Oral evidence: Global Britain: the future of UK sanctions policy, HC 1703
Wednesday 23 January 2019
Ordered by the House of Commons to be published on 23 January 2019.
Members present: Tom Tugendhat (Chair); Ian Austin; Ann Clwyd; Mike Gapes; Stephen Gethins; Priti Patel; Andrew Rosindell; Mr Bob Seely; Royston Smith.
Questions 1-25
Witnesses
I: Tom Keatinge, Director, Centre for Financial Crime and Security Studies, Royal United Services Institute, and Dr Justine Walker, Head of Sanctions Policy, UK Finance.
Written evidence from witnesses:
Royal United Services Institute
Witnesses: Tom Keatinge and Dr Justine Walker.
Q1 Chair: Welcome to this afternoon’s session of the Foreign Affairs Committee, on UK sanctions policy. Thank you very much, Mr Keatinge and Dr Walker, for coming in. Mr Keatinge, you said in your submission that the Government should make clear statements of strategic objectives as relating to its independent use of sanctions. Does either of you think the Government has a clear strategic objective for its use of sanctions?
Tom Keatinge: Not obviously is, I suppose, where I would start. Obviously, we had the opportunity to review the Foreign Office evidence that was online prior to this meeting. The standard phraseology is sanctions being an extension of foreign policy, being part of a toolkit, etc. I think we are all used to hearing from all Governments when it comes to sanctions. But in terms of what the strategy is and what we are trying to achieve, that is not clear at this stage.
Q2 Chair: Dr Walker, do you want to comment? If you agree, don’t feel you have to add anything.
Dr Walker: I agree in part with that. The Government statements about the reasoning for sanctions are often the foreign policy articulation of the sanctions. It is the implementation of the sanctions that is less well defined, which we obviously drew out in our evidence. So I would make a slight distinction between the implementation aspect and the reasons for imposing sanctions.
Q3 Mr Seely: I have a couple of questions on this, because I think it goes to the heart of the matter. Do we slightly stumble into sanctions in an unstructured and maybe unthought-through way in terms of what the best sort of sanctions to work are? I know we are part of the European Union and so have a common sanctions policy with them. You are saying it is not well thought through.
Tom Keatinge: I would take a step back and say this. Within the European Union, the UK offers a particular lever for the EU machine, which is the City of London as a financial centre, so the question is: how are we going to use the financial power of this country once we are outside the European Union?
Of course, London will remain one of the biggest financial centres in the world. Therefore, if you believe that financial sanctions are a valuable tool, we have one of the most powerful sanctions tools in the world following Brexit, and we can use that, potentially, as we see fit outside the European Union. So the question is how we would plan to use it, and not just as it relates to sanctions.
As I have also written about, what, just generally, is the economic statecraft of the UK when we are outside the European Union? We will remain a major financial centre. How are we going to use that financial power?
Q4 Mr Seely: On that point, is there not an argument—correct me if I am wrong—between generalised sanctions and very targeted sanctions on individuals? What is the evidence that generalised sanctions work, or is there no evidence that they work but they are a form a gesture politics, as opposed to targeted sanctions? Is there evidence that targeted sanctions have an effect on policymakers?
Dr Walker: If I can take the generalised point, it is really helpful to make that distinction. You talk about whether they work; I think that depends on what you mean. Do they have an impact on the target? Often, yes. Is there circumvention? Often, yes. Do they displace activity? Yes. But there is a public statement: the Government have been seen to be doing something.
The challenge that we often have as an industry when sanctions are targeted on a sector or a Government is how those sanctions respond to on-the-ground events. We see that a lot in Syria. We spoke quite extensively about the challenges we have for humanitarian aid and where you see that different foreign policy objectives are being applied at the same time. It can be very difficult to apply both foreign policy objectives, and the financial sector will often step back.
The other issue comes back to the former question and is around the criteria when sanctions are applied and how they are modified and taken off. In my experience, sanctions are often designed in response to a very critical event, and there is a real political motivation to do something. At that time, there is never really a discussion about what the unintended consequences and the wide impact assessment are, and how we modify them. Those downstream issues can become really challenging and can undermine sanctions long term.
Q5 Mr Seely: So on Iraq and Russia, for example—a historic case and a current case—on what evidence do you make judgments about whether sanctions on Iraq when Saddam Hussein was there worked, or whether we just caused a lot of harm to a lot of innocent civilians? What do you think about the current generalised sanctions on Russia as opposed to the targeted sanctions that came out on two GRU individuals and others this week?
Dr Walker: Targeted sanctions for industry are much easier to apply; you look at a name and the interrelationships around that person. When in Iraq you have certain prohibitions and everybody stops doing anything, that can become really difficult.
The distinction is how targeted the sanction is: the bigger they get, the broader the statement is not to do business at all with that Government or country. In the Russia scenario, we have seen some targeted sanctions come out, but the Russian sanctions have been one of the most complex sanctions regimes for the financial sector to implement in the manner in which they are intended.
