professionals”. This is further supplemented by “wider cooperation including quarterly senior-official meetings encompassing the Sanctions Coordinators Forum, attended by all EU Member States and G7 partners; the Russian Elites, Proxies, and Oligarchs Taskforce; and the G7 Enforcement Coordination Mechanism”.14

23.Our witnesses have underlined the role played by the G7. Sir Julian King, a former European Commissioner for the Security Union, underlined the role of G7 in sanctions coordination, providing the UK, EU, US and other countries with a “safe space” to work together that he described as a “very interesting framework” of cooperation.15

24.Daniel Drake, Deputy Director (Sanctions) at the FCDO, told us that sanctions cooperation is “ultimately … a team sport”. Coordination was done primarily through the G7, “which has created a platform through which the EU can take that to its member states and negotiate successive sets of sanctions packages”. It is also “a useful mechanism to get a collective political commitment to take action”. He noted that the group was negotiating a potential 12th package of sanctions (Mr Drake gave the evidence on 14 December. On 18 December the European Council announced the 12th package)16. Overall, he thought all countries cooperating on sanctions against Russia had complemented each other and where possible, tried to align.17

25.In addition to the work at the G7 level, cooperation between the UK and the EU on sanctions was typically seen as having been effective overall. HE Pedro Serrano summarised it as “more regular than structured”.18 Professor Anand Menon, Director of UK in a Changing Europe, said that both sides “seem pretty happy” with the way coordination has worked so far.19 Dr Benjamin Martill, Senior Lecturer in Politics and International Relations at the University of Edinburgh, noted that the “positive” nature of interactions on sanctions is acknowledged by both UK and EU officials.20 Meanwhile, REDRESS told us that both the EU and UK have now designated over 1,200 Russian individuals and that many of these designations have been coordinated.

26.Tom Keatinge, Director of the Centre for Financial Crime and Security Studies at the Royal United Services Institute, referred to “extremely close working co-operation” between the UK and the EU on sanctions since February 2022, with the sanctions division at the UK Mission to the European Union being “one of the few areas … where you do not sense Brexit”.21 He referred to the Political Declaration signed by the UK and the EU in 2019, which acknowledges that the UK will be free to pursue its own sanctions policy, but also stated that close consultation, cooperation and sharing of information should continue. That, in his experience, has been the case, and even if “there are listings that the EU has that the UK does not, and vice versa” this arena “is one of bonhomie” between the UK and the EU.22

27.Dr Martill indicated that EU and UK packages have been “developed in parallel with informal coordination ongoing ever since Brexit”.23 In his assessment the UK remains a “major player” on sanctions given the role of the City of London and remains “a key policy architect effectively signing onto and mirroring what is now an agreed EU position, albeit on the basis of UK expertise24”.

28.Some witnesses nevertheless considered that existing mechanisms for sanctions coordination may have limitations from a UK perspective. For example, Ian Bond and Dr Luigi Scazzieri, respectively Deputy Director and Senior Research Fellow at the Centre for European Reform, told us that it was harder for the UK to ensure that its interests were reflected in EU sanctions packages than had been the case when the UK was an EU member.25

29.Agathe Demarais, Senior Policy Fellow for Geoeconomics at the European Council on Foreign Relations, emphasised that, in spite of expectations that the UK would continue to apply EU rules on sanctions post-Brexit, the UK has in fact implemented sanctions in an “autonomous” manner. While “informal” discussions between the UK and EU are taking place, she suggested that these are the “exception rather than the rule”.26

30.Maya Lester KC, a leading legal expert on sanctions policy, expressed concern that the cooperation experienced over the past two years may have “a shelf life”, given that some EU Member States, notably Hungary and Slovakia, may now be reluctant to pursue further sanctions packages.27 Dr Stefan Meister, Head of the Center for Order and Governance in Eastern Europe, Russia and Central Asia at the German Council on Foreign Relations, shared similar sentiments. Although the sanctions packages introduced so far are “quite comprehensive”, he saw “a limit” to the willingness to impose more sanctions. Instead, he suggested that the priority should now be to close the existing gaps, exploited by Russia, and to systematically work on secondary sanctions aimed at third countries helping Russia to bypass the existing sanctions regime.28

31.Arrangements for cooperation between the UK, the EU and other partners on the imposition of sanctions since the Russian invasion of Ukraine have been effective overall. These should be considered as a model for pragmatic cooperation between the UK and the EU that could be replicated in other areas of the UK-EU relationship.

