Submission to the Treasury Committee

Economic Crime Inquiry

8 May 2018

Summary

RAID is a UK-based NGO that exposes corporate human rights abuses in Africa and works with victims to hold companies to account. Our goal is to strengthen international regulation of companies and to ensure there is justice for corporate abuse.

RAID’s focus in this submission is on the UK sanctions regime. As part of our case work, we have identified a deplorable lack of transparency and public accountability on how the Treasury implements sanctions. In relation to those on the sanctions lists, lawmakers and the public are provided very little information about any assets that have been frozen, about exemptions to sanctions the Treasury may have granted, or any actions the Treasury has taken against those who have violated sanctions. The result is that we don’t know if the UK sanctions regime is effective.

As RAID’s work on Zimbabwe has shown, President Robert Mugabe was able to access $100 million in 2008 through a deal with a UK mining company despite being the subject of sanctions. This case has been extensively documented by RAID and featured in debate during the passage of the Sanctions and Anti-Money Laundering Bill.[1] To date, the UK government has failed to publicly explain how the deal and transfer of funds was allowed to proceed at a time when sanctions were in place.

If the Zimbabwe case is typical – and the absence of information makes this hard to assess – then the conclusion must be that the UK has been ineffective in stopping sanctions breaches or taking action against those involved in sanctions busting.

In our view, the UK lags behind other jurisdictions on public accountability and transparency of sanctions implementation. The United States, for example, has not only been far more proactive in pursuing sanctions breaches, but also regularly provides enforcement information and reports on exemptions and the licensing of transactions.[2] While the creation of the Office of Financial Sanctions Implementation (OFSI) and new civil and criminal powers enhance the potential for enforcement, an opportunity seems to have been lost to strengthen accountability in the Sanctions and Anti-Money Laundering Bill soon to pass parliament. Nevertheless, we believe there are important actions the UK Treasury Select Committee can take to ensure the regulations the UK government develops to enact the Bill enhance public accountability on how it implements sanctions, including to Parliament.

Contents

In this submission, we set out the following:

1. Brief background on recent developments, including the creation of OFSI, new enforcement powers and the limitations of statistics on sanctions.
2. A case study on Zimbabwe, illustrating the consequences of lack of transparency on sanctions.
3. Recommendations for the Treasury Select Committee.

1. Background on Recent Developments

New enforcement powers

There has been recent government recognition of the importance of financial sanctions to help maintain the integrity of and confidence in the UK financial services sector. RAID welcomes the creation in March 2016 of an Office of Financial Sanctions Implementation (OFSI) in the Treasury.[3] OFSI reports serious cases of non-compliance for further investigation by the National Crime Agency (NCA). Measures to toughen the government’s response to sanctions breaches are included in the Policing and Crime Act 2017. The Act makes sanctions breaches a criminal offence, carrying a penalty of up to seven years in prison. By giving OFSI powers to impose monetary penalties and publish details of serious breaches, the government is sending a clear message that it will not tolerate breaches of the financial sanctions regime.[4]

Despite these important advances, and based on RAID’s experience in the Zimbabwe sanctions case as described below, we are concerned that a public interest exemption allows OFSI to choose not to take enforcement action, even in cases where the facts seem to warrant it. The Treasury can also decide not to publish summary details of penalty action, if this is in the public interest. While there may be a case in some circumstances for such exemptions, we believe that in the interest of public accountability and transparency, such exemptions should be subject to independent review. At present, there is a lack of accountability as the public would not know if OFSI had decided not to take enforcement action.

Figures on suspected breaches

On February 8, the Treasury in response to a parliamentary question, originally revealed that a total of 118 suspected breaches of financial sanctions, with an aggregate value of £117 million, were reported to OFSI in 2017. It stated a further 84 suspected breaches had been reported to OFSI since April 2017 when OFSI gained the ability to impose monetary penalties under the Policing and Crime Act 2017.

