The Protection Of Sovereignty Act: A Compliance Risk For Banks And Money Remittance Agencies

The Protection of Sovereignty Act, 2026 (the "Act") was recently assented to by the President. The Act was published in the Uganda Gazette on 22 May 2026.

The Act requires banks and money remittance agencies (collectively referred to in the Act as "supervised institutions", defined as persons licensed under an Act of Parliament to facilitate the cross-border transfer of money) to report foreign funding (section 25 of the Act).

This alert analyses the reporting obligation imposed on supervised institutions, addresses the difficulty of identifying an "agent of a foreigner", and warns of the impossibility of compliance in the absence of implementing regulations.

The statutory definition of "agent of a foreigner"

Understanding the section 25 obligation requires a firm grasp of the statutory definition of "agent of a foreigner", which serves as the gateway concept for the entire Act.

Under the Act, an "agent of a foreigner" is defined as a person who engages in political activities whilst being financed or subsidised by a foreigner.

Two points are of critical importance for supervised institutions. First, the definition is anchored to political activities: ordinary commercial transactions, trade finance, diaspora remittances, and lawful financial services do not fall within scope and therefore do not give rise to an "agent of a foreigner" relationship.

Second, the Act expressly exempts monies or funding received from a foreigner by a supervised institution, or any person regulated under an Act of Parliament, for the purposes of meeting its regulatory requirements or undertaking its commercial, licensed, or permitted activities. The Act further exempts lawful foreign direct investment, portfolio investment, diaspora remittances, export proceeds, trade finance, commercial loans, humanitarian assistance, technical assistance, grants, concessional financing, development assistance, and any other lawful foreign exchange inflow or outflow.

In essence, commercial enterprises operating in the ordinary course of business would not be affected by this legislation.

The section 25 obligation on supervised institutions: reporting of foreign funding

Section 25(1) of the Act provides that a supervised institution shall not pay out any money to an agent of a foreigner unless the agent of a foreigner has first: (a) declared the source of funds; and (b) submitted proof of the declaration of funds required under section 22(1) (sic).

Section 25(2) further requires a supervised institution to submit a monthly report to the relevant regulator relating to any funds transferred to an agent of a foreigner through the supervised institution, in accordance with regulations to be prescribed by the relevant regulator.

A supervised institution that contravenes section 25(1) commits an offence and is liable, on conviction, to a fine not exceeding UGX 4 billion. Notably, this is a strict liability offence, meaning that there is no requirement to prove intention. A bank cannot successfully claim that it was unaware of the status of its customer. It is significant that, whilst several other offences in the Bill were amended to require proof of intention, this offence was not.

An agent of a foreigner who receives foreign funding without declaring it also commits an offence under section 21, but the penalty for that offence is only UGX 1,440,000. There is a clear lack of proportionality between the penalties imposed on supervised institutions and those imposed on the agents themselves.

In substance, section 25 imposes a gatekeeping function on banks and money remittance agencies: they are required to ensure that no funds are paid out to an agent of a foreigner unless the requisite declaration and proof have been obtained, and they must report such transfers to the Bank of Uganda monthly.

The difficulty: identifying an agent of a foreigner

It must first be appreciated that supervised institutions deal both with customers who hold accounts with them and with occasional customers who may require only a single transaction, such as receiving money by wire transfer.

Furthermore, according to the Bank of Uganda, cross-border payments last year accounted for USD 1.5 billion across 16 million transactions, with 93% of transactions being under UGX 1,800,000.

The principal practical difficulty with section 25 is that it presupposes that a supervised institution can determine whether a given customer is an "agent of a foreigner" within the meaning of the Act. In practice, this determination is fraught with difficulty.

No public register of agents of foreigners currently exists. The registration regime established under the Act depends on the promulgation of regulations by the Minister, which have not yet been made. There is accordingly no list of any sort that a bank or remittance agency may consult. The Act does not prescribe any mechanism, procedure, or guidance by which a supervised institution may determine whether a customer falls within the statutory definition.

In the case of obvious political actors, such as registered political parties, known political organisations, or entities that publicly represent foreign interests before Government, the identification exercise is manageable, if imperfect. A bank presented with a transaction involving known political actors can reasonably be expected to request the section 25 declaration and proof before effecting payment. However, a customer's engagement in political activities at the behest of a foreigner may not be publicly known or readily ascertainable, and the bank will have no practical basis upon which to make the relevant determination with confidence.

