We have seen three significant developments in the UK and EU sanctions regimes in recent weeks:
(1) UK goes alone on Magnitsky Sanctions
On 6 July 2020, the UK government introduced new economic sanctions: The Global Human Rights Sanctions Regulations 2020 (the Regulations).
The Regulations provide the UK government with equivalent powers to those under the US Global Magnitsky Human Rights Accountability Act of 2016. The Act authorises sanctions in response to human rights abuses around the world and expands on the Magnitsky Act of 2012 that was designed to punish Russian officials responsible for the death of a whistleblower - Sergei Magnitsky - in a Moscow prison in 2009.
Under the Regulations, the government has the power to impose asset freezes and travel bans against designated individuals and organisations involved in human rights abuses which amount to a serious violation of an individual’s:
- Right to life;
- Right not to be subjected to torture or cruel, inhuman or degrading treatment or punishment; or
- Right to be free from slavery, not to be held in servitude or required to perform forced or compulsory labour.
The first wave of sanctions targets 47 individuals and 2 entities including:
- 25 Russian nationals involved in the mistreatment and death of Mr Magnitsky;
- 20 Saudi nationals involved in the death of journalist Jamal Khashoggi
- 2 Myanmar military generals involved in violence against the Rohingya people and other ethnic minorities; and
- 2 organisations involved in North Korean prison camps.
The Regulations grant the government broad discretion to designate a person where there are reasonable grounds to suspect that the person is an “involved person” in relation to human rights abuses. This includes where a person provides financial services, or makes available funds, economic resources, goods or technology in the knowledge or with reasonable cause to suspect that this will or may contribute to such conduct.
The vast majority of those designated by the government last week are also already targeted by US sanctions. Therefore, this first wave of sanctions is unlikely to materially impact existing compliance programmes. The introduction of the Regulations is however a significant milestone in the evolution of the UK’s sanctions regime and is the first time that the government has introduced sanctions of this type under a UK-only regime. This is a clear statement of intent by the UK as it prepares to exit the EU sanctions regime at the end of the transition period on 31 December 2020 and suggests that the government is prepared to exercise its power to impose unilateral sanctions under the Sanctions and Anti Money Laundering Act 2018.
(2) Court of Justice of the European Union (CJEU) considers challenge to EU “sectoral sanctions”
The CJEU has dismissed a challenge against Council Regulation 833/2014 (the Council Regulation), which restricts certain Russian banks from accessing EU capital markets, on the basis that the measures are unlawful and disproportionate.
This case represents one of the first challenges to EU sectoral sanctions of its kind.
The General Court had ruled that the purpose of the Council Regulation was to impose costs on Russia for its actions “to undermine Ukraine’s territorial integrity, sovereignty and independence”.
Therefore, the key question before the CJEU was whether the measures in the Council Regulation were “disproportionate and manifestly inappropriate for achieving the objective” of the Regulation.
The CJEU ruled that the Council Regulation was aimed at imposing costs on the Russian state indirectly via majority state-owned Russian banks. In so doing, the CJEU ruled that it was unnecessary to prove that the Council Regulation had the actual effect of imposing costs to Russia, but rather, it is sufficient that the measures were “capable of having such an effect”. As such, in the CJEU’s view, the potential effect of targeted sectoral sanctions against majority Russian state-owned entities could be justified as Russia, as majority shareholder, would be responsible for bail-outs of “last resorts” of such banks.
The CJEU rejected alternative interpretations of the Council Regulation that required sectoral sanctions only to bite against those Russian state-owned banks insofar as they had an “explicit mandate to promote competitiveness of the Russian economy”. The CJEU accepted that certain translations of the Council Regulation required this factor to be present before the sectoral sanctions would bite whereas in other translations this point remained ambiguous. The CJEU ruled that in selecting the appropriate interpretation regard must be had to the objectives of the Council Regulation and decided that a broader translation of the Council Regulation, which gives the EU more latitude to sanction Russian state-owned banks, was to be preferred.
(3) Court of Appeal rules non-payment is permitted to comply with US extraterritorial sanctions
In October 2019, we wrote a blog post in response to a High Court decision (Lamesa Investments Limited v Cynergy Bank Limited), which found that a UK-based borrower was permitted not to make payment to a Cypriot-based lender that had an ultimate beneficial owner who became targeted by US extraterritorial sanctions after conclusion of the loan agreement. The Court of Appeal recently found in favour of the borrower in a decision that includes interesting conclusions regarding how US extraterritorial sanctions under English law would be interpreted in the context of a mandatory provision of law clause. This related blog post contains a detailed summary of the case.