The UK’s Magnitsky Act is an Important First Step, but it is Not the End of the Road

 This is the first time that the UK has used its autonomous sanctions powers since its withdrawal from the EU. Those targeted under the Magnitsky laws include individuals and entities that have been involved in serious violations of human rights, including 25 Russian officials who were reportedly involved in the mistreatment and death of Sergei Magnitsky; 20 Saudi Arabian officials linked to the unlawful killing of Jamal Khashoggi at the Saudi Consulate in Istanbul on 2 October 2018; two high-ranking commanders of the Myanmar Armed Forces alleged to be responsible for atrocities and serious human rights violations against the Rohingya population; and two North Korean entities involved in running prison camps and serious human rights violations against the prisoners.

 These Magnitsky laws mark a major step in punishing human rights violators around the world. Coupled with the powerful U.S. Global Magnitsky Act, the U.S. and UK are now able to cut off targets from two of the most important financial systems in the world. Dominic Raab rightly lauded the development as preventing human rights violators from being “able to launder … blood money in this country.”

However, the measures have already become subject to criticism as they also expose deficiencies in the anti-money laundering (AML) regulations underpinning the ability to implement the Magnitsky laws. For example, the think tank Open Democracy found in a recent report that the UK’s AML systems are insufficient to prevent financial crime in the UK, and have enabled around 400,000 companies to evade declaring their “persons of significant control” (PSCs) and thus concealing their ownership structures. Those involved in illicit activities are therefore able to structure their companies to legally take advantage of the 25% PSC ownership threshold to avoid declaring their interest. Others rely on the reported lack of enforcement of the requirement to disclose their PSCs.

It follows that whilst the Magnitsky laws are a useful step in the fight against human rights abuses, if the systems allow ultimate beneficial owners to maintain their anonymity, then ultimately the sanctions will be of little effect. Therefore, what is required is an upgrade of the UK’s AML regime to ensure transparency and to prevent those engaged in illicit activities from exploiting the weaknesses in the UK’s system as a conduit for cleaning their dirty money.

Furthermore, the scope of the sanctions are considerably more limited than the equivalent measures in the U.S. and Canada. To have true bite, their impact must align. Similarly, increased coordination of investigations and targeting amongst the US, UK, and Canada will be essential if this tool is to have long term efficacy.

Despite these limitations, the UK has taken an important step in what appears to be a general trend for global sanctions programs to address human rights abuses. The measures have had an immediate impact, with reports that various Swiss banks have been dropping high risk Russian clients and scaling back their risk.

 This appears to be a sensible move, given the increasing indications that the EU will shortly implement its own Magnitsky-style laws. In 2019, the EU announced the launch of its preparatory work to develop its own equivalent sanctions regime, and there is mounting pressure, including a recent letter from EU parliamentarians to the High Representative Josep Borrell, to prioritise this issue.

Ultimately, and despite their shortcomings, the significance of the UK Magnitsky laws is in their potential, including their potential to encourage others. 

Whilst the UK may still be grappling with issues in its AML systems, the move marks an appetite to clamp down on human rights abuses. The UK has successfully developed a framework to impose sanctions and the government has confirmed that these listings are only the first wave, “with further sanctions expected in the coming months”.

Furthermore, if, as anticipated, the EU imposes equivalent measures, the collective application of these restrictions (coupled with existing measures in the U.S. and Canada) has a credible chance of acting as a deterrent against human rights abuses and truly becoming, as the government says, “a force for good in the world."

This article first appeared in Financial News on the 3^rd August 2020’