A further challenge lies in the operational difficulty of implementing the gatekeeping function within automated banking systems that are not designed to accommodate the bespoke, status-based screening that section 25 contemplates. What occurs when payments are processed straight-through, credited immediately to the customer’s account with no manual intervention required? Should the receiving bank block the recipient’s account until the agent question is resolved? This is a further area in which implementing regulations are urgently needed, and in which industry engagement with the Minister and the Bank of Uganda will be essential.

Interim risk mitigation measures

As demonstrated above, full compliance with section 25 is, in practical terms, impossible in the absence of a public register or prescribed mechanism for identifying agents of foreigners or indeed given the current state of banking technology.

The strict liability nature of the offence means that even good faith efforts to comply will not constitute a defence if a supervised institution unknowingly pays out to an unregistered agent of a foreigner. Nonetheless, supervised institutions may wish to adopt the following layered framework as interim risk mitigation measures. Whilst these measures cannot guarantee protection from liability, they may assist in demonstrating good faith, supporting any mitigation of sentence argument, and positioning the institution favourably in the event of regulatory engagement or constitutional litigation.

First, institutions should leverage their existing customer due diligence infrastructure under the Anti-Money Laundering Act, which the Act itself cross-references. The know-your-customer, source-of-funds verification, and ongoing monitoring procedures already maintained under anti-money laundering legislation provide a natural foundation for identifying customers whose activities may fall within the scope of the Act.

Second, institutions should develop internal risk indicators to flag customers whose profile suggests possible engagement in political activities at the direction or financing of a foreigner. Relevant indicators might include receipt of substantial cross-border transfers from foreign governments, foreign political entities, or foreign organisations with a political advocacy mandate; stated business purposes relating to policy influence, electoral activity, or public mobilisation against Government policy; and any customer self-identification as an agent of a foreigner, or evidence of registration under the Act.

Third, institutions should take full advantage of the exemptions under the Act. Most transactions processed by a bank or remittance agency will fall within these exemptions, relating as they do to regulated commercial activities, diaspora remittances, trade finance, foreign direct investment, and other lawful capital flows. Compliance officers should be trained to recognise that the section 25 obligation is not engaged by these categories of transactions.

Fourth, institutions should establish internal reporting workflows to capture and collate any transactions that do engage the section 25 obligation, with a view to meeting the monthly reporting requirement to the relevant regulator under section 25(2).

The declaration practice: a practical and legal assessment

A question that has been raised in the industry is whether banks and money remittance agencies should require their customers to sign a declaration confirming that they are not "agents of foreigners" and are not using received funds for political activities as defined under section 2(2) of the Act. This would be analogous to the manner in which some banks obtain declarations on the marital status or literacy of individual borrowers. This section offers a practical and legal assessment of that approach.

There is no provision in the Act that prohibits a supervised institution from requesting such a declaration from its customers. The Act is silent on the mechanism by which a supervised institution is to satisfy itself as to a customer's status. In the absence of implementing regulations prescribing a specific procedure, there is accordingly no legal impediment to a supervised institution developing its own interim declaration form as a matter of internal compliance policy.

Such a declaration practice has several advantages. It provides the supervised institution with a documented basis for having taken reasonable steps to ascertain the status of the customer. It places the customer on notice of the Act and the nature of the prohibited activities. It creates an evidentiary record that may be relied upon in the event of a subsequent regulatory inquiry or prosecution, demonstrating that the institution did not knowingly or recklessly pay out funds to an unregistered agent of a foreigner. In the absence of a public register or regulatory guidance, a self-declaration mechanism represents a pragmatic and proportionate compliance measure.

There are, however, certain risks and limitations that must be acknowledged. Foremost among these is that the offence of paying out to an agent of a foreigner without obtaining a declaration of the source of funding is a strict liability offence. No defence is available once the offence is committed. The measures suggested could, at best, go to mitigation of sentence.

A further difficulty is that a customer who is in fact an agent of a foreigner may sign a false declaration. The Act criminalises the making of false or misleading statements for the purposes of declarations under the Act, with a penalty of up to UGX 1,440,000 or imprisonment for a term not exceeding five years, or both, a penalty that appears disproportionately low relative to the exposure faced by supervised institutions. Whilst this provides some deterrent effect, it does not eliminate the risk that a supervised institution may unknowingly rely on a false declaration and subsequently face a severe penalty. It is therefore important that the declaration practice be adopted as one element of a broader compliance framework, rather than as a standalone measure.

Further consideration is whether the declaration, by expressly referencing political activities, might create discomfort or resistance among customers who perceive it as intrusive. This is a reputational and client-relationship risk that each institution must weigh against the compliance benefit. In our view, the risk is manageable if the declaration is framed in neutral, compliance-oriented language and is presented as a standard regulatory requirement applicable to all customers, rather than as a targeted enquiry directed at specific individuals.