On February 21, the Treasury issued a significant correction, stating there were 133 suspected breaches with an aggregate value as £1.4 billion.[5] Since April 2017, when OFSI gained new powers to impose monetary penalties, there had been 103 suspected breaches.

The extent of the correction raises important questions about how the Treasury is collecting and reporting on sanctions breaches, the accuracy of the figures and whether it is adequately deterring breaches. The total value of sanctions breaches for 2017 was over twenty times higher than for 2016. Although the disparity was not explained in the Minister’s answer, newspaper reports have attributed it to the omission of several high-value cases, observing that the total value of sanctions breaches for 2017 was over twenty times higher than for 2016.[6]

As of February 2018, the Treasury was unable to confirm how many investigations into these alleged breaches were ongoing. To date, no criminal prosecutions or civil enforcement action has yet been taken against any individual or entity for sanctions breaches under the new powers.

Powers introduced by the Criminal Finances Act 2017

The US and other jurisdictions have additional ways in which they can deploy sanctions through the use of Magnitsky-type powers, named after the Russian activist and lawyer who died in a Russian prison after exposing large-scale corruption. In 2016, the US extended its original legislation by passing the Global Magnitsky Human Rights Accountability Act. This allows not only for asset freezes and travel bans, but also for targeted sanctions on individuals anywhere in the world responsible for committing human rights violations or acts of significant corruption.

The UK has elements of Magnitsky-type powers under the Criminal Finances Act 2017. This extended the definition of ‘unlawful conduct’ (under the Proceeds of Crime Act 2002) to that which constitutes (or is connected with) the commission of a gross human rights abuse or violation, allowing for civil recovery proceedings (freezing and recovery orders) relating to property obtained through such unlawful conduct. Section 13 of the Act entered into force on 31 January 2018.[7] A series of parliamentary questions, tabled in October 2017, sought to establish what preparations were being made to allow the NCA to implement section 13.[8] The Secretary of State for the Home Department replied: ‘Work is underway to ensure the necessary court rules, secondary legislation, training, guidance and human resources are in place for commencement of the Act by Summer 2018.’

The Criminal Finances Act also allows for unexplained wealth orders (UWOs) and interim freezing orders where, inter alia, there are reasonable grounds to suspect that a person is or has been involved in serious crime, including money laundering and bribery and corruption. At the end of February 2018, the NCA announced that it had secured the first two UWOs (as well as interim freezing orders) relating to two properties worth £22m believed ultimately to be owned by a politically exposed person (PEP).[9]

In May 2018, the government introduced a Magnitsky amendment to the Sanctions Bill, which will allow sanctions to be targeted at public officials, those acting in an official capacity, or those acting on behalf of public officials, whose conduct constitutes the commission of a gross human rights abuse or violation. Based on RAID’s current reading of the proposed text, such targeting would not extend to corruption, as it does in the US and Canada (see box below for an example of how the US has used such grounds to combat economic crime). At the time of writing, the Bill has not yet passed into law and we recognize further changes may be made. The Criminal Finances Act applies not only to those carrying out the conduct, but also to those engaging in activity connected with the commission of abuse, including profiting from, or materially assisting abuse. The amendment to the Sanctions Bill does not currently extend to others (including, for example, companies) who assist or benefit from the conduct of such officials, which could limit its scope by excluding the former from sanctions.

2. A Troubling Sanctions Case: The CAMEC Platinum Deal and Zimbabwe Sanctions

RAID has investigated a 2008 deal by UK incorporated and London-traded Central African Mining and Exploration Company plc (CAMEC) to buy a platinum mine from the sanctioned and abusive regime of Robert Mugabe.[10] CAMEC transferred US$100 million to the Mugabe regime as part of the purchase, an injection of hard currency that funded a campaign of violence against opposition supporters. The funds appear to have paid for weapons, trucks, and the dispatch of youth militias and war veterans to crush the opposition, killing 200 and torturing 5,000.[11]

Mugabe and his key allies in the government, ZANU-PF, and the military, were all on EU and US sanctions lists at the time of the platinum deal. The Mugabe regime’s violent crack-down to subvert the election was planned and orchestrated by the Joint Operations Command (JOC), eight members of which, in addition to Mugabe, were already designated sanctions targets.

