The Anti-money Laundering Act of 2020 Presents…
On 29 March 2019, the UK is scheduled to leave the EU after triggering Article 50 of the Treaty of the European Union in 2017. There are two likely possibilities at this stage; pass the Brexit Withdrawal agreement through Parliament or leave the EU, adhering to World Trade Organisation rules.
But what does this mean for the UK’s sanctions policy going forward, and how could this impact financial services? Will there be a convergence of sanctions policy with our European neighbours as per our previous adherence to the Common Foreign and Security Policy (CFSP), or will there be a divergence as the UK charts a new course?
The future relationship of the UK and EU will almost certainly dictate whether there will be a divergence in sanctions policy by the UK. The future relationship could be one of three options; 1) Brexit is cancelled; 2) a ‘soft’ Brexit, or 3) a ‘hard’ Brexit.
In the event of option 1 materialising, nothing will change.
In the case of option 2, a soft Brexit, the UK will become a member of the European Economic Area (EEA). EEA members are obliged to accept a majority of EU laws, such as the Fifth Money Laundering Directive (5MLD).
If option 3 happens, the European Union (Withdrawal) Act 2018 will preserve EU law in domestic law or convert it into UK law on exit day , as well as implement UN sanctions in UK domestic law .
The UK has said that in a no-deal scenario they would work with the EU to enforce new sanctions after leaving the EU, where it is in their mutual interest , but it also creates an opportunity for the UK to drastically change their sanctions policy in the medium and long-term.
This article will now outline this possible divergence in more detail.
The Sanctions and Anti-Money Laundering Act 2018 (SAMLA 2018) was passed in May 2018 to ensure the UK can impose, update, and lift sanctions following Brexit. When SAMLA, 2018 was first introduced, the expectation was that it would enable the UK to maintain the status quo post-Brexit. However, the creation of SAMLA 2018 theoretically creates scope for UK sanctions policy to diverge from that of the EU.
For instance, following the Salisbury attack on Sergei and Yulia Skripal in March 2018, Prime Minister Theresa May spoke of introducing an amendment to the Sanctions Bill to “strengthen our powers to impose sanctions in response to the violation of human rights” . For banks, outside of the fact that SAMLA provides scope for divergence, they should also be aware that it allows the UK Government to designate individuals, groups and organisations for sanctions by name or by description. This makes sanctions compliance more challenging, with banks having to consider whether potential counterparties fall within a specified description, rather than merely whether their names appear on sanctions lists .
For the most part, the UK has been in line with the EU in terms of its sanctions policy, but there has been precedence for the UK going it alone. One instance was the Landsbanki Freezing Order 2008, when HM Treasury froze the UK assets of Icelandic bank Landsbanki to prevent funds held or controlled by Landsbanki’s UK branch leaving the country. This extreme measure was taken after a dispute with the Icelandic government regarding Deposit Guarantee Schemes following the collapse of Landsbanki in October 2018. This occurrence shows that based on geo-political events, the UK can take the initiative in enacting its own sanctions policy outside of the CFSP. Banks should ensure that their current sanctions screening is adaptable enough to react to geopolitical events that may result in sanctions policy divergence.
More recently, tensions with Russia have risen following the alleged Russian interference in the 2016 Brexit referendum and the Salisbury nerve agent attack against Sergei and Yulia Skripal in 2018. Currently, the EU has sanctions in place against Russia as a response to the annexation of Crimea from Ukraine in 2014, which was recently extended to 31 July 2018. The EU has not imposed further sanctions following the Salisbury incident.
Any new EU sanctions would require unanimity among all 28 states, with some states unlikely to agree given their business relationships with Russia. As a consequence of Brexit, the UK will no longer require unanimous support for sanctions policy, meaning that it’s possible for differences in sanctions policy between the UK and the EU to emerge. Given the recent volatility between the UK and Russia, banks will need to carefully assess their sanctions compliance stance and risk exposure towards Russia in particular.
Financial institutions will need to pay close attention to the Brexit negotiations as it will have a significant impact on the sanctions policy relationship between the UK and the EU going forward. A hard Brexit gives the UK considerable opportunity to diverge from the EU, as they will no longer be restrained by requiring a unanimous decision from all 28 states and can potentially leverage sanctions to pursue domestic interests, i.e. negotiating new trade deals and seeking new foreign investment into the country.
According to the chair of the Geneva International Sanctions Network, Erica Moret, approximately 80% of the EU’s sanctions that are currently in place have been put forward or suggested by the UK . Post-Brexit, there may be no efforts within the EU to align their policies with other Western nations like the UK or US, leading to multi-jurisdictional complexity and conflicting requirements by different regulators worldwide. There is a lot of uncertainty regarding the direction the UK will take post-Brexit, but contingency planning within financial institutions should be well underway. Below is a summary of the potential post-Brexit scenarios and the short / long term expectations for AML / Sanctions.
|Soft Brexit (Norway Model)||Switzerland Model||Turkey Model (Customs Union)||CETA Canada Model||Hard Brexit (WTO)|
|DESCRIPTION||Member of European Economic Area (EEA)||Member of the European Free Trade Association but not the EEA / Access to EU market governed by series of bilateral agreements||Member of EU Customs Union / No say on the tariffs it has to impose on goods it imports from non-EU countries / Has to apply the EU's common external tariff||Preferential access to the EU single market without all the obligations that Norway and Switzerland face / Eliminating most trade tariffs||WTO sets rules for International trade that apply to all members / No obligation to apply EU laws|
|IMPACT||Obliged to accept majority of EU laws||Bilateral agreements where the UK has agreed to take over certain aspects of EU legislation in exchange for accessing part of the EU's single market||The UK would gain independence in its policy making||The UK would gain independence in its policy making||The UK would gain independence in its policy making / Businesses have to respond immediately to changes as result of leaving the EU|
|SHORT TERM / SANCTIONS / LEGISLATION / EXPECTATIONS||UK complies with EU AML legislation / Fifth Anti-Money Laundering Directive (5MLD) enforced by Jan 2020||21-month Brexit transition period / During transition period, Britain has promised to abide by all existing and new European laws||21-month Brexit transition period / During transition period, Britain has promised to abide by all existing and new European laws||21-month Brexit transition period / During transition period, Britain has promised to abide by all existing and new European laws||No 21-month transition period as no UK-EU agreement / Businesses have to respond immediately to changes as result of leaving the EU|
|LONG TERM / SANCTIONS / LEGISLATION / EXPECTATIONS||UK continues to comply with EU AML legislation / Any additional EU AML legislative will be adhered to||5MLD n/a to the UK Sanctions and Anti-Money Laundering Act (SAMLA) 2018 creates scope for the UK AML regimes to gradually differ to EU||5MLD n/a to the UK / SAMLA 2018 creates scope for the UK AML regimes to gradually differ to EU||5MLD n/a to the UK / SAMLA 2018 creates scope for the UK AML regimes to gradually differ to EU||5MLD n/a to the UK / SAMLA 2018 creates scope for the UK AML regimes to gradually differ to EU|