Written evidence submitted by Alexandre Prezanti,
Partner at Global Diligence LLP (IEF0016)
RE: CALL FOR EVIDENCE:
RESPONDING TO ILLICIT AND EMERGING FINANCE
- Introduction and Summary
- The following evidence is submitted to the Foreign Affairs Committee in response to the Call for Evidence: Responding to Illicit and Emerging Finance on behalf of Global Diligence LLP (“GD”) and its civil society clients. This submission is aimed at addressing the following questions: How effective are the UK’s sanctions regimes on corruption and human rights? How could sanctions be used to greater effect in countering illicit finance?
- GD is a public interest, international legal advisory firm working primarily in unstable and conflict-affected regions. We provide the highest level of legal advice and representation to individuals, communities and organisations who are typically deprived of access to justice – those impacted by armed conflict, state oppression, and the climate and environmental emergency. Acting on behalf of civil society organisations and victims, GD has made multiple submissions to the Foreign, Commonwealth and Development Office under the Sanctions and Anti-Money Laundering Act 2018, and to the National Crime Agency under the Proceeds of Crime Act 2002. The purpose of this submission is to convey our experience in engaging with UK sanctions mechanisms and to provide recommendations for improving their effectiness.
- In summary, this submission will discuss: (i) the need for improved coordination on sanctions between Her Majesty’s Government (“HMG”) and its partners; (ii) the importance of extending sanctions to family members who hold UK assets on behalf of designees; (iii) issues with the enforcement of sanctions; and (iv) the absence of dialogue between HMG and submitting parties.
- This submission may be made public. However, the submission is accompanied by a confidential annex which sets out details on concrete cases (case studies A, B and C). The accompanying annex is submitted in confidence.
- Better coordination with allies and partners
- Notwithstanding evidence of some cooperation on sanctions between HMG and its allies and partners, we note key instances where HMG appears to have been unwilling or unable to coordinate on targets and timing of designations with the United States Government (“USG”) and the European Union (“EU”). Failure to coordinate with strategic partners undermines the impact of targeted sanctions, creates avenues for asset flight and weakens the appearance of a united democratic front against corruption, autocracy, and human rights abuses. A formalised process of coordination between HMG, USG and EU authorities is strongly recommended.
- Targeted sanctions are designed to address the transnational nature of corruption and gross human rights abuses. Their raison d’être is predicated on the understanding that kleptocrats and human rights abusers rely on global financial markets to hide and launder their illicit gains. As such, sanctions are only effective if they create a “net” across all major financial and banking centres. Key to achieving this is close cooperation and coordinated action amongst western allies and partners. This is acknowledged in HMG guidance on the Global Anti-Corruption Sanctions Regulations 2021: “HMG is likely to give particular consideration to cases where international partners have adopted, or propose to adopt, sanctions and where action by the UK is likely to increase the effect of the designation in addressing the corruption in question”.
- Coordination requires HMG, USG, and the EU to target the same actors and networks at the same time. Failure to coordinate action creates lacunas that can be utilised by kleptocrats and their financial enablers. Specifically, failure by one jurisdiction to target an individual or entity at the same time as the others puts the targets on notice and allows them to sell off or transfer their traceable assets, and to hide their wealth beyond the reach of sanctioning authorities. Such lacunas cancel out the intended impact of targeted sanctions and create an image of a divided and disorganised “West”. The perceived impunity that arises from the lack of coordinated action emboldens autocratic leaders and their enablers to violate fundamental rights, misappropriate public resources and undermine international peace and security.
- Examples of HMG failing to coordinate designations with its allies and partners:
Case Study A: an example of HMG failing to follow the USG in targeting a major corruption and money laundering network, notwithstanding evidence of the network’s assets in the UK. The network was actively destabilising trade, democracy and security in the region where it operates. HMG’s failure to act in this case undermined USG’s efforts to tackle the network, by providing the network with continued access to its UK assets and UK financial institutions.
Case Study B: an example of HMG delaying the designation of a key financial enabler of an autocratic regime. The individual in question owned or controlled several UK companies and UK assets worth millions. HMG delayed designating the individual for nearly two months after he was sanctioned by the EU. This put the individual on notice and allowed him ample time to transfer his UK assets to family members and associates. By the time UK sanctions against him became operational, he claimed that he no longer owned or controlled any assets in the UK.
