The unintended consequence of broad-based economic sanctions
19 April 2022
SUGGESTED
Government and Institutions
14 April 2022
Government and Institutions
Lifestyle Economics
15 November 2024
In the last couple of months, the UK Parliament rushed through a raft of new legislation to bolster its sanction regime in response to Russia’s unprovoked invasion of Ukraine. While this is understandable, indeed laudable, this legislation goes significantly beyond its stated purpose and triggers serious dangers to our liberty and property rights.
When scrutinised, the proposed sanction regulations are poorly considered and purely reactive: they have been drafted in haste to appease public opinion. Yet these well-meaning sanction rules threaten to jeopardise our civil liberties. What is more, they fundamentally contradict in the message the UK government is so keen to convey about our role as an entrepreneurial hub open to investment capital from across the globe.
In truth, the new sanctions legislation shackles ‘Global Britain’ by deterring investment from our shores.
These new Johnsonian sanction rules massively add to the regulatory burden faced by investors. Even worse, they oblige honest and law-abiding individuals and enterprises to give away commercially sensitive information which might well impact on their personal security.
A blunderbuss approach
The cancellation of Tier One ‘Entrepreneur’ visas in February 2022 is a classic example of this contradiction. Tier One visas were issued to foreign nationals from across the globe who wanted to start a new business or join and invest in an existing business here in the UK. It has proved a popular scheme with Chinese nationals ranking as the main recipients with a 33% share.
However, concerns about ‘dodgy’ money – given greater prominence by the popular press – encouraged the Johnson government in a fit of crusading zeal to punish Russians – whether supporters or vocal critics of the Putin regime. And there are many in the Russian diaspora who fall into the second endangered category (remember all those Russians who have met an abrupt death in recent years).
In fact, the number of visas issued to Russian nationals has plummeted from a peak in 2014 to just 72 in 2021. Altogether, Russians accounted for 18% of investor Tier One visas issued between 2008 to 2021. So, the idea that Britain is overwhelmed by a horde of wealthy Russians is sheer fantasy.
But, more to the point, Boris’s bureaucracy has scrapped Tier One Visas entirely. This is to be regretted as it was a programme that attracted much needed sources of investment capital to our shores and generated many jobs. Crucially, no attempt was made to toughen the application process so as to weed out “dodgy” money. The government resorted to a flawed broad-brush approach. It reached for the blunderbuss.
The present Government’s own webpage claims that it is “Banging the drum for Global Britain as a lodestar of freedom and democracy, and for our strategic global relationships.” However, the principal way we can realistically reduce our dependence on Russian sources of energy is through reaching out to other oil-rich regimes. But many of them have been criticised for their lamentable human rights record. For instance, Boris Johnson has been obliged to go cap in hand to beg Mohammed bin Salman Al Saud, the effective ruler of Saudi Arabia, to increase oil production in the same month as the Kingdom executed 81 men in one day, setting a new record in recent times.
Bin Salman knows that Britain needs his help and support, so we find the UK having to modulate its ethical standards in order to mitigate soaring energy prices at home.
A threat to property rights
As part of the new sanctions regime, the Government has introduced legislation allowing it to detain any Russian-owned yachts or aircraft entering the UK. While this responds to a popular cry for action, bolstered by countless tabloid newspaper headlines, in practice these powers allow the government to detain someone’s property on the basis of citizenship. This does not apply solely to the property of sanctioned individuals, or vocal proponents of Putin’s regime, but in a blanket way to the property of Russian citizens.
Specifically, this legislation led to the detention of the superyacht Phi, valued at £38 million and moored at Canary Wharf, in April 2022. The National Crime Agency (NCA) issued a self-congratulatory press release and series of photographs taken on-board. Phi is indeed owned by a Russian – Mr Vitaly Vasilievich Kochetkov – yet as the Government itself later confirmed, his name was not on any UK sanctions list. Furthermore, he is also reported to be an EU citizen.
The clear danger illustrated by this case is this Government’s appetite ‘to be seen to be doing something’ and leading the way in a response to Russia’s aggression in Ukraine. It also highlights our politicians’ troubling desire for popular acclaim. But this zealotry risks riding roughshod over individual property rights citing owner’s nationality as due cause. That is a worrying precedent.
In January 2018, the Government introduced Unexplained Wealth Orders (UWO) as part of the Criminal Finances Act 2017. This gives several government agencies the powers to make a court application for a UWO which compels a respondent to explain how an asset valued at more than £50,000 was acquired. While introduced with much fanfare, this has become a little-used power, and pitched the NCA onto a battlefield where it has performed poorly.
UWO’s can lead to the application for a Civil Recovery Order (CRO) in the event that a satisfactory explanation cannot be provided for a source of wealth. However, significantly, none have been obtained since the end of 2019. Furthermore, of the nine so far issued several have been challenged and one expensively reversed following litigation in the courts. In short, the initiative has proved a shambles – but one that could threaten and deter high net worth individuals from coming to Britain.