The UK sanctions regime

32.Ms Lester told us that following the UK’s exit from the EU, the Government had faced an “extraordinarily difficult task” to try to carry over EU sanctions into UK legislation. The Government’s intention had been to maintain continuity of EU sanctions in the UK. This was achieved through the Sanctions and Anti-Money Laundering Act 2018, under which 35 sanctions regimes were drafted into UK regulations, “with all the evidence for the thousands of people listed reviewed by the FCDO”.29

33.Ms Lester explained that the UK had been able to “learn from its experience with EU sanctions and improve on that with its own domestic legal framework”. She considered that the UK now had “a very well thought-through and effective legal framework for the imposition of sanctions”. No longer constrained by the need for unanimity within the EU, the UK can be “nimbler and swifter” in imposing sanctions.30

34.Mr Keatinge (RUSI) observed that the Government had been trying to demonstrate the independence of its sanctions regime before Russia’s invasion of Ukraine, when the Rt Hon Dominic Raab MP was Foreign Secretary and his ambition had been to use sanctions “to demonstrate British values”. All of that work had been swept aside following the events of February 2022.31

35.Ms Lester drew our attention to an “urgent procedure” for imposing sanctions introduced following the Russian invasion of Ukraine. This instrument allows the Government to “designate people in the UK simply because the EU has designated them … or the US, Canada or Australia”. She noted that the UK has imposed a vast number at a very quick pace, while relying on the work done by other allies. 32

36.Some aspects of the UK sanctions regime remain a work in progress. Ms Lester drew attention to what she saw as limited resources and a lack of clarity resulting from the speed at which sanctions have been imposed on Russia. The FCDO and HM Treasury (HMT) had been “absolutely swamped” with inquiries, licence applications and other queries, largely as a consequence of the pace at which sanctions on Russia were introduced. Although the numbers of personnel working on sanctions at the HMT-based Office of Financial Sanctions Implementation (OFSI) and at the FCDO had increased, she said that this had not yet led to all inquiries being dealt with at an increased pace.33 In addition, the speed of introduction of these legal restrictions was not matched by clarity of guidance. As a consequence, the business community operates in an area of “great uncertainty”.34

37.An additional area of uncertainty for British businesses is who exactly is subject to sanctions introduced by the Government. While the Government lists all individuals who are targeted for asset-freezes and travel bans, any restrictions also extend to the companies they control, but these are not listed by the Government. Citing different decisions by the High Court and the Court of Appeal on the implications of this problem, Ms Lester argued that this has led to uncertainty. The ensuing “chaos” required the Government’s intervention and an announcement that it will “try to list entities by name where we can”. In Ms Lester’s assessment, this is currently as area “of complete uncertainty”, where legal clarity is required.35

38.In its written evidence, Spotlight on Corruption noted that the Government has prevailed in every court challenge of its sanctions measures so far.36 REDRESS raised concerns that the UK’s broad criteria impeded the ability of individuals to challenge sanctions designations.37

39.Another change noted by Ms Lester when comparing the UK and the EU sanctions regimes is that the former do not expire while EU sanctions have to be reconsidered or reviewed every six months: “The UK went from annual reviews to triannual reviews to no reviews”.38 This may lead some of the designated people to be frustrated that there is no possibility of engagement with the Government on what action they could take to be removed from the list following a review39 (see further discussion in the section on off ramps, paragraphs 85–87).

40.Mr Keatinge predicted that a new “UK independent sanctions regime 2.0” will “emerge” from the work currently being conducted on Russia sanctions and therefore suggested that “the jury is still out”.40

41.We recognise that the UK’s independent sanctions regime is still a work in progress, but it appears, on balance, to have been effective overall in the context of the sanctions introduced following the Russian invasion of Ukraine. Without the need for agreement on unanimity, the UK can be nimbler and swifter in imposing sanctions.

42.Nevertheless, some witnesses expressed doubts about aspects of the UK’s post-Brexit sanctions regime including a lack of detail in listing individuals but not the companies they control and questions about the efficacy of enforcement through the work conducted by the National Crime Agency and the Office of Financial Sanctions Implementation. We ask the Government to respond to these specific concerns in its response to this report, addressing in particular the robustness with which breaches of UK sanctions are investigated and enforced.

43.We note that the current sanctions mechanism in the UK does not include a sanctions review mechanism akin to the EU’s sanctions review system. We ask the Government to explain in its response to this report why that is the case and whether it is considering further changes to the current regime as it reviews how it functions in response to Russia’s invasion of Ukraine.

Differences between the UK, EU and US sanctions regimes

44.Several witnesses, including Susi Dennison, Senior Policy Fellow at the European Council on Foreign Relations, expressed concern about “loopholes” resulting from different criteria for listings between different sanctions regimes.41

45.Radosław Sikorski, a former Minister of Foreign Affairs of Poland, emphasised to us (before he was reappointed to that position in December 2023) that having similar lists of sanctioned institutions, companies or individuals “on both sides of the Atlantic and on both sides of the Channel” made sanctions more effective.42 He told us that the argument for coordinating was “overwhelming” and stressed that it was essential to “plug holes that companies and potential breakers of sanctions find”.43

46.Neil Whiley, Director, Sanctions and Export Controls at the trade association UK Finance, told us that a challenge for international companies arises when different sanctions regimes, involving the same person, are imposed without international coordination as this will create opportunities for asset flight from one jurisdiction to another.44 In order to address this issue, the Government has introduced its urgent procedure, “where we can list EU, US, Australian and Canadian listings” (what Mr Keatinge refers to as “the copy and paste provision”). In theory, the procedure should prevent asset flight, but as noted by Mr Whiley, it is not always the case.45