If we look beyond the UK-EU regime and at the recent US sanctions that were applied in April last year, certain individuals in Russia and a small number of entities were sanctioned.
They were a very small group, but the ripple effect was on thousands upon thousands. We saw a lot of unintended outcomes on individuals who were so far removed, and communities in Ireland who were involved in the aluminium sector were suddenly not able to be paid. That was not the intended scope. When you have a regime such as Russia, where the ownership is so complex, looking at impact and effectiveness becomes quite difficult.
Q6 Mr Seely: But you would still prefer targeted over non-targeted sanctions.
Dr Walker: That is the desired element. Clearly, if a Government say, “Don’t do business with a certain country,” that becomes easier to implement, because everybody just says, “Don’t do business,” but the harm to civilians is significant.
Sitting suspended for a Division in the House.
On resuming—
In the absence of the Chair, Mike Gapes was called to the Chair.
Chair: Mr Keatinge and Dr Walker, apologies for the delay. Unfortunately, we are not masters or mistresses of our own time in this place. I welcome you back this afternoon. We will go straight to question two of our inquiry on the future of UK sanctions—Mr Gethins.
Q7 Stephen Gethins: Thank you for your patience—although some of the issues were devolved, it was exclusively our colleagues from south of the border who were holding us up in that Division.
This might be a good place to start—especially in the light of what you were saying earlier on, Dr Walker—and it might be good for my understanding: I wonder whether you can set out the different characteristics of the US and EU sanctions regimes. I also noticed that in your written evidence, you said that the UK should try to align itself more closely with the EU sanctions regime after Brexit, should it happen. Could you flesh that out a wee bit for us? That is to both of you, but if Dr Walker started that would be really helpful.
Dr Walker: Indeed. The US sanctions regimes tend to be more robust in many ways, both in their implementation and in their scope and enforcement. They often comprise a much broader set of sanctions, so if you are looking at country programmes such as Iran, Cuba or Syria, you will see much broader prohibitions on actually doing anything with those countries. Then there are licences to permit certain types of activity. That is quite different from the EU sanctions, which tend not to restrict everything but try to target certain areas. One of the challenges we have is that often when you start targeting certain areas, when they get wider and wider the reality is that that virtually targets everything anyway.
One of the benefits of the US sanctions regimes is their licensing framework. They have general licences and can be much quicker at bringing forward those general licences if there is the political desire to do so. Sanctions originate from different areas, so you have sanctions from the Administration and you have legal sanctions, which stem from Congress: the architecture of the US regime is, by far, much more comprehensive. It is extremely complex, can be very difficult to navigate, and is very robustly enforced, as we have all seen, but there is an element of licensing there.
There are some characteristics that are particularly useful, and in certain areas—if it’s sanctions by the Administration—they can amend them much quicker. If they are sanctions by Congress, it can be incredibly difficult to roll back those sanctions. We have seen, even before the current Administration, the sanctions on Iran—even when there was a political appetite within the Administration under President Obama to roll back the Iranian sanctions, they had to do that by licence. They couldn’t actually roll back the legal framework.
The other aspect of the US regime is they tend to merge a lot of the different issues within the same regime. You may have one regime that will deal with terrorism issues, regional stability, ballistic missiles and human rights, and they can be all within the same legal framework. That makes it very, very difficult to roll back unless all of those areas are addressed.
The EU regime is quite different in nature. It does require consensus across all members, so what you tend to have is, in some cases, a lesser framework. It tends to be more targeted by nature; there is much more desire within the EU to target certain activities. There are always sunset clauses, so sanctions have to be positively re-approved to continue, which characteristic-wise is very different from the US.
That is not to say that one is necessarily better than the other. As an industry, we think the EU regime has many benefits, particularly around roll-back, but the reality is that when you are applying complex sanctions regimes, they are all incredibly difficult when you are looking at scenarios like Russia, Iran or Syria. Often, it is Governments and then everything underneath it, and it becomes sanctioned, and then business relationships—the nexus of the sanctions becomes very broad, even if it is the US or the EU.
We talked about alignment with the EU for a number of reasons: partly because most of our members have an EU base, although many of them have a US footprint as well, but we also felt that EU-UK alignment was incredibly important for closeness of decision making. Actually, we feel that US-EU-UK alignment is equally as important.
There will always be legal differences: in the Russia regime, we see quite a lot of differences around certain quite key terms, such as the meaning of “financial transactions”, the meaning of “significant transactions” and what “financial assistance” means. If you are looking at multi-million sector exposure, they can be very difficult to implement.