When CAMEC was sold on to the then FTSE-100 Kazakh-controlled Eurasian Natural Resources Corporation,[17] a major CAMEC shareholder and Mugabe crony, Billy Rautenbach, who had arranged the platinum deal and who was placed on EU and US sanctions lists as a result, was not only able to sell his shares, but appears to have been granted a license by the Treasury to access the proceeds.

Freedom of Information requests

Since July 2011, RAID has sought information about the UK Treasury’s reasoning for approving and licensing the CAMEC platinum deal under the Freedom of Information Act (FOIA), ultimately appealing the decision to withhold information to the Information Commissioner and then to the courts.

Given the prime facie unacceptability of the transaction under EU sanctions, RAID asked the Treasury whether CAMEC had consulted it prior to entering into the transaction; whether the Treasury had licensed the sale of Rautenbach’s CAMEC shares to ENRC, some of which were hidden through offshore entities; and whether Rautenbach had been granted a licence to unfreeze the proceeds, in light of the fact that ENRC’s acquisition of CAMEC coincided exactly with his return to South Africa to reach a plea agreement over 326 fraud charges, paying a fine of R40 million (£3.3 million).

The Treasury relied mainly upon an exemption (section 44) under FOIA which prohibits disclosure ‘incompatible with any EU obligation’:  the UK has signed up to EU sanctions and, in the UK government’s  view,  Article 8 of Council Regulation (EC) No.314/2004 of 19 February 2004, implementing restrictive measures in respect of Zimbabwe, prevents the disclosure of any information gathered. This article is repeated under most EU sanctions regimes. In effect, the UK Treasury was saying that it could not disclose any information about the implementation of sanctions in the vast majority of cases. Since the FOIA exemption under which it is cited is absolute, there would be no consideration of the public interest.

The court case and the Treasury’s approach to disclosure

RAID contested the government’s interpretation of the Article 8 and appealed the decision to the Information Commissioner. Although the Commissioner upheld the Treasury’s decision, RAID was granted the right to appeal to the courts.

Most of the evidence produced by the Treasury in RAID’s court case was presented in confidential files and considered in closed session, which RAID was not allowed to attend because the actual information sought was being discussed. The tribunal rules meant RAID was not represented in the closed session. So, unusually and worryingly for a UK court, no one was present to argue on behalf of the plaintiff.

What was said in open court nevertheless gives some rare insights into the inner workings and approach of HM Treasury. Peter Maydon, then head of HM Treasury’s Sanctions and Counter-Terrorist Financing Unit said that disclosing information on particular deals or individuals would result in financial institutions, sensitive to safeguarding their reputations, withholding information in case it became known that they acted for those on the sanctions list. To withhold such information is a criminal offence, but Mr Maydon admitted that financial institutions were ‘savvy’, knowing that the government is unlikely to pursue such cases because this would damage the ‘goodwill’ upon which the Treasury depends when seeking information in the first place. The Treasury provided no convincing response as to why other jurisdictions, such as the US, did make some disclosure on their implementation of sanctions without it diminishing cooperation with the banks.

Mr Maydon also confirmed that Treasury staff knew that their decisions on sanctions matters were unlikely to be disclosed because of exemptions under FOIA. Mr Maydon went as far as to say that questioning such decisions undermined public confidence in the implementation of sanctions. RAID’s view is precisely the opposite. We believe undisclosed and unaccountable decisions made behind closed doors undermine confidence, especially when, as in the CAMEC case, there is a perception that sanctions were breached and that those on the sanctions list profited.

RAID continues to question the necessity of withholding all information on sanctions. When asked in court about OFAC’s practice of releasing information on licensing, Mr Maydon dismissed such disclosure as confined to ‘a few cases’ and asserted that the UK need not, in any case, follow the Americans’ lead. In fact, OFAC has posted databases detailing its licensing in thousands of sanctions cases (see annex, below).