47.Spotlight on Corruption highlighted divergence in restrictions on providing and paying for legal services. It noted that in the Government’s assessment Russian business is “highly dependent” on UK legal services to operate internationally.46 However, Ms Lester told us that there was a risk that measures in this area, including some of those enacted by the Government in July 2023, could “prohibit the giving of compliance advice on sanctions, with different sanctions regimes”. We were told that this had led to an outcry from UK law firms, because it seemed to suggest that such measures would mean they would be committing a criminal offence by advising their clients on what sanctions meant, which was not the case in the US and the EU.47 The Government has acknowledged this issue and, in consultation with the Law Society, put out a general licence allowing for such advice to be provided. Ms Lester told us that, in her understanding, the Government is currently working on amendments to the Legal Services Regulations to assure that compliance advice is not prohibited.48

48.Meanwhile, REDRESS told the Committee that “[u]nlike the EU, the UK is yet to use its sanctions regimes to target Russian individuals and entities specifically for their involvement in human rights violations in Ukraine and recognise in their designations the abuses suffered by victims”. It suggested that such designations are “crucial to provide a form of accountability and contribute to the documentation of the violations committed in Ukraine”. According to REDRESS, the UK sanctions regime is nevertheless “wider in scope” than the EU’s in some other respects, for instance covering those who have obtained a benefit from or support the Government of Russia rather than just those engaging in conduct that undermines the territorial integrity, sovereignty or independence of Ukraine.49

49.We also heard about some divergence between the approaches of the EU and UK on the one hand, and the US on the other. For example, Mr Bond and Dr Scazzieri noted that the EU and UK have historically been resistant to “secondary sanctions” against countries perceived to be supporting Russia, but that these are seen as a more legitimate tool by the US. They suggested that there was a “case for the EU and the UK to consider adopting something more like the US approach, particularly in cases where co-ordinated lobbying has not resulted in third countries tightening up their export control processes, or where they seem to be actively helping Russia establish illicit supply chains”. Mr Keatinge told us that US officials, on occasion, indicate that they “hang back” from being more “heavy handed” on sanctions, because they want to maintain the ongoing sanctions coordination with its European partners and allies.50 Ms Demarais indicated that, in some circumstances, the UK may “choose to align with the US, which is typically more hawkish on sanctions, rather than with the EU”.51

50.Ms Lester considered that, although there are differences based on different cultures and legal systems, broadly speaking the UK, the EU and the US “have very roughly the same restrictions”. Nevertheless, she told us that differences matter to the business community, and the financial sector in particular, due to the costs of compliance.52

51.Mr Keatinge explained that some differences between UK, EU and US sanctions could be explained by differences between their respective economies. While the UK had an especially strong interest in sanctions introduced in the early stages of the conflict relating to oligarchs and financial services, some of the more recent debates, for example about sanctioning the diamond trade, are more relevant to the EU than to the UK (since Belgium has a critical role in the diamond trade).53 Ms Demarais indicated that some divergence may also be a result of the UK wishing to avoid imposing sanctions on individuals that it has “confidential” relations with, providing the example of “well-connected individuals that are deemed likely to take part in a potential political transition in Moscow”.54

52.Mr Drake provided us with an example of an area where sanctions regimes may differ, but where this does not necessarily lead to gaps or loopholes. There are types of Russian commodity where the scale of dependency differs—while the UK may be able to move to a full ban quickly, the EU has to negotiate it with all Member States and one country can stall or delay sanctions due to a high degree of dependency on the given commodity.55 The Minister for Europe indicated that generally the difference “lies merely in the timescale of application … it certainly does not result in gaps”.56

53.Asked about the Government’s approach to divergence on sanctions, the Minister for Europe told us that “agility” had been a key benefit of the UK’s independent sanctions regime.57 Mr Drake explained that in some cases the UK had been “able to move ahead maybe with a smaller set of partners”, citing financial measures introduced in concert with the US.58 He also highlighted some differences in the priorities of those imposing sanctions. For instance, transport sanctions are “particularly significant” for the EU, given its land border with Russia, but less relevant for the UK. Nevertheless, he acknowledged that “sanctions will always be far more effective if we act collectively as a sanctions coalition”. He considered that to date “we have complemented each other”.59

54.We have received evidence indicating that some minor differences between UK and EU sanctions regimes have been justified in the context of the sanctions introduced since the Russian invasion of Ukraine. We note that, as a country outside the EU, the UK has the freedom to align its sanctions policy with the US, which can sometimes be more hawkish on sanctions than the EU.

55.Nevertheless, we received persuasive evidence that sanctions are most effective when imposed and enforced by as wide a coalition of countries as possible. Divergence between sanctions regimes results in gaps and loopholes, which weakens their overall effectiveness. This, in turn, reduces the impact that the imposition of sanctions seeks to achieve. We therefore call on the Government to work with its international partners to ensure that divergence on the imposition and enforcement of sanctions regimes is as limited as possible. We ask the Government to set out what steps it is taking to avoid the negative impact of divergence in its response to this report.