Essentially, for ease of comprehension and to have the best impact, it is best for the financial sector if the three regimes are aligned. We saw that with the EU-US regimes in 2014—the Russian sanctions around the eastern Ukraine and Crimea situation. Politically, the messaging was very similar; although the sanctions were very complex, the political messaging was very, very similar. That does help with implementation. At the moment, with the Iran regime, we see very different messaging from the EU and the US. They are getting wider and wider apart, and that is the worst-case scenario for industry.
The other aspect, which we drew out in our evidence, was that because of the difficulty of roll-back in the US system—it is just phenomenally difficult to roll back complex regimes in the US—if the UK is aligned with the EU in its decision-making structure, which are provisions that the sanctions Act will indeed allow, then we will be able to roll back in a manner that events on the ground enable us to do. We will not be tied into a very prolonged sanctions regime, which we often see in the US scenario.
Tom Keatinge: I was going to say one thing, which is that the consensus nature of EU sanctions effectively neuters them in a number of cases.
Let us imagine that after the Skripal attack in Salisbury, the UK had been independent to impose sanctions as it saw fit. We could have expected to see sanctions come out of the United Kingdom Government at that time. The action that has been taken against Russia as relates to sanctions since 2018 has not been taken by the European Union—well, there was a little bit recently—but by the United States. The consensus element of EU sanctions is something that limits their application.
The other thing I would say, which partly repeats something I said before, is that notwithstanding where we are in the US right now, looking at it over time the US has made a strategic application of sanctions as part of the financial hegemony it has enjoyed until relatively recently and continues to some extent to enjoy now. If we are going to be global Britain and so on, the question that needs to be answered is how we are going to use our central position in the global financial sector. How are we going to make people be as concerned about OFSI as they are by OFAC? To me, that is a question we have not answered.
Q8 Stephen Gethins: Dr Walker, you might be best placed to answer this, but in terms of the differences you have that divergence. For example, on Iran we have a divergence. How has that practically impacted on your members? Can you reflect on that?
Dr Walker: When we saw the nuclear deal first implemented, a lot of our members did not significantly change their approach to Iran because they had such US exposure. They were still caught by US primary sanctions, which still prohibited virtually everything anyway; it was only the secondary sanctions, on activity where there was no US footprint—no US dollar, US bank or US person involved. Most of our members will have some type of US footprint, so they have not overly changed their position.
Where it has impacted most is in relation to the update to the blocking regulation. When the US withdrew from the nuclear deal, the EU decided politically that they wanted to take a very different stance. They looked to update the blocking regulation, which is a fairly dusty piece of legislation—it is 20 years old, written in an era that means it does not work today. Because updating the regulation would take so long, they just updated the annex, because they could do that very quickly.
Essentially, the EU put a lot of the Iranian sanctions in. That means you are prohibited from complying with US sanctions. The reality for any global bank is that US financial sanctions are a real driver of their risk appetite and decision making. To ask them not to comply with US sanctions is incredibly difficult.
The main impact from a practical point of view is around the blocking regulation and the consequences that has had. In trying to find a way to navigate a complete conflict of law scenario, the financial system has tightened its risk appetite to Iran. Even permissible US activity they are not facilitating, because they would have to rely on a US licence and that is prohibited under the blocking regulation. In our mind, that makes the situation worse than before the nuclear deal and is clearly not effective in what Government are hoping for.
Q9 Chair: May I take you up on the impact of US policy on other countries? Historically, the US has operated a form of extraterritoriality. There were sometimes issues with countries that were trading with Cuba, for example. When you refer to businesses that have financial or other interests in the United States, is this just prudence on their part, or is it because of the US legislation, which claims extraterritorial reach against companies—even those registered in other countries?
Dr Walker: What we see is banks trying to navigate both the primary and secondary sanctions.
On the secondary sanctions, let me give a scenario. Let us say a small UK entity whose export is of purely UK origin goods—remember, if it is of US origin, it is under US jurisdiction—chooses to look to continue to doing business with Iran. The reality is that that UK exporter will still need to access financial services, which will need to access the international financial system, so you are always getting a US nexus.
Q10 Chair: Are you talking about SWIFT banking systems?
Dr Walker: SWIFT is obviously one of the elements, but it is not necessarily SWIFT. At every level it is very difficult to carve out the US financial system. SWIFT was obviously one of the battlegrounds between the EU and the US post the US withdrawal from the nuclear deal.
We as an industry have always taken the stance that it is for Governments to decide how and where they wish to impose sanctions: the foreign policy decision of Governments. But, by way of implementation, what we indicated is that there was still US permissible activity that could take place with Iran, and if you then sanctioned the SWIFT network and caused all Iranian entities to be cut off, it would make it very difficult to process humanitarian, civilian and agri-food transactions, so SWIFT was quite a specific element.
The other aspect is around the US being able to say to a European company, which is essential to the movement of funds, “You have to comply with US sanctions.” When it was previously used, it was done in alignment. We talked about alignment earlier. It was done between the EU and the US and there was agreement. So there was not a conflict of law scenario there, whereas the latest dialogue around SWIFT is very much a conflict of law.
