Sanctions Designations & Challenges in the UK
Under SAMLA Section 1, the Secretary of State or the Treasury is empowered to make sanctions regulations in furtherance of a variety of foreign policy objectives, including national security, deterrence of human rights violations, and resolution of armed conflicts. Such regulations must prohibit specific parties from being designated unless an appropriate government Minister from the Foreign, Commonwealth and Development Office (“FCDO”) has “reasonable grounds to suspect” that the party is or has been involved in a specified harmful activity (or is owned or otherwise associated with a party who has been so involved). Before deeming an activity as sanctionable, the Minister must consider whether so doing is appropriate with respect to the objectives set forth in Section 1.
Per this framework, sanctions designations in the UK occur in a two-step process. First, sanctions regulations are created to broadly set forth the categories of parties who may be targeted for sanctions under those regulations. Second, the FCDO determines which parties and entities within those categories should actually be sanctioned.
For example, with respect to Russia, the Secretary of State exercised its powers under SAMLA by issuing the Russia (Sanctions) (EU Exit) Regulations 2019 (the “Russian Regulations”). These regulations broadly permit designation of any person or entity who is or has been involved in “destabilising Ukraine or undermining or threatening the territorial integrity, sovereignty or independence of Ukraine” or “obtaining a benefit from or supporting the Government of Russia.”
To challenge sanctions imposed under this provision, SAMLA requires the designee to first petition the FCDO to vary or revoke the designation. If that petition is unsuccessful, the designee can seek review of the FCDO’s refusal to vary or revoke before the High Court. In determining whether the FCDO’s decision should be set aside, SAMLA directs the court to “apply the principles applicable on an application for judicial review.”
Sanctions Designations & Challenges in the US
The equivalent legislation to SAMLA in the U.S. is the International Emergency Economic Powers Act (“IEEPA”), a law passed by Congress in the 1970s in response to the Iran hostage crisis. IEEPA grants the president far reaching powers “to deal with any unusual and extraordinary threat, which has as its source in whole or substantial part outside the United States, to the national security, foreign policy, or economy of the United States, if the President declares a national emergency with respect to such threat.” Such emergencies must be declared pursuant to the National Emergencies Act (“NEA”), another 1970s-era law. Once an emergency is declared, the President can, via Executive Order, block “any right, power, or privilege,” in “any property in which any foreign country or a national thereof has any interest by any person.”
In general, the Executive Orders authorize the Treasury Department’s Office of Foreign Assets Control (“OFAC”) or the State Department to impose sanctions on specific entities, individuals, countries, and/or industrial sectors. The Executive Order issued by President Biden in 2021 response to Russia’s occupation of Crimea, for example, permits OFAC to designate anyone determined to be “responsible or complicit in” a range of activities for the benefit of Russia’s government, including “activities that undermine the peace, security, political stability, or territorial integrity of the United States, its allies or its partners.”
Challenges to sanctions designations are governed by OFAC regulation, 31 C.F.R. § 501.807. Per this regulation, a designated party “may submit arguments or evidence that the person believes establishes that insufficient basis exists for the designation” or “propose remedial steps . . . which the [party] believes would negate the basis for the designation.” If OFAC is unpersuaded by the designee’s arguments, the designee has the right to appeal the decision in federal court. Alternatively, the designee or “any other person suffering legal wrong” because of an OFAC designation can directly seek court review of that action without first presenting a challenge to OFAC.
LLC Synesis v. FCDO
LLC Synesis is a Belarussian technology company that produces software for use in transport logistics, artificial intelligence, and public security systems. Among its products is the “Kipod” video surveillance system that allows users to identify individuals caught on camera through facial recognition. In December 2020, Synesis was designated by the FCDO on the basis that it had sold Kipod to Belarus’s Ministry of Internal Affairs which, according to the FCDO, “enhance[d] the capacity of the Lukashenko regime to carry out human rights violations and repress civil society.”
Synesis applied for Ministerial review of its designation in January 2022, arguing that the FCDO’s basis for designation was “wrong, having been founded on vague, unsubstantiated and incorrect assertions.” After further investigation into the underlying evidence, the FCDO rejected the company’s challenge and concluded that Kipod had indeed been used by Belarus to “track down civil society and pro-democracy activists, in order to repress them.” Synesis then brought proceedings in the High Court under SAMLA Section 38(2), which allows a designee to ask that an FCDO refusal to vary or revoke a designation be set aside.
As the first such case brought before the court, the parties disagreed on the appropriate standard of review. Synesis argued that the High Court needed to make its own independent assessment of the evidence to determine whether there were in fact “reasonable grounds” to suspect that Synesis was involved in anti-democratic activities. This position relied on the judgment in Secretary of State for the Home Department v MB [2006] EWCA Civ 1140, a pre-Brexit case considering the propriety of a control order issued by the Secretary of State against a suspected terrorist. In that case, Lord Phillips concluded that “Whether there are reasonable grounds for suspicion is an objective question of fact. We cannot see how the court can review the decision of the Secretary of State without itself deciding whether the facts relied upon by the Secretary of State amount to reasonable grounds for suspecting that the subject of the control order is or has been involved in terrorism-related activity.”