Implementation and enforcement of sanctions

56.In our report published in April 2023, The future UK-EU relationship, we identified implementation and enforcement of the sanctions that had been imposed as an area in which closer cooperation between Western partners, including the UK and EU, was needed (see Box 1).

Box 1: The future UK-EU relationship report. Recommendations on sanctions

We welcome the effective cooperation between the UK and EU in the imposition of sanctions against Russia. The overall sanctions regime must, however, be more robust. We believe, in particular, that closer cooperation between Western partners, including the UK and the EU, is needed on the implementation and enforcement of sanctions and the evaluation of their success or failure. We therefore welcome the announcement of a new G7 Enforcement Coordination Mechanism (Paragraph 118) Complementary to the Enforcement Coordination Mechanism, we recommend that the UK and the EU should agree a Memorandum of Understanding around information sharing and cooperation on imposition, implementation and enforcement of sanctions as soon as possible, similar to the enhanced sanctions partnership agreement reached between the Government and the US Treasury. This need not be an elaborate mechanism but we believe that it would be beneficial to have some formal arrangements in place, which would help to ensure that momentum is maintained beyond the current phase of the war (Paragraph 119). A careful calibration of international cooperation on sanctions policy, including a system for monitoring enforcement, would provide added value in relation to other current and future threats where sanctions can be a deterrent. We can be sure that the objects of UK and EU sanctions will be working hard to diminish their impact and only the closest cooperation over implementation will ensure their effectiveness (Paragraph 120).

Source: European Affairs Committee, The future UK-EU relationship (4th Report, Session 2022–23, HL Paper 184)

Implementation

57.It is difficult to make an authoritative assessment of the impact of sanctions on Russia. Some of our witnesses told us that the sanctions introduced so far have been effective. Mr Sikorski noted the drop in Russia’s foreign income from the sale of its oil and gas, because it had been forced to sell it either via intermediaries, or to alternative markets, while offering discounts. He also believed that sanctions had been effective in restricting Russian access to chips required by them for missiles and other advanced military systems.60 The EU Ambassador to the UK shared a similar assessment.61 However, some commentators have argued that the sanctions have not had the impact expected.62 Official estimates suggest that Russia’s economy grew by around 3 per cent in 2023.63

58.The Foreign Secretary told us that, according to FCDO estimates, without sanctions Russia would have had over $400 billion more to fund its invasion of Ukraine. He added, “We think that sanctions, if you take them all together, have been effective”. He noted that in December 2023 alone, 46 individuals and entities involved in circumvention of sanctions on dual use technologies had been sanctioned, including 11 in third countries—four in the UAE, three in China and one each in Belarus, Uzbekistan, Serbia and Turkey.64

Circumvention

59.We nevertheless heard of ongoing challenges with circumvention of sanctions. According to Mr Keatinge “circumvention” was the “buzzword for the sanctions community in 2023”.65 Dr Meister observed that Russia has de facto created an “architecture to circumvent sanctions and the secondary sanctions”, focusing on the sale of its natural resources and supply of technology for the military industrial complex.66 Reports in the media have increasingly drawn attention to this issue.67

60.One of the mechanisms used by Russia to circumvent sanctions deals with the sale of its natural resources, notably oil and gas. In September 2022, the Finance ministers of G7 countries agreed to cap the price of Russian oil and petroleum products, in a bid to undermine Russia’s ability to fund its actions in Ukraine.68 On 5 December 2022 the cap was set at $60 per barrel.69

61.This mechanism, as Mr Whiley explained, allowed UK companies, otherwise prohibited from dealing in Russian oil and petroleum products, to deal in Russian oil as long as the price was below the set cap. We were told that the companies concerned included shippers, insurers, financiers, exporters and pilots.70 However, the Russian authorities have facilitated circumvention by using fleets flying “flags of convenience” (flags of states with limited domestic regulation, enforcement capacity and few criteria for registration)71, rather than flags of the UK, EU Member States or the US. Legally, it is difficult to sanction such vessels. Mr Keatinge noted that a lesson we should learn from the case of evasion of oil sanctions is to continue to cooperate on “sanctions maintenance”—“[a]s the target shapeshifts, you need to track that”.72

62.The Foreign Secretary told us that the Government wants to do “everything we can” to make sure that the cap is effective. He considered that it had “been an effective move and has definitely starved Russia of money, but we need to keep up the pressure of trying to make sure that, whenever they are using shadow fleets or what have you, we go after the shadow fleet, the money and the providers”.73

63.Mr Drake added that the fact that Russia had found a way to circumvent the oil cap was a concern for the Government. He said that the response is twofold—first, identification of specific actors (for example, in the UAE) that are helping Russia to violate it, and sanctioning them. Secondly, taking steps to strengthen the price cap, working with the UK insurance industry. At the time of writing relevant measures are being negotiated at the G7 level.74

64.When discussing mechanisms to address the challenge of sanctions circumvention more generally, witnesses mentioned the need for further coordination and for individual countries to improve the effectiveness of their sanctions implementation.

