The intersection between asset freezes and effective AML enforcement
Recent events have galvanised calls to liquidate assets belonging to sanctioned individuals or entities.
Transparency International, for example, recently called for the ill-gotten assets of kleptocrats to be confiscated where there is sufficient evidence of corruption, sanctions evasion or other crimes.[2]Similarly, earlier this year, the British Home Secretary suggested that the second Economic Crime Bill would enable the expropriation of assets belonging to those found to be working on behalf of the Russian leadership.[3]Further afield, the US President has set out plans to make it easier to seize and forfeit the assets of oligarchs,[4]while in May, the EU Commission proposed new rules on the confiscation of assets belonging to oligarchs who violate sanctions.[5]
Recent months have also seen the birth of new domestic and international units (such as the NCA’s Combating Kleptocracy Cell[6]and the international Taskforce of Russian Elites, Proxies and Oligarchs (REPO)[7]), each targeting the assets of corrupt elites with seizure firmly in mind.
Does this represent the drawing of new battle lines in the war on illicit wealth? Have the objectives changed from using sanctions as a tool of foreign policy to a way to identify, freeze and expropriate corrupt wealth?
The State of Play
The purpose of the Russian sanctions regime (like any other) is political: namely, to encourage Russia to cease its actions destabilising Ukraine or undermining or threatening the territorial integrity, sovereignty or independence of Ukraine. Designations are made by the Secretary of State and, unless criminal enforcement action is taken, fall outside the remit of the criminal justice system – no proven element of criminality is required to designate an individual or entity but rather merely reasonable grounds for suspicion of certain specified conduct (which does not need to be criminal in nature).
Current designations under the Russia regime have yielded an unprecedented amount of frozen assets held primarily within the regulated sector. As at April of this year, the UK had frozen over £900bn of global assets under this regime.[8] These figures dwarf the amounts frozen under all other autonomous UK sanctions regimes previously and represent a correspondingly large increase in the compliance and enforcement burden on those responsible for policing and enforcing the regime.
The toolkit
Information gathering
There has been a marked increase in the level of information regarding sanctioned entities and persons and frozen assets available to governmental authorities in recent years and months.
Annually, OFSI conducts a frozen asset reporting exercise requiring persons in or resident in the UK who hold or control funds or economic resources belonging to, owned, held, or controlled by a designated person, to provide the details of these assets. There are also ongoing duties to report potential sanctions breaches by designated persons to OFSI that, as of 30 August 2022, extend expressly to UK cryptoasset exchange providers or custodian wallet providers.[9]Specific reporting and notifications obligations arise under the various regulatory regimes, too. See, for example, Principle 11 of the FCA’s Principles of Business, Fundamental Rule 7 of the PRA Rulebook and SUP 15 of the FCA’s Handbook. Where there is a cross-over with suspected money laundering or terrorist financing activities, additional disclosure obligations arise under the UK’s anti-money laundering and counter-terrorist financing (“AML/CTF”) regimes.
All of this means there is data available to those who have the means of probing it and mounting criminal investigations.
Enforcement efforts are also ramping up. The director of OFSI recently said that enforcement cases are becoming a priority and a focus for the agency.[10]For its part, the FCA has recently confirmed that it is increasing its focus on intelligence-gathering and enforcement efforts against attempts to circumvent financial sanctions,[11]and the regulator has set up a dedicated reporting tool for those with concerns about possible sanctions breaches.[12]It plans to test firms’ automated screening processes with a new analytics-based tool, and has begun to undertake on-site reviews of firms’ sanctions controls.
Suffice to say that the opportunities for law enforcement to use their powers are growing.
From freezing to seizing
In its report, the FAC recommended that law enforcement agencies take advantage of the unprecedented number of asset freezes in place to consider if there is a criminal case for asset seizure. However, there are a number of reasons (aside from resourcing issues) why pursuing the seizure of assets that have been frozen under existing sanctions legislation may be difficult.
