The United Kingdom and the European Union are moving independently towards imposing Magnitsky sanctions - named after slain investigator Sergio Magnitsky (pictured) - on the assets of corrupt 'politically exposed persons,' but will the Brexit process get in the way of their effectiveness?

In other contexts, including corruption, the conduct would have to be unlawful both in the UK and in the place where it occurred for its proceeds to be recoverable – so, for instance, a Russian oligarch could argue against the freezing or recovery of the proceeds of conduct in Russia on the basis that his conduct was lawful there. The amendments remove that argument, but only when ‘gross human rights violations’ are involved.

...and in sanctions

The idea behind SALMA is to create a new sanctions regime in the UK to replace the outgoing EU system that will end on 31 December, when all EU rules end. Generally speaking, the idea is to replicate the EU's system as closely as possible, the better to minimise disruption in the short term. Again, backbenchers in the House of Commons amended the Act to introduce Magnitsky sanctions.

The possibility of challenges

Again, the amendments concentrated on that first category of targets, i.e. people responsible for, or connected with, ‘gross human rights violations.’ This time, though, the effect of the provisions is to enable ministers to take measures such as asset freezes and travel bans against people they reasonably suspect to be in that category. It is important to note that the people whose assets are threatened will be able to appeal to the High Court. The EU's scheme, by contrast, only allows these people to go to the General Court and the Court of Justice of the EU in Luxembourg.

The risk of a clash: while EU rules still linger in the UK...

When MPs on select committees were debating SALMA, they wondered whether the UK had to be out of the EU scheme in order to use such sanctions, or whether it could do so while still a member of the EU or while waiting for the transitional period to end on 31 December this year. Although the Government stated that it could do so without delay, it is possible that this was on the basis that there were then no plans for EU Magnitsky sanctions. As things now stand, depending on how long it takes for the EU to design and implement its scheme, there is a real risk of the parallel regimes clashing with each other. The same individuals or groups could be targeted by both EU sanctions enforceable in the UK before 31 December and by British sanctions (which may be broader) and foreign oligarchs might appeal to the courts in both jurisdictions, which might lead to different results.

...and afterwards

Thinking beyond the IP, there are clearly broader risks of having EU and UK schemes with broadly similar aims but without co-ordination in their design. One key risk of course is the complexity and associated costs for businesses that straddle the EU and the UK, post-IP, and will have to comply with both sanctions regimes (as well as, in many cases, that of the US). But there are also issues of legitimacy and effectiveness.

Should Magnitsky sanctions target the proceeds of corruption?

These issues come into sharpest focus when we return to the question of whether Magnitsky sanctions in the EU or the UK should target the proceeds of corruption, as they do in the US version. That would clearly prove a useful addition to the armoury of authorities keen to clamp down on suspect wealth, but so far the UK has shied away from tackling corruption in this way under its domestic law. The EU has targeted people, for instance from Egypt, Tunisia and the Ukraine, who are said to have misappropriated public funds. But Magnitsky sanctions would need no connection with a third-country regime; they could simply target those suspected of corruption offences, whomever and wherever they were.

The argument against

The response from someone whose assets are frozen because they are suspected of corruption is likely to be, bluntly, prove it: there are already manifold systems, particularly in the UK, for the recovery of such property and for its freezing in the meantime, and a strong case that the authorities should use the right tool for the job notably, using a judicial process rather than a political one. In due course that may well be an argument made in the High Court on behalf of a sanctioned person, and one that may be better received there than in the CJEU.

The prospect of regulatory divergence

Unless the UK and the EU decide to work together when evolving sanctions policy in the future, the EU might well adopt a scheme that can target the assets of people thought to be guilty of corruption, while the UK’s scheme might remain riveted on the assets of people involved or connected with gross human rights violations. That could of course provide an incentive for oligarchs and kleptocrats keen to place their wealth in Europe to do so in the UK rather than the EU. This is despite the (so far largely theoretical) risks that they face from unexplained wealth orders.

* John Binns can be reached on +44 (0)20 7430 2277