65.Mr Keatinge noted two examples of close international coordination that have been happening in response to sanctions evasion. First, regular joint visits of three sanctions envoys (UK, US, EU) to countries where evidence of sanctions evasion by Russia has been found, “to have conversations with them about ensuring that they understand what it is we are trying to achieve with the sanctions on Russia”. This had complemented coordination efforts through G7.75

66.Mr Keatinge added an important caveat to criticism of implementation. He indicated that, before Russia’s invasion of Ukraine, many EU Member States did not have practical working experience of sanctions implementation. He told us that this had meant that their “capacity to deal with the deluge of sanctions that came forward after February 2022 was very low”. Mr Keatinge identified 2023 as the time when countries were trying to move from a “low” to a “higher” level of sanctions implementation.76 Dr Meister emphasised that implementation is a responsibility of Member States, not of Brussels.77 Mr Keatinge told us of a number of EU countries he had visited which had acknowledged and recognised the capability-building support on sanctions implementation provided by the United Kingdom.78

67.Nathalie Loiseau MEP, Co-Chair of the UK-EU Parliamentary Partnership Assembly and former Minister of European Affairs of France, argued that “we are doing a good job” in fighting together against circumvention, as evidenced by the close cooperation between the EU Special Envoy David O’Sullivan and the director of the UK sanctions directorate, and their common trips to key third countries, including Kazakhstan and Kyrgyzstan.79

68.The Minister for Europe told us that “cracking circumvention” was the key to improving the implementation of sanctions.80 In addition to existing efforts to tackle it, the Government announced an additional £50 million as part of a new economic deterrence initiative.81 The Department for Business and Trade (DBT) has established an Office for Trade Sanctions Implementation, equivalent to the existing HM Treasury-based Office of Financial Sanctions Implementation. Mr Drake described this as “a significant scaling up of effort in DBT to implement and enforce trade sanctions”.82

69.Mr Drake provided more details on the coordinated effort to respond to circumvention through third countries. The key allies, the UK, US, and EU, had identified a list of products related to technologies that Russia is trying to get hold of and which cannot be imported directly, thus relying on procurement via third countries. Envoys agreed to arrangements “with at least some of those countries” to impose controls on how such technologies travel through their territories. Mr Drake noted that some of those countries had indicated that they do not plan to set their own sanctions but are happy to cooperate on stopping the circumvention of international sanctions imposed on Russia. He reassured us that there had been “some positive progress with a number of the countries that we have been working with”.83

70.Ms Loiseau also called for more scrutiny of the implementation of sanctions and cooperation between parliamentarians “on what we find out in order not to fool ourselves and be more effective”.84

Role of the financial services sector

71.We heard that financial services companies are the critical actors when it comes to sanctions implementation; it is “in their DNA”, as Mr Keatinge put it.85 Mr Whiley characterised their role as being “the gatekeeper” and “the last chance we have to stop a breach of sanctions”.86 Mr Whiley did offer a caveat, noting that when looking at sanctions imposed on Russia, 80 per cent of them are trade-based, while only 10 per cent are financial. Nevertheless, “financial services are the oil in the machine that allows that trade to happen and continue”.87

72.Mr Whiley noted that banks are not able to be effective on their own. He argued that actors involved in oil, gas, shipping and insurance all have to be part of the conversation, otherwise financial services will not have access to the specialist information necessary to make sanctions more robust.88 Mr Keatinge gave the example of France, where the initial strategy was to rely entirely on banks to implement and enforce sanctions implementation on industry. Over time industry became engaged in the process as well.89

Enforcement

73.Mr Keatinge expressed concern about the current state of sanctions enforcement: “frankly, I do not think enforcement exists in the sanctions dictionary in Europe right now”. Though “circumvention” might have been the buzzword for the sanctions community in 2023, he hoped that it would be replaced by “enforcement” in 2024:

“We have issued these sanctions, we are running out of ideas as to what to sanction next and we are perhaps running out of consensus to bring forward new packages, so let us make sure that the sanctions we have in place already are being properly implemented and, where they are not, that we are taking enforcement action”.90

74.Other witnesses also highlighted challenges relating to enforcement of sanctions. Professor Szyszczak suggested that the US is “more robust” than both the UK and EU Member States in imposing fines for sanctions violations.91 Meanwhile, REDRESS characterised the UK’s efforts to enforce sanctions as “weak”.92