Q11 Chair: Mr Keatinge, you referred to a consensus approach being less effective. Isn’t there another issue of enforcement? Even if you have a declaratory position agreed, the level of enforcement might differ between different countries within the European Union.
Tom Keatinge: Yes. The European Union agrees sanctions on a consensus basis, but the enforcement is done on a member state by member state basis. There are plenty of examples in Europe where vested interests lead to a different attitude taken towards the implementation of sanctions country by country. There is no united front.
Justine mentioned the fact that many sanctions regimes have to be rolled over every six months. That is about all they are able to do in the European Union. The idea that you might adjust or maintain them—well, put yourself in the position of someone who is under sanctions. You will not just sit there and go, “It’s a fair cop. I just won’t access my bank account any more.” You will restructure your companies, reorganise yourself and do whatever you can to get out from underneath the light that is being shone on you. If you do not actively maintain the sanctions regime, they decay in value almost from the moment that they are announced. To my mind, that is where the EU system falls down on effectiveness.
Q12 Chair: But as regards enforcement, is there any move to have a mechanism at European level that might get greater commonality between the different EU states?
Tom Keatinge: I do not believe so. It is all the EU can do to have a discussion about possibly having a common anti-money laundering monitor across the EU. You see it all over the place in this sphere, which is where local enforcement, or local supervision, is what happens, and so the consistency that might in theory come down from the directive or regulation from Brussels fragments as you get down to the coalface, which is where the enforcement or supervision has to happen.
Q13 Chair: Would it be fair to say that there are certain countries—let’s take the example of sanctions on Russia—who, for political reasons, would not wish in practice to carry those sanctions out, because their Government has a rather friendly relationship or a dependent relationship with Putin, compared with ours?
Tom Keatinge: It is not necessarily related to individuals; if you rely on another country for your energy security, you will have a different attitude toward sanctions on that country than if you do not. I am afraid it will be a matter of national security. Again, that is why I say it takes the shooting down of an airliner or something else sufficiently egregious to bring people around the table in Brussels to say, “We cannot avoid putting sanctions in place, given the nature of what has happened.”
Q14 Mr Seely: The implication of what you say, or the assumption I am making, is that when we are no longer part of the European Union, if that in fact happens, our sanctions policy can be much more nimble, because we do not have the lowest common denominator factor that the European Union provides. Therefore, can you imagine us aligning our sanctions policy, especially in the field of finance, more closely with that of the US?
Tom Keatinge: I can imagine that scenario, but I can also imagine a scenario where the powers-that-be say, “Well, the downside of being more forward-leaning than the European Union is that we make ourselves less attractive for business, etc.”
We will put ourselves in an extremely difficult position: do we want to be a kind of beacon, sanctioning people for human rights abuses and using kingpin sanctions and the financial leverage that we have, or are we going to take a pragmatic or business-led view that says, “Maybe at the margin, issuing sanctions in this case will be damaging for the UK, and therefore we will be weaker than perhaps we could otherwise be.”
This comes back to my original point—I am sorry to be boring about it—about what our strategy will be as a financial centre once we are free of the European Union.
Q15 Mr Seely: What do you think our strategy should be?
Tom Keatinge: We should be using the financial power that the UK has to support trade around the world. What is our geo-economic strategy as a nation? I don’t know the answer to that; I don’t think anybody does. We should be using our financial power around the world to support trade, but equally, if we are going to set ourselves up as a beacon of good governance, we will have to be willing to take the hits that go with taking that position.
Q16 Priti Patel: There is no doubt that you have outlined quite a big challenge for the Government. Where do you see the whole of Government in this? It seems from the submissions we have received, and also, if I may, from the representations you have both just made, that it feels fragmented across Government.
The EU takes one approach, obviously, and America and other countries do their own thing. I understand the implications: that we are cutting our nose off to spite our face in terms of financial markets and the City and the attractiveness of things of that nature. But if we are to be leaders, do you see enough collective will working across Government Departments—including not just the Treasury, but the Home Office, the FCO and the key bodies—to start driving some of this? Do they have the capacities? Do they have the skills? Are they in the right place? Effectively, the Government need to bring all those equities together.
Tom Keatinge: Let me start by saying something that Justine will almost certainly respond to. If you look at the way the financial landscape has changed over the past five or so years, banks have generally withdrawn from activity in parts of the world that we are now talking about engaging with. We have Ministers rushing around Africa trying to drum up business. At the same time, we have Barclays selling their controlling stake in African banks.
How are we going to encourage re-engagement by the UK financial system in countries that we want to trade with? We are going to have to have the financial links to support that trade. What is being done to encourage the banks to re-engage, to reverse or desist from the so-called derisking that has been happening over the last few years? The simple answer is that it is not obvious that anything is being done. If you want to get trade to move from A to B, you need to have financial plumbing, and if that financial plumbing is not in place, the trade will not follow.