On balance, a customer self-declaration confirming that the customer is not an agent of a foreigner and is not using received funds for political activities as defined in the Act represents a prudent interim measure in the current regulatory environment. It is consistent with the Act, but it must be clearly understood that it does not constitute a defence to the strict liability offence under section 25(1). At best, such measures may go to mitigation of sentence or demonstrate good faith in the context of regulatory engagement.

Commencement and regulations

As at the date of this alert, the Act has been assented to by the President but has not yet been published in the Uganda Gazette. Upon publication, the Act will take immediate effect, and the section 25 obligations will become legally binding on all supervised institutions.

No implementing regulations have been made under the Act. The Minister is empowered to make regulations for the further implementation of the Act, and such regulations are to be laid before Parliament for information. Until regulations are promulgated, supervised institutions must comply with the Act's primary obligations without the benefit of detailed procedural guidance on matters such as the form of the section 25 declaration, the content of the monthly reports required under section 25(2), and the procedure for registration of agents of foreigners under Part III of the Act.

We would encourage all banks and money remittance agencies to begin reviewing their internal procedures, developing interim declaration forms and reporting workflows, and engaging proactively with the Bank of Uganda and the Financial Intelligence Authority in anticipation of the Act's commencement, particularly where transactions involve occasional customers require manual intervention rather than straight-through processing. Such engagement should include advocacy for implementing regulations that provide supervised institutions with a workable mechanism for identifying agents of foreigners, without which the section 25 obligation remains, in practical terms, impossible to discharge.

The case for constitutional challenge

The analysis above demonstrates that section 25 of the Act imposes a strict liability offence on supervised institutions in circumstances where compliance is, as a practical matter, impossible. No public register of agents of foreigners exists. No mechanism is prescribed by which a supervised institution may determine whether a customer falls within the statutory definition. Many customers whose activities may engage the Act will not be readily identifiable as such. Automated payment systems are not designed to accommodate the bespoke, status-based screening that section 25 contemplates. Yet the penalty for contravention is severe, up to UGX 4 billion, and no defence of due diligence, good faith, or reasonable steps is available.

In these circumstances, serious consideration should be given to a constitutional challenge to section 25 by supervised institutions, whether individually or through industry associations. Several grounds may be available.

First, the requirement to comply with an obligation that is impossible to discharge may offend the rule of law and the principle of legality enshrined in the Constitution. A law that penalises conduct which the regulated person has no practical means of avoiding is arbitrary and unjust.

Second, the imposition of strict criminal liability in circumstances where compliance is impossible, coupled with a penalty of up to UGX 4 billion, may constitute a disproportionate interference with the right to property and the right to a fair hearing under the Constitution. The absence of any defence, even one of due diligence or reasonable steps, exacerbates this concern.

Third, the vagueness of the statutory definition of “agent of a foreigner”, which depends on the customer’s engagement in “political activities” at the financing of a foreigner, neither of which may be ascertainable by a supervised institution, may render the provision void for uncertainty. A penal provision must be sufficiently clear and precise to enable the regulated person to know, with reasonable certainty, what conduct is prohibited.

Fourth, the gross disparity between the penalty imposed on supervised institutions (up to UGX 4 billion) and the penalty imposed on agents of foreigners who fail to declare their funding (UGX 1,440,000) raises questions of equal treatment and proportionality. The principal wrongdoer faces a fraction of the penalty imposed on the gatekeeper who, through no fault of its own, may be unable to identify the wrongdoer. By way of analogy, consider a scenario in which a thief breaks into a house and makes away with valuables. Both the watchman and the thief are eventually apprehended, tried, and convicted. Yet it is the watchman who receives the harsher punishment, not the thief.

A successful constitutional challenge could result in section 25 being declared void or in the Court reading down the provision to require, at minimum, proof of knowledge or recklessness, or to provide a defence of due diligence. Either outcome would significantly improve the legal position of supervised institutions.

These sector-specific concerns are of course secondary to the underlying fundamental objections to the whole sovereignty law, namely that under the Constitution, all power belongs to the people, all power and authority is derived from the people, all public office is held in trust for the people, the people exercise their sovereignty in accordance with the Constitution and are ruled only by their will and consent. A law that purports to curtail the exercise of the people’s sovereignty inverts the whole concept of sovereignty, subjecting it to executive control. Such law is patently unconstitutional and has no place on our statute books.

We would strongly encourage supervised institutions to engage with industry associations and their legal counsel to assess the merits and strategy of such a challenge. Given the severity of the penalties and the impossibility of compliance, a constitutional challenge may represent the most effective means of protecting the industry’s legitimate interests.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.