Under the guise of targeting “Putin’s cronies hiding dirty money in the UK”, the Home Office introduced amendments to the UWO legislation, intended to “mitigate operational risks”. In reality, they remove valuable checks and balances against potential “overreaching” by the NCA.
Crucially, under the Economic Crime Transparency and Enforcement Bill 2022, costs orders against government agencies are capped for those successfully defending a UWO. This curbs the possibility of embarrassing and expensive losses for the NCA; in one major case the costs order amounted to £1.5 million.
This is an outrage since it encourages the NCA to brazenly slap UWOs on individuals without much fear of justified financial penalties. This is a momentous step against individuals’ property rights under English law.
In short, and much like its reactive approach to Tier One visas: rather than investing in improving the agencies to whom these powers are given, the Government has acted reactively and brought in changes which impinge on the rights of the many in order to target a few.
Tightening the shackles
The latest threat to private property is enshrined in the new Register of Overseas Entities, which provides details of the beneficial ownership of all overseas entities who own UK property, whether commercial or residential. The Register will be maintained at UK Companies House and will be publicly accessible.
In practice, there are myriad reasons why an individual or individuals would use an offshore company or structure for property ownership. However, the Johnson administration appears to be operating on the assumption that employing an offshore structure is bound to be nefarious and suspicious. Such a perception dramatically erodes individuals’ right to privacy since it allows prying journalists or the maliciously curious to delve into peoples’ private arrangements. Not only does this raise security issues for those individuals who do not want their personal data publicly available but it also ignores existing methods of obtaining the same information by those who have a legitimate interest. The British Virgin Islands, for example, have a beneficial ownership register as do Jersey and Guernsey. It simply is not available to all and sundry. And for good reason.
In a nutshell, the Johnson government has adopted a series of knee-jerk and questionable policies under the guise of taking a tough and robust stance on Russia. Yet, on examination, these policies and regulations award immense powers to officials and law enforcement officers who may easily be tempted to abuse these newly conferred powers in a misjudged move to seize private property. This is hardly the way to appeal to overseas investors and certainly one that runs roughshod over Britain’s hard-won reputation for integrity and the primacy of the rule of law. Global Britain’s brand must be one rooted in fair play and respect – these new Government sanctions and regulations run counter to this tradition.
______
Jessica Miller is the founder of Strela Advisory, a bespoke investigative consultancy for Corporate & Private Clients.
Keith Boyfield is Regulation Fellow at the Institute of Economic Affairs and the founder of Keith Boyfield Associates Ltd., a City of London-based consultancy.
When scrutinised, the proposed sanction regulations are poorly considered and purely reactive: they have been drafted in haste to appease public opinion. Yet these well-meaning sanction rules threaten to jeopardise our civil liberties. What is more, they fundamentally contradict in the message the UK government is so keen to convey about our role as an entrepreneurial hub open to investment capital from across the globe.
In truth, the new sanctions legislation shackles ‘Global Britain’ by deterring investment from our shores.
These new Johnsonian sanction rules massively add to the regulatory burden faced by investors. Even worse, they oblige honest and law-abiding individuals and enterprises to give away commercially sensitive information which might well impact on their personal security.
A blunderbuss approach
The cancellation of Tier One ‘Entrepreneur’ visas in February 2022 is a classic example of this contradiction. Tier One visas were issued to foreign nationals from across the globe who wanted to start a new business or join and invest in an existing business here in the UK. It has proved a popular scheme with Chinese nationals ranking as the main recipients with a 33% share.
However, concerns about ‘dodgy’ money – given greater prominence by the popular press – encouraged the Johnson government in a fit of crusading zeal to punish Russians – whether supporters or vocal critics of the Putin regime. And there are many in the Russian diaspora who fall into the second endangered category (remember all those Russians who have met an abrupt death in recent years).
In fact, the number of visas issued to Russian nationals has plummeted from a peak in 2014 to just 72 in 2021. Altogether, Russians accounted for 18% of investor Tier One visas issued between 2008 to 2021. So, the idea that Britain is overwhelmed by a horde of wealthy Russians is sheer fantasy.
But, more to the point, Boris’s bureaucracy has scrapped Tier One Visas entirely. This is to be regretted as it was a programme that attracted much needed sources of investment capital to our shores and generated many jobs. Crucially, no attempt was made to toughen the application process so as to weed out “dodgy” money. The government resorted to a flawed broad-brush approach. It reached for the blunderbuss.
The present Government’s own webpage claims that it is “Banging the drum for Global Britain as a lodestar of freedom and democracy, and for our strategic global relationships.” However, the principal way we can realistically reduce our dependence on Russian sources of energy is through reaching out to other oil-rich regimes. But many of them have been criticised for their lamentable human rights record. For instance, Boris Johnson has been obliged to go cap in hand to beg Mohammed bin Salman Al Saud, the effective ruler of Saudi Arabia, to increase oil production in the same month as the Kingdom executed 81 men in one day, setting a new record in recent times.