Dr Walker: On the question of Government co-ordination, we engage with a number of the key Departments in a very helpful way, but we do find that it can be challenging in ensuring co-ordination across Government Departments, because each Department may be responsible for different elements of foreign policy.
We spend a lot of time now trying to work with Government and indeed the international community on how we can find safe ways to move money into some of the most challenging sanctioned environments of the world, whether that is Syria, Yemen or other jurisdictions.
We often find—and it’s not just the UK Government because we find it reflected across most Governments that we work with, and I think all Governments—that there is a disconnect between the sanctions policy, whereby you look at something through the sanctions lens, and the development policy, or indeed trade policy, depending on what jurisdiction you are talking about, which look at things through a completely different lens.
I will give you a couple of examples. A number of years ago, the Department for Trade decided that they really wanted to increase UK trade with Cuba; there are not UK sanctions on Cuba. They were doing lots of roadshows to encourage that, so we said to them, “You do realise it’s going to be quite difficult to move the funds. So we need to have a conversation, so that exporters and people looking to trade with Cuba will actually understand the challenges they may face.” That’s a cross-jurisdictional element—so, that’s a US issue versus a UK/EU issue.
However, even if we look at Syria and we consider the amount of donor commitment from the EU and indeed from the UK to humanitarian programmes in Syria, we look at the types of programmes that are identified as priorities, for example fuel distribution programmes. A number of years ago, that was identified as the key priority. People were dying because there was no access to electricity, it was freezing cold, they couldn’t cook, they couldn’t put lighting on, they couldn’t run generators and the hospitals couldn’t work. So that was identified as the key priority from a humanitarian point of view.
However, fuel distribution—purchasing the fuel in Syria—was illegal. So we were asking NGOs and then their banks to facilitate a trade that was actually illegal. And we come across these instances all the time. That is one; there are many, many more.
Q17 Priti Patel: That is a very good example of illegal activity, but there are other parts of the world where we know and Government will know—I just think that the Home Office are in the mix right now—of serious organised crime that has taken place. It has a massive implication in terms of money laundering—sanctions to some extent, but also financial transactions that come over here. That affects our reputation and it affects a wider ecosystem as well. Where do you think Government should be doing more to step up, to knit all this together to have a greater coherence?
Dr Walker: There are indeed synergies between the financial crime agenda and the sanctions agenda, but there are also quite distinct differences. So, in the anti-money laundering agenda or the corruption agenda, what you are looking at is the proceeds of those funds, and where they stem from, and whether they are stemming from an illicit or highly undesirable activity.
Within the sanctions environment, you are often looking at who you are making funds available to and who you are providing goods to. So there are some quite distinct legal differences. Of course, there is crossover around risk and there may be crossover around some of the legal tools used, but there are quite distinct differences.
On the financial crime area, in UK finance we have quite a large team dealing with that. We have been working very closely with Ministers on that agenda. We are seeing that the Government are working quite robustly in some areas.
Now, Tom perhaps has a different view on this, but often it’s not for want of officials or Government Ministers or others trying to do something about it—often it is just the complexity that if you are doing trade in certain jurisdictions, it can be very difficult to understand the origin of the finances, or to decide if somebody is a good person or a bad person; they can often move out of both. In some situations, it is very clear—it might be cartel money, or other drugs money—but in other scenarios it can be quite difficult.
We see that a lot around corruption. So, often it becomes a risk decision rather than purely knowing if the funds are of illicit origin. It’s a risk decision of, “What’s the reputational risk of doing business with that person?”
Q18 Royston Smith: Forgive me if you have mentioned this already; I was late coming back. I wanted to ask about the EU post Brexit. You mentioned that if you want to get Brussels to step up to the mark, it sometimes takes something significant like the downing of an airliner rather than anything else. If we struggle sometimes to influence the rest of the EU to act in concert with us, how will we do that beyond Brexit? Do you think that is going to make a difference?
Tom Keatinge: First, it is worth considering what the EU will lose from a sanctions perspective when the UK leaves the European Union. It is not just the City of London as a financial lever to pull; according to the Government, 50% of EU sanctions regimes are informed by UK intelligence. The question is how the EU will fill that gap.
That is not to say that we are the only people who can provide that information, but I wonder whether that might be a way in which the UK continues to engage with the European Union, as a way of keeping a hand in what is going on in terms of sanctions in the European Union—not sitting round the table voting on the consensus, but at least feeding the machine in Brussels with information that perhaps can be acted upon by the European Union. I am absolutely sure the US were fed with information by the UK when it came to some of the decisions that they made on sanctions on Russia last year.