UK’s response to Russia’s war in Ukraine: On 23 February 2022 (one day before Russian troops crossed the Ukraine border) the EU sanctioned all Russian law-makers responsible for rubber-stamping President Putin’s pretext for attacking Ukraine. Conversely, the UK waited another two and a half weeks before making similar designations. Likewise, whilst the EU immediately targeted Russian oligarchs and key regime enablers following the invasion (designating 82 individuals on 25 February), the UK limited its sanctions to a handful of individuals and waited until 10 March to target Kremlin-linked oligarchs with high-value UK assets. These delays demonstrate a lack of coordination with the EU, undermine the deterrent effect of EU sanctions, and undermine the image of a united Europe against Russian aggression.
- Recommendation: HMG and its allies and partners should consider creating a formalised process for coordinating the scope and timing of sanctions. Failing this, HMG should consider aligning its designations (and their commencement) with the USG and EU wherever possible.
- Closing the family members loophole
- Kleptocrats and human rights abusers use proxies to hide their ownership and control over assets in the UK and other jurisdictions. Such proxies may include close associates and family members or others who can be trusted to unofficially hold the property on the target’s behalf. As such, targeting a foreign public official or oligarch will not necessarily result in the freezing of assets associated with that individual. To close this loophole, HMG should cast a wider net of inquiry to identify individuals and companies within the targets network who may be holding valuable assets in the UK. Whilst “associates” are covered by the legislation, HMG should consider widening its legal framework to make it easier to designate close family members of designated individuals.
- Examples of the family members loophole:
Case Study B: the individual in question acted as a key financial enabler of an autocratic regime – including through UK-based companies under his control. Just weeks before his designation by HMG, the targeted individual transferred nearly all his UK-based assets to his family members. Despite being informed of this, HMG has not targeted the family members. The assets remain intact and at the individual’s ultimate disposal.
Case Study C: the individual in question is a senior foreign public official. He was targeted by HMG in response to his government’s conduct. Whilst the official has no known UK-based assets in his own name, one of his close family members owns a high-end property in London. HMG was informed of the target’s link to this property. No action has been taken.
- Recommendation: In preparing designations HMG should conduct a thorough investigation to identify individuals and companies within the targeted person’s network who may be holding valuable assets in the UK. To facilitate the designation of family members who act as proxies, HMG should consider amending regulation 6(2)(d) of The Global Human Rights Sanctions Regulation 2020 (and equivalent provisions in other sanctions regulations) to include “a close family member of” in that provision. Similar language has been used by the USG in Executive Order 14024 (section 1(a)(v)).
- Gaps in enforcement
- Once a designation is made, it is crucial for HMG to enforce full compliance with the applicable legislation. Any gaps and inconsistencies in enforcement can be exploited by designated individuals and their enablers to circumvent sanctions. It is also important for sanctions to be seen to be consistently and methodically enforced. Assets can be moved very quickly beyond HMG’s reach. As such, HMG should boost its capacity to react quickly to new developments. Gaps and inconsistencies in enforcement undermine the purpose of designations and the deterrent effect of sanctions.
Case study B: An asset expressly identified by HMG as belonging to a sanctioned individual was traced in the UK. HMG was immediately informed of this, but no action was taken. The asset was then removed from the UK and beyond HMG’s reach. Following its removal, HMG retrospectively amended its guidance, expunging all references to the asset. No action was taken in relation to UK-based entities that facilitated the asset’s transit through the UK.
- Recommendation: Effective enforcement requires strong investigative capacity and ability to act quickly. HMG should commit more resources towards enforcing compliance with its sanctions regimes and be consistent in enforcing existing sanctions.
- Absence of dialogue with submitting parties
- It has been our experience and the experience of other organisations that there is almost no dialogue or cooperation between HMG and submitting parties following the submission of designation requests. All submitters receive a standard email acknowledging receipt of information and informing the submitting party that HMG is “unable to provide comments, updates or feedback on proposed designations, evidence or other information that has been submitted”. This is in stark contrast to the USG, which opens a direct channel of communication between the submitting party and the relevant State Department and Treasury case officers. Active dialogue is important, because situations being referred to HMG are rarely static – as new evidence or new developments emerge, the submitting party should be able to communicate these quickly to all relevant persons reviewing the relevant submissions. An open dialogue also provides HMG with an opportunity to verify the credibility of evidence submitted in support of requests for designations, and to clarify any inconsistencies or lacunas in the information provided. HMG could also use its channels of communication with submitting organisations as a network to gather information on new developments in geographic or thematic areas that go beyond what has already been submitted. Given the finite nature of HMG’s resources, it should use its civil society networks more effectively. The absence of dialogue dissuades civil society from engaging with HMG in this area.
- Recommendation: HMG should engage more with organisations and individuals submitting requests for sanctions. As per USG practice, HMG should consider connecting the submitting party with the relevant case officer reviewing the request.
Partner at Global Diligence LLP
London, 14 March 2022