75.Spotlight on Corruption said that efforts to investigate sanctions evasion had faced “serious setbacks”. In their assessment, the “problems exposed in these early enforcement efforts highlight the need for scrutiny of whether the new Combatting Kleptocracy Cell (CKC), established within the National Crime Agency, is delivering on robust enforcement of sanctions”.93 They also expressed doubts about the effectiveness of the UK’s Office of Financial Sanctions Implementation (OFSI) as a sanctions enforcement actor, highlighting that only nine fines have been issued since it was established in 2016 and that none had yet been issued for breach of Russia sanctions regulations. Spotlight on Corruption questioned whether the measures that have been introduced are currently backed up by a credible threat of enforcement.94 It recommended that the UK and partners should now prioritise coordination efforts on enforcement, including a greater emphasis on information- and intelligence-sharing, “particularly to track cross-border financial flows and clamp down on the use of sanctions-neutral third countries as a way to dodge sanctions”.95

76.Ultimately, as noted by our witnesses, enforcement, like implementation, is primarily a matter for the individual nation states. In the case of the EU, while the EU institutions will “cheerlead and cajole” and the European Parliament has debated criminalisation of sanctions evasion, the responsibility ultimately falls on Member States.96 In the case of the UK, responsibility falls on the Government.

77.The UK’s expertise in developing and implementing sanctions regimes is an asset which should be used more actively to support the capabilities of other countries, both EU and non-EU. The aim of sharing the UK’s experience should be to ensure more effective implementation of sanctions by a wider range of countries. In its response to this report the Government should provide details of what support it is currently providing to other countries.

78.We are concerned about growing evidence that Russia has been able to circumvent sanctions through third states and uninsured shadow tanker fleets. We welcome the Government’s efforts to address this, in cooperation with our partners and allies, and in the current format of cooperation between envoys. Since the lifting of sanctions on Russia appears to be a distant prospect, circumvention will remain a challenge requiring ongoing cooperation. We urge the Government, when replying to this report, to list the measures already taken in response to circumvention; and to set out their plans for more effective enforcement, including through closer and more effective cooperation with the EU and its Member States.

79.It is disturbing that the weight of evidence we received suggests that the UK has not so far been as effective as it could be at enforcing the sanctions that have been introduced. We note in this regard REDRESS’s assessment of the UK’s performance as “weak” and Spotlight on Corruption’s evidence that investigation of sanctions evasion had experienced “serious setbacks”. Effective sanctions regimes must be enforced. We therefore ask the Government to address this concern in its response and to set out specific examples of robust action taken by the Government and its agencies to enforce UK sanctions regimes.

Use of sanctioned assets for the reconstruction of Ukraine

80.It has been proposed that sanctioned Russian assets should be used to fund the future reconstruction of Ukraine. This has been advocated by the Ukrainian government and has strong support from some EU Member States, for example Poland. In September 2023 the US special representative for reconstruction was quoted as saying that sanctioned assets “ought to” be used to help fund the process.97 However, other key stakeholders such as the European Central Bank and some experts have expressed caution about the legality and practicality of this proposal.

81.Some witnesses highlighted the legal complexity associated with the use of sanctioned assets in this way. Maya Lester KC noted the need for evidence of criminal conduct “in order to seize as opposed to freeze assets” and that there is an existing regime under the Proceeds of Crime Act (POCA) that could be used, “where that is warranted”. In her assessment, seizing assets without clear legal criteria would “raise obvious difficulties in rule of law terms”.98 Mr Whiley added that the ownership and control criteria “cause a web of designations to reach out across the business environment, and not all of those frozen assets belong unconditionally to the designated person”. In this context it should be noted that the POCA regime is only about recoverable funds, not confiscation of all the frozen assets.99 The EU Ambassador to the UK told us that the EU “want[s] to ensure that whatever we do is fully legally sound, because any measure taken that is not legally sound would probably be counterproductive”.100

82.Mr Keatinge suggested that attention should be paid to frozen central bank assets, “because there is a much better return for Ukraine to be had by focusing there”.101 In October 2023 the President of the European Commission said that the EU was working on such a proposal “to initially focus on the so-called windfall profits” from Russian Central Bank assets.102

83.When asked about the feasibility of using sanctioned assets for the reconstruction of Ukraine, the Foreign Secretary told us that:

“ To answer the bigger question of whether it is time not just to freeze the assets and to spend some of the interest but to spend some of the assets, there is a legal route to doing this”.103

84.The Minister for Europe stressed that “it is all about the legality”.104 He said that the Government was looking at the possibility but that “if it was easy, we would have done it already”.

