UK sanctions regime during the Transition Period

Legal, Sanctions — By on February 11, 2020 at 4:25 PM

UK sanctions regime during the Transition Period

At a Glance…

Until the end of the Transition Period (currently 31 December 2020), during which the UK will be bound by existing EU sanctions decisions, the UK may, in exceptional circumstances, exercise discretion and decide to diverge from any new EU sanctions regime. Companies should update their sanctions procedures and sanctions clauses to account for the developing UK sanctions regime.

Authors: Brett Hillis, Leigh T. Hansson, Ray-Shio Ho, Alexander Brandt

Position up to “exit day”

As an EU member, the UK participated in the EU’s Common Foreign and Security Policy (CFSP), which included the EU’s sanctions regime. Over the past few years, the EU has imposed a range of international sanctions, either implementing UN decisions or acting autonomously (e.g., in relation to Ukraine and Crimea, where Russia’s status as a permanent member of the UN Security Council would have prevented any UN action). Changes to the EU’s foreign and security policy require unanimity and in controversial cases (such as Ukraine) it can be argued this limited the EU’s ability to respond to changing circumstances.

EU regulations and decisions establishing sanctions had direct effect in the UK pursuant to the European Communities Act 1972 (“1972 Act”). In addition, the UK established criminal sanctions for non-compliance with EU sanctions by making UK regulations under section 2(2) of the 1972 Act.

The Sanctions and Anti-Money Laundering Act 2018 (“2018 Act”) introduced UK domestic powers for Ministers to make sanctions regulations.

Once the Transition Period has ended, the 2018 Act is expected to be the main legal authority for the promulgation of sanctions regulations. Since 2018, several regulations have been introduced under the 2018 Act (e.g., The Russia (Sanctions) (EU Exit) Regulations 2019) in anticipation of the end of the Transition Period. The sanctions-related restrictive measures put in place by these regulations, which are largely similar to the current EU sanctions regime, come into force at 11 p.m. on 31 December 2020.1

Transition Period

Notwithstanding the above, section 1A of the European Union (Withdrawal Agreement) Act 2020 (Withdrawal Act), which received royal assent on 23 January 2020, states that despite the repeal of the 1972 Act on “exit day”:

“[t]he European Communities Act 1972, as it has effect in domestic law or the law of a relevant territory immediately before exit day, continues to have effect in domestic law… on and after exit day so far as provided by subsections (3) to (5).”

The 1972 Act continues to have effect until 11 p.m. on 31 December 2020 unless otherwise stated by the UK government2.

Equally, under the Agreement on the withdrawal of the United Kingdom of Great Britain and Northern Ireland from the European Union and the European Atomic Energy Community passed on 19 October 2019 (Withdrawal Agreement),3 the UK has entered into a transition period, which will continue until 31 December 2020,4 with the possibility of extension for up to two further years.5 Article 127 of the Withdrawal Agreement envisages that EU law will continue to apply until the end of the Transition Period, and references to Member States in the EU sanctions regime shall include the UK.6 The Withdrawal Agreement was ratified on 29 January 2020.

Accordingly, the general position is that the UK sanctions regime will be aligned with that of the EU sanctions regime during the Transition Period. However, when the Withdrawal Act is read together with Part 4 of the Withdrawal Agreement, the position is somewhat nuanced:

EU sanctions legislation continues to apply in the UK until the end of the Transition Period

As explained above, pursuant to Article 127 of the Withdrawal Agreement and section 1A of the Withdrawal Act, EU law will continue to apply in the UK until the end of the Transition Period, unless otherwise stated. This means that, as a general rule, the UK will continue to be bound by existing EU sanctions legislation, in addition to new and updated decisions and regulations passed by the Council of the European Union regarding sanctions during the Transition Period.

It is possible for the UK to depart from EU sanctions legislation with respect to new decisions

Article 129(6) of the Withdrawal Agreement states that, following CFSP decisions made after 31 January 2020, the UK may “make a formal declaration to the High Representative of the Union for Foreign Affairs and Security Policy, indicating that, for vital and stated reasons of national policy, in those exceptional cases it will not apply the decision.” It further states that in “a spirit of mutual solidarity, the United Kingdom shall refrain from any action likely to conflict with or impede Union action based on that decision, and the Member States shall respect the position of the United Kingdom.” As the relevant regulations providing for restrictive measures usually last for a year and require the EU to legislate to extend such restrictive measures, any such extension would arguably be considered a new decision and therefore provide the UK with opportunities to diverge.

Similarly, section 1A(3)(a) of the Withdrawal Act provides that on or after 31 January 2020, the UK government has the discretion to exclude certain things from the definition of “the Treaties” and “the EU Treaties” in the 1972 Act, which theoretically could include CFSP decisions.

It should be noted that the ability to diverge does not apply to any non-CFSP decisions where the UK is otherwise obliged to comply (e.g., under a treaty obligation). Therefore, for example, the UK will not be able to diverge where sanctions are imposed in accordance with UN Security Council resolutions.

UK sanctions autonomy?

As stated in Article 129(6) of the Withdrawal Agreement, the UK has agreed to refrain from acting inconsistently with the EU’s sanctions regime. However, this does not mean that the UK is unable to “gold plate” or adopt more extensive measures in respect of certain targets. While the required standard for divergence during the Transition Period is high, it is possible to imagine that situations could develop in the coming months in response to which, for example, the UK might want to go further than the EU – for example, where the actions of a potential sanctions target have a particular effect on UK interests.

It will also be important to watch for UK government announcements on how it plans to use sanctions powers after the end of the Transition Period. Companies should certainly ensure that their sanctions policies and procedures account for the fact that the UK has its own sanctions powers and that there is no guarantee that such powers will be aligned to those of the EU. This is particularly important for UK-domiciled entities, and for companies with UK-based counterparties, which use financial institutions acting from an office or branch in the UK, or which contract under the laws of England and Wales, or another UK jurisdiction. Steps to consider include reviewing sanctions clauses to check they reference the UK sanctions regime appropriately as well as checking with screening service suppliers as to their coverage of UK sanctions lists.

  1. Available at: https://www.gov.uk/government/publications/sanctions-policy-after-31-december-2020.
  2. Sections 39(1) to (4) of the Withdrawal Act.
  3. Available at: https://www.gov.uk/government/publications/new-withdrawal-agreement-and-political-declaration.
  4. Article 126 of the Withdrawal Agreement.
  5. Article 132 of the Withdrawal Agreement, which requires the agreement of the 27 Member States, on the assumption that a request for extension is made by the UK.
  6. Article 127(6) of the Withdrawal Agreement.

If you have questions or would like additional information on the material covered in this Alert, please contact one of the authors – listed below – or the Reed Smith lawyer with whom you regularly work.

Brett Hillis

Brett Hillis
Partner, London
+44 (0)20 3116 2992
bhillis@reedsmith.com

Leigh Hansson

Leigh T. Hansson
Partner, London & Washington, D.C.
+44 (0)20 3116 3394
+1 202 414 9394
lhansson@reedsmith.com

Ray-Shio Ho

Ray-Shio Ho
Associate, London
+44 (0)20 3116 3773
rho@reedsmith.com

Alex Brandt

Alexander Brandt
Associate, London
+44 (0)20 3116 3733
abrandt@reedsmith.com

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