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Sanctions (EU Exit) (Miscellaneous Amendments) (No. 2) Regulations 2022

Volume 824: debated on Monday 17 October 2022

Motion to Approve

Moved by

That the Regulations laid before the House on 19 July be approved.

Relevant documents: 12th Report by the Joint Committee on Statutory Instruments (special attention drawn to the instrument)

My Lords, the instrument before us was laid on Tuesday 19 July 2022, under the powers provided by the Sanctions and Anti-Money Laundering Act 2018, also known as the sanctions Act. The Joint Committee on Statutory Instruments published its 12th report of the 2022-23 Session on Friday 14 October. The committee reported the instrument for two reasons: one for defective drafting and another relating to one of the sanctions regimes to which the amendment applies—the Burundi (Sanctions) Regulations 2021. I will address each of these briefly in turn.

First, the JCSI raised concerns about the absence of definitions on sanctions in the new information provisions. It is not satisfied that the drafting of the new regulation clearly achieves the stated policy to limit the functions in question to those imposed under the relevant instrument. We are considering the most appropriate way to address the committee on that point.

The second aspect flagged to us by the committee relates to the Burundi (Sanctions) Regulations 2021, which was originally laid in December 2021 to replace the Burundi (Sanctions) (EU Exit) Regulations 2019. The replacement regulations were made to reflect the 2020 Burundi elections and the peaceful transfer of power. As noble Lords may recall, the 2021 regulations were debated but they were not approved by resolutions of both Houses within 28 days, and therefore ceased to have effect on 23 January 2022. This was in accordance with Section 55(3) of SAMLA. Having carefully considered the consequences, the FCDO concluded that the 2019 regulations have not been revoked by the 2021 regulations and therefore remain in force. The Joint Committee on Statutory Instruments accepted this conclusion.

The UK Government continue to monitor developments in Burundi and to keep the sanctions regime under review; we are currently considering a 2022 regulation. We thank the committee for its detailed feedback and continued engagement on the FCDO’s sanctions legislation, which we continue to bring forward at pace. I also take this opportunity to thank those across your Lordships’ House for the continued support for amendments brought forward by His Majesty’s Government to update the sanctions regime throughout this Session.

Sanctions form a key pillar of our foreign policy. It is essential that our sanctions regimes are maintained and updated appropriately, so that we can respond at pace to the activities of malign actors around the world. Indeed, we have recently shown the strength and utility of our sanctions in our response to Vladimir Putin’s invasion of Ukraine and Russia’s crimes against the Ukrainian people.

The legislative instrument that we are debating today updates all our sanctions regimes, including those we are required to implement due to our UN obligations, as well as our autonomous UK regimes. These regulations ensure that crypto asset businesses fall within the scope of financial sanctions reporting requirements, strengthening our ability to respond to emerging threats and evolving global standards.

Specifically, the regulations require crypto asset exchanges and custodian wallet providers to report to the Treasury if they encounter any designated persons in the course of business or if they are holding any frozen assets on behalf of customers who are designated. Crypto asset businesses are also required to report any suspected breaches of financial sanctions.

The regulations also include new powers for public authorities to share financial sanctions information with the Treasury. This change ensures a wide range of persons and organisations, from regulators to local authorities, have a dedicated information-sharing gateway. They will no longer have to rely on gateways that are not sanctions-specific or on the Treasury’s powers to compel information from partners.

We hope that this will give organisations confidence to share information so that the Government can better pursue breaches and uphold the integrity of UK sanctions. These changes are possible thanks to the Economic Crime (Transparency and Enforcement) Act 2022, which amended the sanctions Act in March this year.

The regulations also make changes to our various sanctions regimes to update definitions and clarify intentions. These amendments ensure that the definition of “designated person” is consistent across regulations. They include a correction of the reporting obligations relating to the transfer of funds to a ring-fenced account. They clarify that, within the Libya sanctions regime, it is not a breach of sanctions to credit a frozen account with interest and specify that Treasury licences would be available for the purpose of satisfying prior obligations. They also correct acronyms which were entered incorrectly into the initial regulations or were missing, and update the name of the African Union peacekeeping force in Somalia.