Assuming we do not break those links as well, that is a way that we can continue to be involved—plus the fact that the bottom line is that the Europeans respect the UK when it comes to engagement with the sanctions topic. If you speak to people in Brussels, the UK not being part of that sanctions machine anymore is a loss to them, full stop. They will, I think, have a reason to continue to engage with the UK, albeit not necessarily to do what we would like on sanctions.
Q19 Chair: What are the main challenges that the EU regime poses in terms of impact on humanitarian operations?
Dr Walker: The main challenges, as we see it, are that, under the EU framework, there is no opportunity to give a general licence. That is actually a significant weakness. The EU will say that their regulations do not prohibit certain types of activity, so delivering aid into Syria is not prohibited. The problem is that aid may have to use a bank that is designated. It may have to engage, increasingly so, with Government forces, given that the Government now control significantly increased areas than they did a couple of years ago.
The other aspect is really around the fact that at the EU level the sanctions are implemented and enforced in individual member states. There is often not a lot of dialogue at member state level between Government agencies, the financial sector and the NGO community about the risks and, indeed, the ability to move money.
We have seen things such as, within the EU’s Syria regime, a prohibition on opening new correspondent banking relationships, even for the non-designated banks operating in Syria. That prohibition very much came from the previous EU regime on Iran, when it was at its height, and it was applied to Syria. The problem that we have is that, as banks have gradually removed from Syria, and they do not have correspondent relationships, there is a prohibition on opening new ones. We have this awful situation where it can now become very difficult to move money in a safe and transparent way into Syria.
It partly interacts with the previous question about criminal money flows. When you cannot move funds safely and transparently, and you have end-to-end monitoring, you see it going underground and creating a criminal economy. That is something we certainly have observed in the Syria situation. There has been a whole growth of that.
There are also conflicts around advice given to NGOs, around not moving bulk cash across borders. Clearly, that is very sound advice, but when you are not giving them a formal banking channel, and where you are giving them a hawala network, which might be linked to a terrorist organisation—it may not be, but it may be—then you are actually making it very difficult both for the bank to facilitate that and for the NGO to carry out their activity. So, it is twofold. I think the legal framework doesn’t actually work very well in relation to the Syria regulations and to the on-ground situation in Syria. There is the risk element of the combined risk between corruption, anti-money laundering transparency and sanctions, which makes it very difficult. There is also the fluidity in a conflict zone, which means that banks will often step back.
These are all cross-cutting issues. They don’t sit with any one Department. You can go and have a very good conversation with DFID, and they will be very sympathetic, and then you say to them, “Well, why are you not providing an up-front licence to the programmes you are funding? Why are you not using the tools that are available to you?” They say, “Well, do we have to?” Then you will speak to OFSI, the sanctions enforcement body, and you will ask them to issue guidance on this, and they will be very reluctant to issue detailed guidance, because they are worried that people will then look to evade it.
You will then ask the Foreign and Commonwealth Office, and they will say, “Well, our sanctions are designed to change the behaviour of the Government of Syria and to ensure that they are not using chemical weapons on their people and innocent civilians.” So the foreign policy objective is very clearly what is driving their viewpoint, but they are then not focusing on the wider objectives that we also have, of getting money in. These are some of the challenges.
Chair: Mr Keatinge, do you want to add anything to that?
Tom Keatinge: No. That was very complete.
Q20 Ann Clwyd: I was quite involved with the implementation of sanctions on Iraq at various times. First of all, as I say, the sanctions on Iraq did not take place as they should have done before the war, or those that did take place were not sufficient. It was the exporting of arms anyway to Iraq at that time.
But, after the war there wasn’t enough finessing, because the sanctions—UN sanctions, EU sanctions, UK sanctions—hit the whole of Iraq. Kurdistan, which wasn’t really the baddy here, was caught up in the whole sanctions regime. The humanitarian effect was plain to see, for those of us involved. We had no way of influencing what should have happened in parts of Iraq and not happened in others. How do you get over that problem? Is there a way, or is it so heavy-handed that it hits the lot?
Tom Keatinge: Anyone who studies sanctions uses the Iraq case as the moment when the international community realised that sanctions needed to be smart, as opposed to extremely dumb, as they were then. That is not to say that that kind of situation couldn’t happen again, but certainly in any of the sanctions literature you read, or in the reviews done at the United Nations and others, Iraq is the case that they all realised needed to never happen again.
Dr Walker: One of the things we said in our evidence, which I know individual Governments find very unappealing, is that when banks look at processing humanitarian transactions and ensuring that that is still able to continue in order to save lives, where it is permissible activity, that should be something that is also aligned by way of licensing regimes. Governments are really reluctant to do that.
We have not seen the EU really come out with a framework which would enable that to happen, although what I would say is they are actually much more engaged now than they were a couple of years ago, particularly on the development side within the European Commission, because they are having to look at Syria issues in a very real way.