Off-ramp

85.Witnesses also discussed the potential to provide a so-called “off-ramp” for those currently on the sanctions register, if they meet certain conditions. Mr Keatinge drew our attention to a 2021 US Treasury sanctions strategy review that talked about “the importance of reversibility of sanctions”. He noted that the idea that sanctioned individuals could make voluntary contributions to the reconstruction of Ukraine “in exchange for some sanctions relief” was “floated by the Foreign Office” during the Ukraine Recovery Conference in London in June 2023. However, the idea had subsequently “not got anywhere”.105

86.Mr Whiley noted that sanctions are a coercive measure, and their primary aim is to change behaviour. In the case of Russia sanctions, supporters of Ukraine had used a lot of “stick” but he did “not see any carrot for Russia to change its behaviour”. He argued that if change of behaviour is the goal of sanctions, then “you do need an off ramp”.106

87.Ms Lester noted the words of Giles Thomson, the director of OFSI, about a possible new “voluntary route to seek removal from a sanctions list” in exchange for a “voluntary agreement” to release frozen assets in the UK to fund the reconstruction of Ukraine.107 She also noted that the US has an off ramp mechanism—Task Force KleptoCapture, at the Department of Justice; “it will have discussions with designated people … about creative possibilities for things people could do to be off-ramped”.108

The sale of Chelsea FC and the case of Roman Abramovich

88.We asked the Government for an update on the proceeds from the sale of Chelsea FC by sanctioned Russian billionaire Roman Abramovich. At the time of the sale, Mr Abramovich pledged to donate the proceeds to a “charitable foundation” tasked with supporting the victims of the conflict in Ukraine. 109 However, this has not yet taken place.

89.REDRESS referred to this process in written evidence, arguing that, if arrangements for the donation can be finalised successfully, this may “demonstrate the feasibility” of a “voluntary donation mechanism” for sanctioned assets.110 However, it suggested that “the process has reached a stalemate, with neither the Government nor those tasked with creating the foundation taking responsibility to progress the matter”.

90.The Minister for Europe told us that the proceeds from the sale are frozen in a UK bank account and the Government “is going through the process of independent experts establishing a foundation to manage the money, and a licence application will need to be made to take that forward”.111 When pressed on reasons for the delay, given agreement from the Charity Commission that such a fund can be set up, the Minister noted that there is a “disagreement” between the parties about who should benefit from the fund and where the monies should be spent. The Government is insisting that the funds have to be spent in Ukraine on Ukrainians.112

91.The Foreign Secretary confirmed that the Government is very keen that these funds should be spent specifically on humanitarian causes in Ukraine, “not on other causes linked to Ukraine or anything else”. He added that “there is an issue with that, which we need to see through”. He acknowledged that it may “take a bit of time, but emphasised that it was “important to get the right result”.113

92.The Government should work closely with the EU and other partners to explore possible options to make use of sanctioned assets (or their proceeds) to support the reconstruction of Ukraine. However, any mechanism to make use of Russian assets must be consistent with international law and must not damage the international financial system. We noted that the Foreign Secretary suggested to us that there is a legal route to achieve that. The Government should outline what action it is taking on finding a legal route, including any discussions that it has had with the EU and other partners in its response to this report.

93.In contrast to the UK, the EU periodically reviews its individual sanctions regimes. This issue is linked to the creation of arrangements for sanctions to be lifted. In our view, the Government should consider introducing a process for periodic review of sanctions in force, which could provide a mechanism for the eventual removal of sanctions, in coordination with EU and other partners. We recommend that the Government should in the meantime consult with the EU on the design of any “off-ramp” arrangement through which sanctioned entities could be removed from the sanctions list if certain conditions are met, such as providing support for reconstruction of Ukraine.

94.We find it incomprehensible that the Government have not yet resolved the problems around the promised use of frozen assets from Chelsea FC’s sale to support Ukraine. The unfulfilled promise made by Mr Abramovich at the time of the sale of Chelsea FC reflects poorly on him and the Government for not pushing for a more binding commitment. We urge the Government to use all available legal levers to solve this impasse rapidly so that Ukraine can receive much needed, promised, and long overdue relief. All of the funds should be spent in territories controlled by the Ukrainian government.

The future of sanctions coordination

95.We asked our witnesses whether there were lessons to be learned from recent experience for future coordination between the UK and EU on sanctions policy in respect of other states. In response Baroness Ashton, drawing on her experience of the sanctions process in relation to Iran, suggested that over time sanctions regimes in both the UK and the EU “have got better” as a result of “learning” done between countries and between organisations”. Sir Julian King told the Committee that G7 work on sanctions had also been “evolving” as a result of the Ukraine crisis, suggesting that this was now providing a “very interesting framework” for western cooperation.114

96.Ms Loiseau argued that western allies “have to make sure that the sharing of information and joint efforts for enforcement and the fight against circumvention continue not only when it is Russia or Belarus but every time we decide sanctions, because we basically have the same objectives and it only strengthens our case if we are ready to work together”.115 She indicated that at present the UK, the EU and other actors were “learning by doing”, given the unprecedented nature of the sanctions against Russia and Belarus. She concluded by arguing that a “permanent framework of cooperation on sanctions is necessary”.116 Ms Demarais (European Council on Foreign Relations) shared these sentiments and suggested that the UK and France remained the only two European countries that have the “intelligence capability to track individuals and groups engaged in illicit behaviours or sanctions evasion”. In her assessment, joint designations would “boost the effectiveness of sanctions”. However, she noted that France may be less enthusiastic than some countries about greater cooperation with the UK, since it has taken on a leading role within the EU process in the absence of the UK.117

