Written evidence from the Law Society of England and Wales (FSP0013)

1.              The Law Society of England and Wales is the independent professional body that works to support and represent over 180,000 members, promoting the highest professional standards and the rule of law.

2.              The Law Society is a named supervisory body in Schedule 1 to the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017. It has delegated all anti-money laundering (AML) regulatory and enforcement responsibilities to the Solicitors Regulation Authority (SRA).

3.              The Law Society welcomes this opportunity to respond to the Foreign Affairs Committee’s inquiry. Our member firms both advise clients on, and encounter as businesses in their own right, the requirements of sanctions compliance. The breadth of the profession’s membership in terms of global reach, types of client and areas of practice is such that the nature of our members’ familiarity with sanctions varies considerably. This response therefore draws on a range of views and experiences. We do not comment on foreign policy issues as these go beyond the Law Society’s remit.

The effectiveness of sanctions as an instrument of foreign policy, including examples of both successful and unsuccessful use of sanctions to influence the behaviour of foreign actors

4.              The absence of clearly stated or framed objectives for most EU (and non-EU) sanctions regimes makes it difficult to comment meaningfully on their effectiveness.  Government is best-placed to comment on the effectiveness of sanctions as a foreign policy tool. 

5.              There are, to our knowledge, few examples of sanctions regimes that have directly brought about the desired behavioural change. In the relatively few cases where this could be said to have happened, it has come at a cost of significant economic and human impact to the targeted persons and/or the residents of the target country and at indirect cost to persons beyond the boundaries of the sanctioned jurisdiction. However, we recognise that there are other considerations which feed in to the decision as to whether and in what form to impose sanctions. An assessment of whether they prove effective is relative to other possible courses of action or inaction.

6.              Smart or targeted sanctions measures, increasingly used by the EU (and others) to target specified persons, entities, ships, sectors etc, have the potential to at least partially address effectiveness. They enable the focus of economic pressure to be aimed at those most directly implicated in the activities in question, but with less collateral impact on the economies of the designating and the designated state than country-wide measures. But even since the use of smart sanctions it is hard to point to examples of targeted sanctions clearly “working” in the sense of bringing about the desired effect. It should be noted that the effectiveness of sanctions targeting is often diluted by the “over-compliance” approach of businesses who do not necessarily reflect the targeting in their compliance practices (for example a requirement for a warranty that a party does not operate in certain countries ignores the fact that certain avenues of legitimate business may be pursued in such a country).

7.              To ensure that sanctions are effective, coordination between the major global economies should ideally take place. Coordination between the UK, US and the EU is especially important. While we recognise that coordination is possible only where the underlying foreign policy positions are substantially aligned, the tension between the requirements of US secondary sanctions and the EU Blocking Regulation is an illustration of the difficulty for operators and the adverse impact on effectiveness of EU sanctions where EU and US objectives and measures are not aligned.

The advantages and disadvantages of the EU’s approach to the use of sanctions, both generally and in specific cases (such as Russia)

8.              The EU takes a more targeted approach than the US to sanctions generally in that it does not operate genuinely comprehensive sanctions such as US primary sanctions on Iran.  However where, as with e.g. Syria or North Korea, the EU measures are very extensive, the distinction may be academic.

9.              The EU allows licences only on specified grounds, in contrast to the broad licensing power enjoyed by Office of Foreign Assets Control (OFAC). The Foreign and Commonwealth Office (FCO) has expressed its intention to apply in the UK, after Brexit, the current EU grounds for licence/derogation (with some modest extensions and potentially some financial sanctions general licences such as in relation to humanitarian activity), although its legislation – the Sanctions and AML Act 2018 (SAMLA) - allows for a broader approach to licencing.  