Aside from conviction-based powers (such as confiscation orders), the UK’s asset recovery regime contains a number of measures for the realisation of assets representing the proceeds of unlawful conduct. These include civil recovery orders (and the associated unexplained wealth orders regime) and orders providing for the seizure and forfeiture of money and personal property, including account forfeiture orders targeting money in bank accounts. All rely on establishing some underlying criminality. Even where the allegation is one of money laundering, it rests on the authorities being able to establish some form of criminal conduct from which it is possible to build a case that the assets represent criminal property.
Critically, the purposes for which the assets have been frozen under the sanctions regime are not aligned with the use of these powers. While a breach of sanctions legislation might amount to a criminal offence, designation is not tantamount to criminality.
Other key impediments include:
- the inherent difficulty of investigating historical transactions carried out abroad within deliberately complex structures;
- the likelihood that respondents will have a greater appetite to challenge in rem attempts to seize their property and significant resources available to them to mount such challenges;
- the lengthy, intelligence-led task of selecting the most appropriate cases for investigation; particularly given there are clearly resourcing issues as evidenced by the FAC’s report and evidence given to the Parliamentary Committee examining the effectiveness of the regime;[13]
- delays in pursuing in rem asset recovery is inevitable given the volume of intelligence available, which may give rise to additional avenues of challenge which resourcing issues may exacerbate further; and
- the volume of intelligence data to examine, the continually shifting landscape, ongoing challenges to designations, unresolved licence applications and the dynamic political landscape mean good cases are likely to fall through the cracks.
Scanning the horizon – what should regulated firms be doing?
In the short-term, firms must ensure compliance with their sanctions obligations as they face increased scrutiny by the regulators. We can also expect increased enforcement activity from OFSI (whose resources are currently being increased for these very purposes) and the NCA as the intelligence data they are sitting on starts to yield results. Firms will also face a greater compliance burden with their annual frozen asset reporting due to the significant increase in activity this year.
In the medium term, the second Economic Crime Bill looks set to reinforce firms’ roles as the first line of defence in policing activity on their books, especially that which is designed to frustrate the use of asset recovery powers. Firms will need to be alert to these incoming changes and ready to respond and update their systems and processes accordingly.
It is clear there is appetite to detect, deter and disrupt the flow of illicit wealth into the UK. Whether the increased scope of the sanctions regimes provides the authorities with the opportunities to do that remains to be seen. However, the weight of responsibility for supporting those efforts rests with the regulated financial services sector. As such, there is greater impetus than ever on getting sanctions compliance systems and controls right, and the need for the sector to continue to engage in sanctions horizon scanning.
[1]
[2] https://images.transparencycdn.org/images/2022-Report-Up-to-the-task.pdf
https://hansard.parliament.uk/commons/2022-03-07/debates/97B249F2-C666-46EF-B46A-F2FF22DE2264/EconomicCrime(TransparencyAndEnforcement)Bill, in response to David Davis.
[4] https://www.whitehouse.gov/briefing-room/statements-releases/2022/04/28/fact-sheet-president-bidens-comprehensive-proposal-to-hold-russian-oligarchs-accountable/
[5] https://ec.europa.eu/commission/presscorner/detail/en/ip_22_3264
[6] https://www.nationalcrimeagency.gov.uk/who-we-are/publications/591-sars-in-action-march-2022/file
[7] https://www.gov.uk/government/publications/russian-elites-proxies-and-oligarchs-task-force-ministerial-joint-statement/russian-elites-proxies-and-oligarchs-task-force-ministerial-joint-statement
[8] https://www.gov.uk/government/news/new-sanctions-targeting-putins-war-leaders and https://committees.parliament.uk/publications/22525/documents/165961/default/
[9] The Sanctions (EU Exit) (Miscellaneous Amendments) Regulations 2022 https://www.legislation.gov.uk/uksi/2022/819/regulation/1/made and The Sanctions (EU Exit) (Miscellaneous Amendments) (No.2) Regulations 2022 https://www.legislation.gov.uk/uksi/2022/818/contents/made
[10] https://committees.parliament.uk/oralevidence/10468/html/
[11] https://committees.parliament.uk/publications/23023/documents/168751/default/
[12] https://www.fca.org.uk/firms/financial-crime/reporting-sanctions-evasions
[13] https://committees.parliament.uk/work/6581/russia-effective-economic-sanctions/
