Sanctions and Monetary Obligations


A. Introduction


B. Sanctions and International Law


C. International Sanctions


D. EU Sanctions


E. UK Sanctions


F. Foreign Sanctions


G. ‘Long Arm’ Jurisdiction and Monetary Assets


A. Introduction


The preceding chapters in this Part have demonstrated that a State has the right to impose exchange controls to limit the outward flow of money, and that the existence of such controls is entitled to a degree of international recognition.


The present chapter will consider economic sanctions which, likewise, States may seek to impose restrictions on outward transfers.1 They do, however, differ from exchange controls in terms of their extent. A legitimate system of exchange controls applies as against foreign countries generally, and is designed for the protection of the domestic economy of the imposing State. In contrast, economic sanctions are generally designed to harm the economy of another State.2 The expression ‘economic sanctions’ has been well defined3 as ‘measures of an economic—as contrasted with diplomatic or military—character taken by States to express disapproval of the acts of the target State or to induce that State to change some policy or practice or even its governmental structure’.4


In general terms, sanctions will usually involve a ‘freeze’ over the assets of the target State, to the extent that such assets are held within the State or States which impose the sanctions concerned.5 In a monetary context, this will mean that debtors resident in the imposing State will be barred from making payments which are otherwise due to the target State or to companies or individuals resident within it. Thus, so long as the sanctions regime remains in place, a bank branch situate within the imposing State will be unable to repay deposits or operate accounts for the benefit of the target State or any of its residents. The present chapter will proceed on the assumption that the relevant sanctions operate in the manner just described.


In line with the approach adopted in relation to exchange control, it is necessary to enquire whether the imposition of financial sanctions is consistent with international law. It is also necessary to consider the precise consequences of sanctions for domestic monetary obligations, and the extent to which a sanctions regime adopted by a foreign State is capable of recognition and application in English proceedings.


In order to cover this ground, it is proposed to consider the following matters:

(a) the consistency of a sanctions regime with international law;

(b) the effect of sanctions adopted by supranational organizations;

(c) the effect of sanctions imposed by the European Union;

(d) the effect of sanctions unilaterally imposed by the United Kingdom; and

(e) the status of foreign sanctions before the English courts.

B. Sanctions and International Law


In view of the definition of ‘sanctions’ provided at paragraph 17.02, it is apparent that measures of this kind are deliberately intended to harm the financial interests of the target State and its residents. As that definition contemplates, sanctions may even be intended to impel a country to change its entire political system.6 In view of this coercive element, it is necessary to ask whether the imposition of sanctions is consistent with international law. It must not be forgotten that every State has the right to select and to organize its own political and economic structures; this right is an attribute of the sovereignty and independence of the State.7 As a result, no State has the right to intervene in the internal affairs of another State with a view to securing changes to its political ideology or outlook.8 How, then, can the imposition of economic sanctions for political ends be reconciled with these principles?


The answer lies in the undoubted rule that an intervention into the internal affairs of another State only contravenes international law if it is ‘forcible or dictatorial or otherwise coercive’, such that the target State is effectively deprived of its sovereign rights over the subject matter in question.9 It seems to be accepted that a decision to terminate trading relations or to impose an economic embargo does not meet this threshold test, and thus cannot be taken to be contrary to customary international law.10 Furthermore the imposition of a sanctions regime could not in any event contravene the rules of customary law, if it constitutes a proportionate response to an international wrong committed by the target State itself.11


For the purposes of this chapter, and so far as rules of customary international law are concerned, it is thus necessary to rest upon the broad principle that the imposition of financial and economic sanctions will not amount to an international wrong by the imposing State.12 As will always be the case, however, the general rules of customary international law must yield in the face of treaty engagements to the contrary.13 Apart from any specific bilateral arrangements, two multilateral treaties merit specific mention in this context.


First of all, the Treaty on the Functioning of the European Union broadly prohibits national restrictions which would impede the free movement of capital and payments as between Member States.14 Consequently, and regardless of any general principle of international law, no Member State could unilaterally impose economic sanctions against another Member State in a manner which contravenes the relevant treaty provisions.