We do think that there is an awful lot of scope for that system to be improved. We provided quite detailed evidence within our submission. I would also say it is not just EU, UK and US sanctions here. We also note where you then have UN prohibitions and UN designations on, for example, terrorist organisations. The UN derogations in themselves can be highly problematic to implement; at times, there may not actually be even any UN derogation. Within some of the counter-terrorism regimes, it just becomes prohibited to do anything, and there is not necessarily a sufficient carve-out. So it is at every single level. In UK Finance, and formerly, in our BBA days, we were really trying to push this issue significantly to the forefront of international thinking.
Q21 Priti Patel: On the whole issue of licensing and humanitarian transactions, you have, if I may say so, put it very articulately and clearly in terms of the response from Government in terms of their willingness to give licences, despite the fact that we spend large sums of money as a country on humanitarian causes, trying to keep people alive, the Syrian crisis. That is in the billions now. What do you think the Government should be doing on this front?
Secondly, there are a lot of big organisations, international organisations—not just NGOs and charities, but combined organisations. Are they savvy enough to work with our Government and other Governments to ensure that, ultimately, money can be tracked and traced so that, effectively, we as taxpayers, or the Government, can follow people, money and outcomes? This is such a grey area, particularly in war zones and areas of conflict.
Dr Walker: First of all, Government would say they actually receive very few licence requests for humanitarian provision, so in fairness to Government, they are often not being asked to make a decision on a licence. We do see that, quite often when they are asked to make a decision, the grounds for the licence can be very complex.
This comes back to the legal framework—that, particularly in implementing the EU regulations, there were often not grounds to give a licence. The fuel distribution programme would have been one of them. It would have been against the EU regulations. At the time, the UK did lobby hard to change that, but that was in response to lobbying from industry and the NGO sector itself.
I think that, first of all, the legal framework has to be fluid enough to respond and to ensure that Government is able to issue a licence. We certainly have advocated that, where Government is the main donor to a programme, they should be forward-leaning, and they should be sitting down at the beginning of a project to work with the NGO, to say “We accept you are working in an environment where it is likely, in all probability, you will have engagement with a sanctioned actor. You cannot deliver this programme without that and, in response to this, we will actually give an up-front licence, under certain criteria, to ensure that you are legally protected in delivering that.”
It also becomes complex because even when you have licences—so the US have the general licences and they also give some specific licences—they will only sometimes include the contractors or other downstream agencies. So we see quite different licences for UN organisations versus NGOs and then private contractors. The nature of delivering humanitarian programmes in many of these countries is you will be partnering with organisations on the ground which may not be officially humanitarian organisations—so it is whether the licence covers that.
I think you have to look from the whole grant-giving donor side to the delivery, ensuring that the humanitarian organisation is covered for what is viewed as necessary, which in turn will, if the licences are sufficient, give the bank confidence to process those payments. That conversation is slowly starting to be had, but it is a very slow conversation. The UK have moved forward in the past year—we have seen action—but it has taken a long time to get that bit of movement. I would say that it probably requires quite a culture change within Government to be more forward-leaning and willing to take part of the risk.
The risk is actually issued downstream, to the NGO, the humanitarian actor, and the bank. The problem is pushed there, so if there is a conflict of law, or if the risk is just too great, it’s a case of, “You deal with it.” That worked okay five years ago, but because the financial sector have tightened up so much on their compliance and are now analysing all these relationships, and the sanctions regimes have grown in complexity, the financial sector are just saying, “We have to step back, because we cannot be sure we are operating within the legal framework.”
Tom Keatinge: Can I add one thing? It comes back to the point that I was making before. If we want to show global leadership, then as Justine says, the Government has to be prepared to take risks. You cannot write a cheque; you can’t make a deposit to an NGO and then say, “Right, off you go, and you take all the risk.” You have one end of Whitehall doling out the cash and the other end of Whitehall putting up the border. It doesn’t make any sense at all.
Chair: I am conscious that we may lose our quorum at some point because some Members have to go to meetings, so, Ann, can you quickly ask a question on Russia?
Q22 Ann Clwyd: What are the best ways to evaluate whether sanction regimes, such as the sanctions on Russia, have been effective at changing behaviour?
Dr Walker: Again, it depends on what we are talking about when we say “effective”. The US will say that their sanctions of April last year have been effective on, for example, certain oligarchs, because they have had to change their ownership of companies to have those companies go through the procedure to be delisted. We would look at it from a different point of view and say, “Actually, it caused global chaos, and is that really what we wanted, in the metal markets and some of the other trading sectors?”
I think it depends. Talking about applying sanctions to a country like Russia, which will be able to diversify, will look to other partners and will be able to move ownership quite quickly, is a very different conversation from discussing sanctions on Iran or some of the smaller targets, or individuals. When you start to look at Russia, the question is: what behaviour change are we looking at? Is the concern election interference? Is it selling certain commodities to Syria? Is it situations such as we saw in Salisbury? What are we trying to change, with what sanction?