Given that sanctions targets are publicly known, and the business dealings of Mr Rautenbach have been widely reported in the media, Mr Maydon was asked whether there was any danger to individuals should the Treasury corroborate facts that are already in the public domain. Mr Maydon replied that, in general, corroboration of existing, known facts was not a danger, but this did not apply in the current case, something that he would discuss further only in closed session.

The lower tribunal upheld the Treasury’s decision to withhold the requested information.[23] Again, RAID was granted permission to appeal:[24] ‘It [the upper tribunal] will be exercised to give permission only if there is a realistic prospect of an appeal succeeding.... In this case, there is a realistic prospect that the decision involved the making of an error on a point of law...’  The issues to be discussed included ‘whether any question should be referred to the Court of Justice of the European Union.’ After careful consideration following the BREXIT referendum, RAID decided not to proceed since the government has expressly stated its intent is to withdraw from the court’s jurisdiction.

The consequences of failing to account for sanction breaches

Although the legal action could not be taken to conclusion, it is apparent that access to information on the implementation of sanctions in the UK is seriously curtailed, with little or no accountability.

When the UK leaves the European Union, the section 44 exemption under FOIA will no longer apply. The soon to be enacted Sanctions Bill, together with associated statutory instruments will instead frame – alongside FOIA and the Data Protection Act – the extent to which specific information on licencing, and wider information on the effectiveness of sanctions implementation will be publicly released. It is disappointing that the Sanctions Bill, as primary legislation, neither frames reporting requirements on the implementation of sanctions and their effectiveness nor transparency on licensing.

The refusal of the Treasury to confirm or deny information on sanctions breaches in specific cases has obvious consequences. Media reporting of suspected breaches will continue, irrespective of the Treasury’s stance. Mass data leaks, such a through the Panama or Paradise Papers, have released information about sanctioned entities or transactions into the public domain, and it is quite possible further such leaks could occur. Without greater accountability and public reporting, there may be inaccuracies that go uncorrected and/or a perception that the UK government has something to hide. Furthermore, as in the CAMEC case, enforcement agencies in other countries, such as those in the United States, are ahead of the curve and are naming and publishing details about suspect transactions, including those involving UK entities (see box). Without public accountability as to why such reprehensible deals are allowed to proceed, there will be a loss of faith in sanctions regimes and important lessons will not be learnt.

The UK will soon have a dedicated Sanctions Act, which will combine with the existing powers of OFSI and the NCA. It is incumbent on the Treasury to demonstrate, openly and through its actions, that the UK is no longer a ‘soft touch’ when it comes to clamping down upon those who breach sanctions.

3. Recommendations to the Treasury Select Committee

We urge the Committee to use its influence to push for the following actions by the government to strengthen the UK sanctions regime.

• An end to blanket confidentiality covering all information on the implementation of sanctions.

• The release of information – redacted as necessary – on the licencing of exemptions, to include transactions under both financial and trade sanctions. In the United States, for example, the Office of Foreign Assets Control (OFAC) has achieved the a balance between commercial confidentiality and public accountability in the way it routinely releases details of licences granted to named companies, allowing some transparency around transactions with sanctioned regimes and entities.
• When OFSI uses public interest exemptions so as not to take enforcement action or not to publish details of certain penalty actions, this should be recorded so that the Treasury Committee and others can monitor the frequency of their use. Consideration must be given to providing for an independent review of any such exemptions to ensure that the public interest is served.
• The creation of a central, publicly-accessible database of companies that have breached sanctions or who are under investigation for non-compliance, so that investors or potential customers (including government departments, spending taxpayers’ money), are aware of the risks of doing business with such entities.
• The publication of quarterly reports, broken down by sanction regime, providing details on the effectiveness of sanctions, including details on:

1. the amount of money and other assets frozen;
2. a breakdown of how many sanctions targets have assets of a particular value frozen;
3. how many sanctions targets have applied for the unfreezing of assets and how many of these applications have been granted, to include the aggregate value of assets released for each type of exemption.