These regulations will ensure that our sanctions continue to hold to account corrupt officials, abusers of human rights, and malign actors across the world, and that our UN sanctions regimes remain accurate. To conclude, these amendments mean that our sanctions regimes take account of the most modern financial services and prevent loopholes being exploited in the future. I welcome this opportunity to hear views on these regulations. I beg to move.

My Lords, I rise briefly to intervene in this debate on the point which the Minister helpfully set out in his opening remarks, one of the two issues raised by the Joint Committee on Statutory Instruments. This instrument amends the Burundi (Sanctions) (EU Exit) Regulations 2019 but, according to the website—the definitive source—those regulations were revoked by the Burundi (Sanctions) Regulations 2021. Commercial websites on UK legislation also refer to the 2019 regulations having been revoked. That would make today’s proceedings a little odd, because we would be amending something that was no longer law.

However, this is not the case. As the department explained in its memorandum to the Joint Committee, although the revoking SI was debated in 2021, it was not approved by both Houses of Parliament within the required 28 days. Therefore, under the terms of the Sanctions and Anti-Money Laundering Act 2018, as a “made affirmative” instrument, it expired. The Joint Committee agrees with the department’s view that the original regulations have not been revoked and can therefore be amended tonight.

I raise this matter because it is important that affected citizens and businesses, and their lawyers, can establish with clarity what the law is or was at a relevant time. In this instance, the only sources to which you could have turned to find out—not only government but commercial sites—had got it wrong. I raise it as a warning of the pitfalls of complex legislation by statutory instrument—of which we have a lot coming down the track—and the need to be absolutely clear about what is and is not law in force. The committee has written to the hard-working team at the National Archives to ensure that the matter is put right there. The committee’s advisers should be commended for identifying it. It is important that we get these things right.

Not on behalf of the committee in any way, perhaps I could also raise the question that the Minister touched on: what is the Government’s current view of the relevance, purpose and desirability of sanctions against Burundi?

My Lords, I apologise if this is Burundi-specific. I would like to address to the Minister a particular point that has been drawn to my attention. He spoke about the economic crime Act and loopholes. Some people from overseas register a company, open a bank account through lawyers and then, when everything is in place, there is a transfer of shares to a party, which rather defeats the object of the exercise. I am sure that the Minister does not wish to go into detail about this today. However, would he care to reflect and pass on to his officials that, in the spirit of the economic crime Act, they might wish to address that situation?

My Lords, I point out that I am speaking as a winding-up speaker, just in case there is anyone else who is interested in speaking from the Back Benches.

The Minister has explained that this statutory instrument brings into the sanctions orbit both crypto asset exchanges and custodian wallet providers. We agree that that is necessary, but I would like to get some clarity from the Minister. Very few crypto asset exchanges are actually located in the UK—I was struggling to think of one. Some of the most popular, such as Binance, are registered in British Overseas Territories. Just to continue the example, Binance is one of the major exchanges and is registered in the Cayman Islands. What impact does this SI have on the regulation of these exchanges and wallet custodians? To stay with the Binance example, that organisation claims that it does not have the authority to sanction or freeze all Russian users’ assets, leaving the expectation that sanctioned individuals are freely using it under assumed or friendly names.

I would also ask how adequate resources are to make regulation and enforcement effective. As the Minister is aware, the FCA is underresourced and, frankly, demoralised. It does from time to time act against small organisations, which would seem to include misbehaving crypto exchanges, and I think that the crypto group in the FCA is actually one of its stronger sections. But the complexity and global nature of crypto makes it very tricky to supervise. The National Crime Agency has only 118 staff to cover all of the powerful and complex world of finance. Would the Minister consider giving the FCA and the NCA a share in the fines and confiscations from successful prosecutions, in order to build their capacity? Will further legislation come forward, despite the Conservative mantra of “deregulate, deregulate”, to deal with the dark side of the crypto industry, which has a real mix of responsible players and sheer anarchists, which obviously is an avenue for running sanctions that makes no use of the respectable exchanges and wallet custodians?