10.              We would urge the UK Government to keep open the option both for greater use of financial sanctions general licences, and for the possibility for the Office of Financial Sanctions Implementation (OFSI) and Export Control Joint Unit (ECJU) to issue ad hoc licences for specific trade and financial matters even where they do not fit readily into an existing recognised licence category. A level of pragmatic flexibility on licences for financial activities may serve the UK well when aligned with the stated policy objectives of the sanctions, and would be achievable post-Brexit.

11.              In particular, we would urge the UK to introduce a general licence for the provision of (and payment for) legal advice and representation. Doing so would remove any ambiguity as regards a designated person’s ability to access legal advice and secure judicial scrutiny of sanctions designations, as well as remove the present risk of delay through the need to seek government approval. We would be pleased to assist the government in shaping the terms of such a general licence.

How the USA sets and uses sanctions as an instrument of foreign policy, and the advantages and disadvantages of its approach particularly where that differs from the EU

12.              The USA’s model and use of sanctions is distinct from that of the EU in a number of ways including:

•              the use of comprehensive sanctions, and more generally that US sanctions tend to be broader than the corresponding EU measures;

•              the breadth of OFAC’s powers as regards interpretation and enforcement of sanctions (although the difference is reduced now that OFSI can issue administrative penalties);

•              OFAC’s active approach to enforcement;

•              OFAC’s extensive use of FAQs to clarify ambiguities;

•              the extraterritorial reach of US sanctions (eg use of US$, the offences of facilitation and of causing a violation, the application of US trade sanctions to the re-export of US goods); and

•              the use of US secondary sanctions.

13.              Of these, the use of secondary sanctions, while arguably effective in US foreign policy terms, causes a problem for our members and their non-US clients. US secondary sanctions are intended to and do interfere with the decision-making autonomy of persons who are outside of US jurisdiction and whose proposed actions are compliant with the laws directly applicable to them. Additionally, they are often ill-defined and lack the legal safeguards that US persons can benefit from in relation to primary US sanctions.  They can prevent solicitors in the UK from receiving payment from clients (because EU banks will not process payments in contravention of US secondary sanctions).

14.              Looked at from the US perspective, this approach might be advantageous in that it enhances the US’s ability to achieve its foreign policy goals. However, it is not an approach that we would want to see the UK follow because of the jurisdictional overreach.

15.              In view of the adverse effect US secondary sanctions have in practice on the UK’s ability to decide the legal framework applicable in the UK (a key dynamic in the Brexit debate) – by which we mean that UK businesses’ options as regards their conduct outside the US are often restricted by the direct or indirect effects of US secondary sanctions - our view is that the UK should use such influence as it has with the US to dissuade it from expanding its use of secondary sanctions, and to improve the quality and tighten the scope of those that it keeps.

16.              Unlike the US, the EU routinely combines asset freezes with a travel ban. It is notable that in the US, the two restrictions (asset freeze and travel ban) can be issued separately.  The Government may wish to consider the merits of decoupling the two measures, as in the US. This decoupling might be useful and appropriate where, for example it is a person’s assets that might be the problem, not their travel.

17.              Our members also report that communication between practitioners and OFAC is often more open and easier to navigate than in the UK where contact with OFSI can be more limited, generally confined to written correspondence, and the guidance quite limited. Members involved in applying for licences either on their own behalf or on behalf of clients often comment that the inability to speak directly to OFSI about the application can be frustrating. The speed of responses and the rationale for licencing decisions could also be improved. A dynamic set of FAQs such as OFAC has could be beneficial.

18.              Finally, it is inescapably the case that US sanctions risk is taken more seriously by operators since the detection and enforcement risk is, and is therefore perceived to be, much greater.

How the UK might best make use of the Magnitsky powers included in the Sanctions and Anti-Money Laundering Act 2018

19.              The inclusion of “Global Magnitsky” (GloMag) powers in SAMLA makes little change to the powers already given to officials to impose sanctions for gross human rights abuses under the Criminal Finances Act 2017, but it potentially signals the government’s willingness to impose sanctions based on human rights breaches.