Finding that MB could not be reconciled with the more recent decisions in QX v. Secretary of State for the Home Department [2022] EWCA Civ 2022 and R (Begum) v Special Immigration Appeals Commission [2021] UKSC 7, Mr. Justice Jay found that the High Court “cannot stand in the shoes of the [FCDO] when conducting this review exercise under section 38 of SAMLA.” Rather, its role is limited to examining whether the FCDO’s decision “was either based on no evidence or was irrational.” As such, Mr. Justice Jay applied the Wednesbury test, which requires government decisions to be set aside only to the extent they are based on irrelevant facts, a failure to consider relevant facts, or are otherwise unreasonable. Noting that the Wednesbury standard contains a degree of flexibility, Mr. Justice Jay accepted the FCDO’s argument that government decisionmakers should be given additional leeway in the sanctions context since it involves “the making of expert judgments in an area of governmental policy.”
In other words, Mr. Justice Jay concluded that the Russian Regulations’ “criterion of ‘reasonable grounds to suspect’ does not import a standard of proof. What it requires is an evaluation or assessment of all the available material information which the Court, if asked to do so, will review applying well-established principles.” Viewed through this lens, he found that Synesis’ “submissions [fell] a long way short of demonstrating a Wednesbury error.”
Van Loon v. Dep’t of Treasury
Tornado Cash is a provider of so-called “cryptocurrency mixing” services, which, according to the U.S. government, can be used “to obscure the source or owner of a particular cryptocurrency units, thereby allowing user to remain anonymous.” In August 2022, OFAC designated Tornado Cash pursuant to Executive Order 13694, issued by President Obama in 2015 to target “malicious cyber-enabled activities originating from . . . outside the United States,” and Executive Order 13722, which targeted those determined to have materially supported the Government of North Korea. In the accompanying press release, OFAC stated that Tornado Cash had been used by illicit actors to launder funds, including hundreds of millions of dollars for the Lazarus Group, a notorious North Korean state-sponsored hacking group.
In September 2022, a group of Tornado Cash users sued OFAC in federal court in Texas, arguing among other things, that OFAC had violated the Administrative Procedure Act (“APA”) and exceeded its authority under IEEPA on the basis that Tornado Cash was merely decentralized software and therefore not a sanctionable “person” and had no cognizable property interest in the cryptocurrency transferred through it. OFAC disputed both points and argued that the designation was lawful.
The parties crossed-moved for summary judgment. Noting that federal law (5 U.S.C. § 706) allows agency action to be set aside only if it is “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with the law,” “contrary to constitutional right,” or in “excess of statutory jurisdiction,” the District Court stated that it was bound by OFAC’s findings “if those findings are supported by substantial evidence on the administrative record as a whole.”
As to the standard of review to be employed in this exercise, the District Court stated that since the Tornado Cash designation involved matters of national security, OFAC’s action should receive “an even greater degree of deference than the Chevron standard and must prevail unless plainly inconsistent with the regulation.” In Chevron, the Supreme Court ruled that a court reviewing agency action “may not substitute its own construction of a statutory provision for a reasonable interpretation made by the administrator of an agency.”
Assessing the administrative record under this standard, the District Court rejected the plaintiffs’ claim that OFAC’s designation of Tornado Cash exceeded its powers under IEEPA, the relevant Executive Orders, or OFAC’s regulations promulgated thereunder. Specifically, the District Court found that OFAC’s interpretation of the term “person” to apply to Tornado Cash was reasonable and that the agency properly determined that Tornado Cash had an “interest in” the cryptocurrency flowing via its software network. Accordingly, the District Court granted summary judgment in favor of OFAC and allowed the designation to remain in place.
Comparing Synesis to Van Loon
The key takeaway from the Synesis and Van Loon decisions is the same: challenges to sanctions designations face long odds of success in both the U.S. and UK in light of the broad statutory authority granted to the FCDO and OFAC and the significant deference given to these agencies by receiving courts. To succeed in having a designation set aside, petitioners in America and Britain must establish that the government has acted capriciously under Chevron or irrationally under Wednesbury. Although employing slightly different verbiage, these standards appear to be effectively the same. Moreover, American and British courts agree that the only evidence the court can consider in a judicial review proceeding is the record underlying the agency action (and not extrinsic evidence).
Nevertheless, there is daylight between the legal procedures governing sanctions challenges in both countries. For example, in the U.S., any person affected by a sanction designation can seek judicial review whereas, in the UK, only the designee can do so. Further, U.S. federal law permits judicial review without the complaining party first seeking administrative review to OFAC. In contrast, SAMLA only allows judicial review once the FCDO has considered and rejected a designation challenge.
To date, there have been no instances in which a sanctioned party has successfully removed the designation through the judicial review process in one country but not the other. Yet, as sanctions continue to be a cornerstone of Western foreign policy and designees continue to mount challenges to FCDO and OFAC decisions, it remains to be seen whether the caselaw governing legal review of such decisions stays aligned or begins to diverge.