Will the Government also go after the enablers—the lawyers, accountants, property developers and others who facilitate sanctions-busting through a variety of routes? In a sense, I am picking up the point from the noble Viscount, Lord Waverley; he described one such route. These firms are a major part of the infrastructure of what is widely known, unfortunately, as the London laundromat. Would the Minister agree that we need a “failure to prevent” sanction to put genuine pressure on and change the behaviour of these enablers?

This statutory instrument—and this is true for upcoming legislation—still fails to give proper protection to whistleblowers or to champion follow-up on their disclosures, even though they are crucial to exposing wrongdoing, particularly in the areas of sanctions-busting, which crosses complex borders and is very hard to track through conventional routes used by regulators or enforcement agencies. This SI once again fails to include as whistleblowers the wide range of people who speak out, and it continues the limitation of the definition of whistleblowers to employees.

This statutory instrument gives confidentiality to disclosures made by employees to proscribed organisations; it lists a long list of proscribed organisations among its various regulations. But this kind of confidentiality is frequently useless. The identity of many whistleblowers is hard to hide, particularly when dealing with kleptocrats, oligarchs and authoritarian states, which, frankly, use all kinds of aggressive means to find the identity of those who have exposed them.

Under the current law, recourse for a whistleblower, who is at risk of retaliation, is to an employment tribunal. That hardly seems meaningful protection to someone whose income, family and life, very likely, are on the line. The Minister will be aware from his portfolio that far too many whistleblowing reports remain anonymous because people are terrified. The regulator then uses the fact that the report is anonymous, and therefore it cannot ask more questions of whoever has been doing the reporting, as an excuse not to follow up on the information that has been provided. Frankly, we have a very sorry track record in acting against these entities. The advice that has been given by so many in this field is, if you can, go to the Americans, because they will be fierce and they will act. That is a very sad story to tell.

I have a Private Member’s Bill that would create an office of the whistleblower to be a proper champion. It is an updated version of the Bill promoted by a Conservative MP, Mary Robinson, who chairs the APPG on whistleblowing, so I assure the Minister that there is no party-political issue here. In light of the Minister’s concern over sanctions and in catching people who bust sanctions, will he give us his support?

My Lords, I, too, welcome the Minister’s introduction of these regulations. I assure him and the Government of our continued support for these measures. In the debate that we had last week, we made our continued support absolutely clear.

There are a couple of points I want to focus on. These were raised by my honourable friend Stephen Doughty in the other place in relation to cryptocurrencies being used to evade sanctions and particularly how they can be used to inject capital into the democracies of the world for the purposes of swaying elections. During the Commons debate, Stephen Doughty asked why the Government have not yet sanctioned Tornado Cash and Blender, two cryptocurrency services already sanctioned by the United States. While I am pleased that the Minister confirmed that the Government are looking at sanctioning those two organisations, I hope the Minister can update tonight about when we can expect further legislation in this regard.

Just picking up the point made by the noble Baroness, Lady Kramer, the Minister in the Commons was unable to update the House on the steps taken to pursue greater global regulation of cryptocurrencies. I hope the Minister can tell us whether the United Kingdom mission to the United Nations has taken part in any discussions on this and whether the point was raised at the annual meeting of the IMF and the World Bank earlier this month, in addition to answering some of the other points that the noble Baroness has raised.

Since the invasion of Ukraine by Putin’s regime, there has been a huge increase in rouble to crypto trades resulting from individuals and businesses wanting to evade sanctions on cross-border payments. Will the Minister tell us what the Government are doing to monitor the providers used for these exchanges?

Finally, earlier this month the US Government fined Bittrex, a cryptocurrency exchange, for repeated violations of sanctions. Will the Minister tell us, specifically and in a more general sense, how we are working with the United States and other allies on investigations such as these so that we can ensure that our measures have full compliance? As the noble Lord, Lord Ahmad, repeatedly says, sanctions are not effective unless we act in concert with others, so I hope the Minister can respond on these points.

My Lords, I thank noble Lords who have contributed to this debate today. I will do my best to address the issues that were raised by noble Lords.

Crypto asset exchange providers and custodian wallet providers have been added to the definition of relevant firms in all UK sanctions regulations, and relevant firms must report certain information to the Treasury when encountering a designated person in the course of their business or where they become aware of a breach of financial sanctions regulations. Reporting obligations themselves have not changed.