20.              There is a risk with the Global Magnitsky powers of inconsistent and apparently arbitrary application. Its potentially very broad scope of application means that inevitably it will only be applied to a small number of those to whom it could be applied.  The UK would therefore need to develop some guiding principles to avoid the impression of arbitrariness and ensure that the threshold reason and evidence standards are respected in line with sections 11(2) and 1(7) of SAMLA.  

21.              The UK would also need to have some clarity as to when a situation merits designation under the Global Magnitsky power, rather than by establishing a new country-focussed regime.  Often the events that lead to country sanctions are in themselves human rights breaches.  It is notable that the US has used its GloMag powers to target those perceived responsible for the murder of Khashoggi.  Would the targets under the EU’s Guinea sanctions be targeted in a similar situation under the Magnitsky power or a new Guinea sanctions regime?  This is relevant to businesses as it may have implications for whether a country is deemed under certain contracts to be targeted by sanctions.

The extent to which the UK should seek to align with the EU in sanctions policy post-Brexit, versus areas in which it may wish to diverge or seek stronger sanctions

22.              In the interests of a multilateral and effective global sanctions system, the UK should seek to align with the EU (and other countries) where possible, but much will depend on how robust the sanctions regime is post-Brexit in the EU.  

23.              However, it should be noted that the compliance cost for businesses is already high. Many companies subject to UK sanctions will also be exposed to US and/or EU sanctions.  Divergence will therefore add to this cost. While businesses are generally sympathetic to the objectives of sanctions, they may resent divergences that add to cost without clear policy benefits.

24.              The FCO’s record in:

•              Identifying individuals, companies and regimes that should be sanctioned;

•              Linking specific sanctions recommendations to broader foreign policy goals;

•              Working with other departments, agencies and the private sector to share intelligence and implement sanctions effectively.

25.              The Law Society cannot comment on the government’s record on these points, since it does not have adequate information as to what role the FCO has played in e.g. identifying individuals for EU designation. Having a clear statement as to the policy aims for imposing sanctions (as required under SAMLA) could assist in interpreting any ambiguities as to how sanctions should apply in a particular situation and is important for the rule of law.   

The use of sanctions alongside other tools designed to combat dirty money, such as unexplained wealth orders

26.              The sanctions tool is a conceptually different tool; it is not a tool for combatting dirty money.  Sanctions are used to put pressure on people/entities/governments which may not have anything to do with the source of wealth of those targeted, and for preventing the allocation of money (which may be “clean” or “dirty”) to causes the UK opposes such as terrorism or nuclear weapons proliferation. It makes it criminal for UK persons to deal with those persons’ assets.

27.              By contrast tools designed to combat dirty money are aimed at detecting and preventing the enjoyment of money that is already suspected of being the proceeds of crime.  The crime in question may be a breach of sanctions, and the sanctions may but need not relate to how the target came to have the money.

28.              Coordination helps UK agencies perform their functions more effectively. For example, if the National Crime Agency (NCA) were in the process of recovering criminal assets and the FCO designated the same individual, the NCA would no longer be able to recover the assets without an OFSI licence. The UK may want to consider whether there should be carveouts to avoid one set of tools getting in the way of the effective operation of the other.

Other comments and recommendations

29.              Brexit offers an opportunity to deliver more guidance on the UK’s sanctions regimes, its policy aims, and the expectations on operators. Specifically, the Law Society would appreciate further guidance from OFSI on the legal sector FAQs it presented to OFSI in May 2018 in relation to the reporting requirement that was extended to lawyers (and others) in 2017.

30.              Generally, the Law Society would welcome the opportunity for regular meetings with OFSI to share such experiences, difficulties or other issues as may be pertinent.  Law firms are often the first port of call for businesses with sanctions issues, and accordingly bring a broad awareness of the issues faced both by them and by their clients. Such meetings could be useful for OFSI as well as for us and our members as the UK’s independent sanctions approach evolves.

December 2018