97.Mr Bond and Dr Scazzieri suggested that in future crises the respective objectives of the UK and the EU on sanctions may not be as closely aligned. They recommended that the UK and the EU should “lay down the foundations” for a relationship built on “mutual trust” now, and then “nurture it until the next crisis”.118 Similarly, Spotlight on Corruption argued that the sanctions against Russia and Belarus have “demonstrated how close coordination between the UK, EU and other partners has the potential to enhance the impact and effectiveness of sanctions”. In its view these lessons should be carried over to other regimes, including the Global Anti-Corruption sanctions regime.119

98.Mr Sikorski proposed that the US-EU Trade and Technology Council could be expanded to include other like-minded democracies, including the UK, and expressed hope that it could “do the job CoCom [Coordinating Committee for Multilateral Export Controls] did during the Cold War in denying bad actors some of the advantages of the free world” (see Box 2).

Box 2: Coordinating Committee for Multilateral Export Controls

The Coordinating Committee for Multilateral Export Controls (CoCom), established in 1949, was an informal multilateral organisation through which the United States together with 16 other countries, coordinated national controls over the export of strategic materials and technology to the Soviet bloc. The countries involved were Australia, Belgium, Canada, Denmark, France, West Germany, Greece, Italy, Japan, Luxembourg, Netherlands, Norway, Portugal, Spain, Turkey and the United Kingdom. Representatives of all 17 countries engaged in three kinds of activities: the development of lists of technologies and products to be embargoed, controlled, or monitored; weekly consultations on exceptions to these lists; and consultation on enforcement of imposed policies. The lists included all military equipment; atomic energy (including sources of fissionable materials, nuclear reactors, and their components); and an industrial and commercial list. CoCom ceased to function on 31 March 1994.120

99.Georgina Wright, Resident Senior Fellow and Deputy Director for International Studies at Institut Montaigne, noted that the EU is currently thinking about two aspects of sanctions. First, how to respond to sanctions evasion. Second, what impact sanctions have on the EU and its Member States. Based on that assessment, it would decide how sanctions can be improved. She urged the UK Government to consider engaging with the EU on these deliberations, “to try to be part of that thinking about how to talk about sanctions evasion and the future sanctions that we may wish to impose on Russia”.121

100.Mr Sikorski told us that it would be “wonderful if we could coordinate our actions against tax havens”, noting that it is “estimated that $50 trillion is hidden away in tax havens”. He stressed that this would require “common action” from the UK and EU but was an area where he would “expect British leadership”, given the UK’s status as a financial centre and its experience in these matters.122

101.Mr Keatinge highlighted the need for the UK to “build alliances” on sanctions, “because we are a middle power”. He emphasised that the UK can “contribute to the sanctions ambitions of others” and that it should “[k]eep doing that” and “not think it is just something worth doing in the context of war in Europe”.123 He noted that one of the lessons learned from the sanctions imposed on Russia is that “the UN Security Council is broken”. Global sanctions are unlikely in the near future. He therefore suggested that alliances are the only way forward. He stressed that the UK’s big lever is the strength of its financial services sector, which means it “can contribute to the sanctions ambitions of others”.124

102.Sanctions are, as noted by Mr Whiley, “a team sport”. All industries should be engaged “to ensure that we have the right people at the right table for the right conversation”, because industries have the required expertise, “and, if we can replicate that internationally as a group of allied nations, we will have a much bigger impact on whoever the target is”.125

103.The Government’s view is that it does “not currently consider it necessary to establish additional structures with the EU on sanctions”.126 The Foreign Secretary told us that, as far as he could see, existing arrangements set up on an “ad hoc” basis in response to the Russian invasion of Ukraine are “working very well”.127 In its written evidence to us the Government stated that arrangements will be kept under review. It also indicated that engagement with the US and EU extends to other sanctions regimes beyond Russia and Belarus.128

104.The evidence that we have considered, including from the Foreign Secretary, suggests that the arrangements for cooperation between the UK, the EU and other allies on sanctions that have been established over the past two years have been effective in responding to the crisis in Ukraine.

105.Looking beyond the current crisis to the longer-term, we consider that the objective should be to ensure that lessons learned from this intensive phase of international cooperation on sanctions are retained and applied in other contexts, including where there may not be the same level of unity among Western countries. To achieve that, we see value in a regular working arrangement between the UK and the EU on sanctions policy, covering other regimes as well as Russia and Belarus. There are different ways in which this could be achieved. It need not be an elaborate mechanism and could build on the working practices established over the past two years. One option, which we have recommended previously, would be for the Government to seek to agree a memorandum of understanding with the EU on sanctions cooperation.

106.Although the Cold War-era Coordinating Committee for Multilateral Export Controls cannot simply be replicated in current circumstances, it established a precedent for an efficient and effective cooperation mechanism that operated successfully for almost 45 years. We ask the Government to set out its view in response to this report on how best to achieve the objective of sustaining cooperation between the UK, EU, US and other like-minded democracies in implementation and enforcement of sanctions regimes in future.

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