What we have seen with the Russian sanctions is that, yes, they have targeted Government individuals, but they have also targeted the circle around Government. I am not sure whether we are seeing any Russian oligarchs feeling particularly poor at the moment under the Russian sanctions, so I can’t answer on the effectiveness on that side. What I will say is that when we are looking at a country such as Russia and a Government such as that, we have to be very clear on what we realistically expect our sanctions to achieve. Is it political messaging, or is it really change of behaviour?
Tom Keatinge: As I said at the beginning, sanctions are part of a toolkit that we use, so just issuing sanctions and then not engaging diplomatically or doing whatever else we want to do alongside issuing sanctions is a mistake. Have the sanctions been effective? Well, Ukraine didn’t get invaded any more than it had been already, but what were we trying to achieve? Has anyone actually articulated what we were trying to achieve? I’m not sure they have done, and therefore it is difficult to assess whether the objectives were met.
Q23 Chair: Finally—apologies, but we have to wrap up shortly—in your written submission, Dr Walker, you emphasised the importance of the UK clearly defining what is meant by control or ownership of a company. How would you clarify the existing European Union concept of control?
Dr Walker: It is confusing. It is a fairly loose term. If the chair of an organisation is sanctioned, does that mean the organisation is sanctioned? You start to apply so many different variations, and again, it depends. If you are talking about a regime such as Russia, we have found that defining ownership is incredibly complex—ownership is the 50% threshold—but control is even more so.
Somebody may sell their shares and step away from their ownership, but are they really still pulling the strings on decision making? That can be incredibly difficult to make a decision on, but it is such an important decision because, under sanctions, it would be about whether you have the legal grounds to freeze the funds. It is not always about risk appetite and whether you do business or a transaction.
Q24 Chair: Can I ask you a follow-up question on that? You said that the FCO should make a greater effort to designate companies that it knows are owned or controlled by a designated person. Do you think that the Government currently have the knowledge, intelligence and resources to do that effectively?
Dr Walker: Clearly, the Government are probably best placed to respond to that. Our observation is that they have access to some of that but will probably not feel that they know everything either. I think that is very true. Sometimes industry will actually often know more. But it comes back to the points about the EU side and that consensus decision making in the EU can be quite a slow process—having names added to an EU regulation can take a while. Clearly, the impact of adding somebody’s name and sanctioning them is significant, so it should be a robust process, which, in many instances, will take a while.
Our view is that Government are often given information and that they could, potentially, undertake further designations. We see that on the US side. The US can be much quicker to add names. When we were looking at Iran, when there was alignment between the EU and the US prior to the nuclear deal, we saw, for example, that the Iranian shipping lines were cancelled. Those ships’ names and affiliations were quickly changed, but we saw the US being very quick in coming out with information to help industry to understand whether somebody was operating on behalf of designated names.
Q25 Chair: This is my final question. Mr Keatinge, how can the sanctions policy be more effectively co-ordinated with the anti-money laundering efforts and instruments? You said in your submission that the UK should set out “a clear plan for its use of economic tools (including sanctions and new financial crime-fighting powers such as unexplained wealth orders) as part of its ongoing commitment to tackle illicit finance and corrupt actors”. Do you think the Government have such a plan?
Tom Keatinge: As I have said a couple of times, it is not obvious. I think that the Government have to be credited for having put their shoulder to the illicit finance wheel. I think I have said to the Committee before that the challenge we face is that we are trying to catch up with 20 years of neglect, so there is a tremendous amount of work to do.
The only way that we are going to tackle the UK’s reputation as a hub of facilitating illicit finance in general is by having a clear strategy across the piece. We have a serious organised crime strategy that was published back in November—a smorgasbord of horrors that might befall any of us at any minute is certainly the way that I read it—and an anti-corruption plan. There are a bunch of plans and strategies out there.
What we are missing is one person who is accountable, 24 hours a day, for ensuring that that is delivered. It is spread across so many different Ministries and Departments on different sides of the river. Until one person wakes up each morning and says, “It’s my job today and every day to address this issue in the UK,” we will continue to suffer from fragmentation.
I will make one very small point: we talked a lot about banks and charities in relation to sanctions. It is very important to remember that, as sectoral sanctions develop, we are talking about a whole load of other industries as well—oil industries, technology companies—and this is an across-the-board UK plc issue. Of course, the banks are in the crosshairs, because they facilitate transactions, but let’s not forget that there is industry out there that is not doing business, not just because of problems in securing finance, but because their sectors are being targeted by sanctions as well.
Chair: Thank you very much, Mr Keatinge and Dr Walker. This has been an extremely useful session. We are sorry about the interruptions by the Division bell. We have had a lot of information from you. If there is anything that you think you wanted to say but did not get the chance to, please write to us. We may well come back to you with one or two follow-up questions in writing if we think we have missed something. We are extremely grateful. Thank you very much.