The instrument that we are debating today strengthens our sanctions in two ways: first, the measure further supports the UK’s technical implementation of recommendation 15 of the Financial Action Task Force standards. It is the international standard-setting body for all anti-money laundering, counterterrorist financing and counterproliferation financing. Recommendation 15 requires the Government to ensure that certain financial sanctions reporting obligations are applied not only to financial institutions and designated non-financial businesses and professions but to virtual assets service providers. These regulations bring crypto asset exchange providers and custodians wallet providers into the scope of those obligations.

The second area in which this strengthens our regime relates to enforcement. The instrument seeks to address the risk of crypto assets being used to breach or circumvent financial sanctions. The definition of “relevant firm” now covers firms that either record holdings of or enable the transfer of crypto assets and are therefore most likely to hold relevant information.

I will address some of the specific points raised by the noble Baroness, Lady Kramer. I felt she made an interesting point about the possibility of the FCA and the NCA sharing the proceeds of fines to build up their capacity, and I will certainly convey that suggestion to my colleague in the other place. I believe the Office of Financial Sanctions Implementation has doubled in capacity this year, and we have seen that mirrored through the infrastructure we have to counter these forms of crime in the UK.

The noble Baroness gave a very effective plug for her Private Member’s Bill to protect whistleblowers. I will not pretend that I know chapter and verse of her Bill, but it certainly sounds sensible and worthy of serious consideration. I will also pass that to colleagues and do my best to ensure that it is treated with the seriousness it no doubt deserves.

The noble Lord, Lord Beith, asked a couple of questions about Burundi. As he acknowledged, the view—I think it is a consensus—is that the 2019 Burundi sanctions regulations remain in place. On the second point, the issue about guidance online has been brought to the attention of the FCDO. Colleagues in the FCDO are now working with those websites to ensure that the right guidance is available, so I think the point he made has already been registered in the Foreign Office by the relevant department.

The noble Lord, Lord Collins, repeated the question put to colleagues in the other place by Stephen Doughty in relation to two firms in particular. Although I do not have the answer for him now, I know that a letter is winging its way across to Stephen Doughty—I am told it will reach him this evening—and addresses the points he raised. I hope that is satisfactory. I will make sure that the noble Lord receives a copy of the letter.

The noble Viscount, Lord Waverley, made a number of interesting points. I flag to him that a new combating kleptocracy cell has been set up this year in the National Crime Agency. I hope it will be able to fulfil some of the roles and functions he outlined in his contribution.

I asked the Minister a general question about Burundi, to which the appropriate section of these regulations relates specifically. Bearing in mind that most countries reduced or ended their sanctions on Burundi earlier this year, what is the current Foreign Office position?

My concern in answering this question is that I never know where the line is drawn. We are not supposed to talk about individual or upcoming sanctions. My understanding is that this has been largely an academic issue—I really hope I am not crossing any lines here—and that, regardless of whether the regulations had been revoked, and we understand that they have not, it would have had no material impact on any company or individual. It is unfortunate and an error, but it has not had any real-world impact. I hope that addresses his question.

I thank the Minister for the responses he has given me so far, but I raised the issue of British Overseas Territories and cited the example of Binance, one of the largest crypto exchanges, which is based in the Cayman Islands, and how these SIs would impact that. If he cannot answer, I am perfectly happy if he comes back in written form.

I apologise for missing that question. The new sanctions automatically come into force in the overseas territories—all except Gibraltar and Bermuda—as soon as they come into force in the UK. As noble Lords would imagine, the UK’s Office of Financial Sanctions Implementation has for many years been engaging substantially and very regularly with the overseas territories and Crown dependencies to help support their development of compliance, enforcement and licensing functions. I hope that addresses the noble Baroness’s question.

It is the responsibility of the UK and our allies to ensure that our sanctions regimes are maintained and updated appropriately so that we can respond at pace to the activities of malign actors around the world. In co-ordination with our allies, we must and do continue to make sure that our sanctions regimes take account of the most modern financial services and prevent loopholes being exploited in the future. I am grateful to noble Lords for having indicated their support for this measure and once again thank them for their contributions.

Motion agreed.