Secondly, economic sanctions are, by their very nature, discriminatory; by their very purpose, they are designed to treat the target State or members of its government less favourably than others with which the imposing State maintains cordial relations. As will be seen elsewhere,15 the ‘most favoured nation’ provision in Article 1 of the General Agreement on Tariffs and Trade (GATT) prohibits discriminatory arrangements both in relation to imports and exports16 and in relation to the international transfer of payments relating thereto. Likewise, Article XI prohibits quantitative restrictions on trade, and the application of economic sanctions would frequently be inconsistent with that Article. Nevertheless, the point appears to have been taken only rarely, no doubt for political reasons17 and partly because of explicit exemptions provided by the Agreement. Article 21(b) allows that a State may, without thereby contravening GATT, take ‘any action which it considers necessary for the protection of its essential security interests … taken in time of war or other emergency, in international relations’. Clearly, any action taken in reliance of this provision should be motivated by considerations of foreign policy, rather than commercial protectionism, but the provision has proved to be difficult to apply in practice.18 Furthermore, Article 21(c) confirms that a State will not breach the Agreement if it joins in action taken pursuant to the UN Charter with a view to the preservation of international peace and security.


As noted at paragraph 17.07, the discussion must accordingly rest on the assumption that the imposition of economic sanctions for foreign policy reasons does not infringe customary international law; it must also rest on the assumption that such sanctions are not inconsistent with any treaty obligation of the imposing State.

C. International Sanctions


On the plane of international law, sanctions may be imposed against a State under the terms of the Charter of the United Nations. Briefly, Articles 39 and 40 of the Charter allow the Security Council to make recommendations or binding decisions to deal with any act of aggression or threat to international peace and security. Article 41 then provides:

The Security Council may decide what measures not involving the use of armed force19 are to be employed to give effect to its decisions, and it may call upon the Members of the United Nations to apply such measures. These may include complete or partial interruption of economic relations and of rail, sea, air, postal, telegraphic, radio and other means of communication, and the severance of diplomatic relations.


Article 41 thus directly contemplates the use of economic sanctions as a means of maintaining or restoring international peace and security. Any sanctions applied against a State in compliance with the Charter plainly could not be regarded as a contravention of any rule of customary international law.20 It is, however, unnecessary to pursue this point in depth because the preceding section has already concluded that the imposition of sanctions for foreign policy reasons does not generally offend international law. But it is necessary to consider the consequences of a Security Council decision in the context of private monetary obligations.


The status of the rules of international law in proceedings before the English courts is a matter of some difficulty and debate.21 Nevertheless, it seems clear that a Security Council decision to impose sanctions cannot of itself affect the content or enforceability of monetary obligations before the English courts; rules of international law cannot be applied so as to defeat existing contractual rights of a private or commercial character.22 A domestic government with constitutional arrangements similar to those applicable in the United Kingdom thus cannot take steps to implement sanctions at a domestic level unless and until the necessary local legislation has been put in place for that purpose.23


In most cases, however, this point will be of no more than theoretical interest. As noted at paragraph 17.12, the United Kingdom is under an obligation to give effect to the resolutions of the Security Council in this type of case; it will do so by means of secondary legislation introduced under the terms of the United Nations Act 1946.24 In such a case, the sanctions regime forms a part of the English domestic law, and must naturally be applied by courts sitting in this country.25


In an international law context, it will sometimes become necessary to reconcile treaty obligations which may apparently conflict with each other. In the present case, there may be some friction between an obligation to impose sanctions and an obligation to ensure the free movement of capital and payments; a treaty obligation of the latter kind is created by Articles 63 to 66, TFEU.26 In that instance, however, the conflict is resolved by Article 351, TFEU, which contains a ‘saving’ for obligations under pre-existing treaties, such as the UN Charter.27 As a result, a person resident in the ‘target’ country could not demand repayment of a frozen bank deposit in London on the grounds that the free movement of his capital is guaranteed by the TFEU; to the extent to which any such guarantee could be said to exist, it would have been overridden by the United Kingdom’s domestic legislation implementing the UN sanctions.


Equally, on occasion, there may be a conflict between the international obligation to impose sanctions and some provision of domestic law. So far as international law is concerned, the position is clear; a State cannot rely on its domestic laws as a ground for non-compliance with an international obligation. So far as domestic courts are concerned, there would usually be no obligation to give effect to the international obligation, especially where the State has deliberately elected to pass legislation which is inconsistent with that obligation.28

D. EU Sanctions


The Council of the European Union may adopt a decision under Chapter 2 of Title V of the TEU in the context of the Union’s Common Foreign Policy and Security Policy. If any such decision ‘provides for the interruption or reduction, in part or completely, of economic and financial relations with one or more third countries, the Council … shall adopt the necessary measures’. Those measures may apply against any person or entity but must include appropriate legal safeguards.29