Bin Salman knows that Britain needs his help and support, so we find the UK having to modulate its ethical standards in order to mitigate soaring energy prices at home.
A threat to property rights
As part of the new sanctions regime, the Government has introduced legislation allowing it to detain any Russian-owned yachts or aircraft entering the UK. While this responds to a popular cry for action, bolstered by countless tabloid newspaper headlines, in practice these powers allow the government to detain someone’s property on the basis of citizenship. This does not apply solely to the property of sanctioned individuals, or vocal proponents of Putin’s regime, but in a blanket way to the property of Russian citizens.
Specifically, this legislation led to the detention of the superyacht Phi, valued at £38 million and moored at Canary Wharf, in April 2022. The National Crime Agency (NCA) issued a self-congratulatory press release and series of photographs taken on-board. Phi is indeed owned by a Russian – Mr Vitaly Vasilievich Kochetkov – yet as the Government itself later confirmed, his name was not on any UK sanctions list. Furthermore, he is also reported to be an EU citizen.
The clear danger illustrated by this case is this Government’s appetite ‘to be seen to be doing something’ and leading the way in a response to Russia’s aggression in Ukraine. It also highlights our politicians’ troubling desire for popular acclaim. But this zealotry risks riding roughshod over individual property rights citing owner’s nationality as due cause. That is a worrying precedent.
In January 2018, the Government introduced Unexplained Wealth Orders (UWO) as part of the Criminal Finances Act 2017. This gives several government agencies the powers to make a court application for a UWO which compels a respondent to explain how an asset valued at more than £50,000 was acquired. While introduced with much fanfare, this has become a little-used power, and pitched the NCA onto a battlefield where it has performed poorly.
UWO’s can lead to the application for a Civil Recovery Order (CRO) in the event that a satisfactory explanation cannot be provided for a source of wealth. However, significantly, none have been obtained since the end of 2019. Furthermore, of the nine so far issued several have been challenged and one expensively reversed following litigation in the courts. In short, the initiative has proved a shambles – but one that could threaten and deter high net worth individuals from coming to Britain.
Under the guise of targeting “Putin’s cronies hiding dirty money in the UK”, the Home Office introduced amendments to the UWO legislation, intended to “mitigate operational risks”. In reality, they remove valuable checks and balances against potential “overreaching” by the NCA.
Crucially, under the Economic Crime Transparency and Enforcement Bill 2022, costs orders against government agencies are capped for those successfully defending a UWO. This curbs the possibility of embarrassing and expensive losses for the NCA; in one major case the costs order amounted to £1.5 million.
This is an outrage since it encourages the NCA to brazenly slap UWOs on individuals without much fear of justified financial penalties. This is a momentous step against individuals’ property rights under English law.
In short, and much like its reactive approach to Tier One visas: rather than investing in improving the agencies to whom these powers are given, the Government has acted reactively and brought in changes which impinge on the rights of the many in order to target a few.
Tightening the shackles
The latest threat to private property is enshrined in the new Register of Overseas Entities, which provides details of the beneficial ownership of all overseas entities who own UK property, whether commercial or residential. The Register will be maintained at UK Companies House and will be publicly accessible.
In practice, there are myriad reasons why an individual or individuals would use an offshore company or structure for property ownership. However, the Johnson administration appears to be operating on the assumption that employing an offshore structure is bound to be nefarious and suspicious. Such a perception dramatically erodes individuals’ right to privacy since it allows prying journalists or the maliciously curious to delve into peoples’ private arrangements. Not only does this raise security issues for those individuals who do not want their personal data publicly available but it also ignores existing methods of obtaining the same information by those who have a legitimate interest. The British Virgin Islands, for example, have a beneficial ownership register as do Jersey and Guernsey. It simply is not available to all and sundry. And for good reason.
In a nutshell, the Johnson government has adopted a series of knee-jerk and questionable policies under the guise of taking a tough and robust stance on Russia. Yet, on examination, these policies and regulations award immense powers to officials and law enforcement officers who may easily be tempted to abuse these newly conferred powers in a misjudged move to seize private property. This is hardly the way to appeal to overseas investors and certainly one that runs roughshod over Britain’s hard-won reputation for integrity and the primacy of the rule of law. Global Britain’s brand must be one rooted in fair play and respect – these new Government sanctions and regulations run counter to this tradition.
______
Jessica Miller is the founder of Strela Advisory, a bespoke investigative consultancy for Corporate & Private Clients.
Keith Boyfield is Regulation Fellow at the Institute of Economic Affairs and the founder of Keith Boyfield Associates Ltd., a City of London-based consultancy.
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