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

Baroness Kramer Excerpts

Monday 17th October 2022 Lords Chamber

[Viscount Waverley (CB)]

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?

[Baroness Kramer (LD)]

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?

--- Later in debate ---

[Lord Goldsmith of Richmond Park (Con)]

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.

[Baroness Kramer (LD)]

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.

[Lord Goldsmith of Richmond Park (Con)]

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.