The Terrorist Asset Freezing Act 2010 (TAFA) provides a precedent for such reporting (albeit narrowly defined) by requiring that the Treasury report quarterly to Parliament on its operation (including statistics on the number of accounts/value of assets frozen).

• Using information from quarterly reports, to publish an overarching annual review on the effectiveness of sanctions. Again, this would build on the example of TAFA, which requires an annual independent review of its operation.

• To improve transparency of the process by which individuals or entities are designated as sanctions targets. RAID recognises that designated individuals should have the right, with due safeguards, to know why they are subject to sanctions, but, to the greatest extent possible, there should also be public accountability for decisions to add to or remove people or entities from the sanctions list.
•             To establish a mechanism by which informed parties, including NGOs, can submit information to better identify sanctions targets and their associated entities.
•             While recent new powers of enforcement – including monetary penalties – are to be welcomed, as is the commitment to publish details of serious breaches, any ‘public interest’ exemptions to these powers should be subject to review.
• RAID supported the case for expanding the criteria in the Sanctions Bill for imposing sanctions to include a strong and unequivocal commitment to human rights. RAID welcomes the extension of considerations in the Bill, which now include: promoting the resolution of armed conflicts or the protection of civilians in conflict zones; promoting compliance with international humanitarian and human rights law; contributing to multilateral efforts to prevent the spread and use of weapons and materials of mass destruction; promoting respect for human rights, democracy, the rule of law and good governance. However, no explicit consideration is currently given to imposing targeted sanctions for corruption, which RAID considers a serious omission if this is not amended.

Annex - OFAC and the release of information on licences

In early 2010, a leading law firm advised its clients of a forthcoming change in OFAC policy on the disclosure of information:[27]

The U.S. Treasury Department’s Office of Foreign Assets Control has begun the process of systematically releasing to the public pursuant to Freedom of Information Act requests records of applications to do business with countries subject to U.S. economic sanctions. To be released also, are the licenses themselves. Until recently, it was assumed that a request for and the issuance of such licenses would be confidential.

In a landmark decision at the end of 2010, and as a result of a request from The New York Times under the Freedom of Information Act (US FOIA), OFAC agreed to provide information on licences (10,000 in total) granted to US companies to allow them to trade with Iran and other blacklisted under the sanctions regime. The newspaper states:[28]

…after The Times filed a federal Freedom of Information lawsuit, the government agreed to turn over a list of companies granted exceptions and, in a little more than 100 cases, underlying files explaining the nature and details of the deals. The process took three years, and the government heavily redacted many documents, saying they contained trade secrets and personal information. Still, the files offer a snapshot — albeit a piecemeal one — of a system that at times appears out of sync with its own licensing policies and America’s goals abroad.

The material released to The New York Times is extensive, including details of who applied for the licence, details of the goods or services to be licensed, and when the licence was granted. Examples of the licenses illustrating the extent of the information release can be viewed at: <http://www.nytimes.com/interactive/2010/12/24/world/24-sanctions.html>.

Following other US FOIA requests from individuals, journalists and NGOs, OFAC has a webpage dedicated to FOIA requests and the information disclosed.[29] Significantly, this includes data in the form of Excel files of the OFAC licensing database for selected years. The 2011 database, released after a request from a freelance journalist, lists, inter alia, the parties holding the licenses, details of the attorneys or the companies that applied for the licenses on behalf of the license holders, the date of application for the license and its date of issue, the type of license.[30]

In October 2013, Bloomberg obtained information under US FOIA on the amount of holdings belonging to Japanese criminal gangs frozen by the US Treasury.[31] In March 2015, The Wall Street Journal obtained mandatory reports from financial institutions to the US Treasury under US FOIA detailing the worth of assets frozen in the US as a result of financial sanctions against Russia.[32] The information includes the names of major international banks and how amount of money frozen in individual accounts.

11