On 11 December 2023, the UK Government announced the creation of a new trade sanctions unit. The Office of Trade Sanctions Implementation or "OTSI" will be responsible for the civil enforcement of the UK trade sanctions regime, including investigating potential breaches and issuing civil penalties, says Sophie Law, senior associate at London-headquartered global law firm Ashurst.
According to the official press release, OTSI will also be charged with helping businesses comply with trade sanctions.
The Department for Business and Trade (DBT) is responsible for implementing trade sanctions and its Export Control Joint Unit (ECJU) has overall responsibility for trade sanctions licensing.
Breach of UK trade sanctions is a criminal offence, and enforcement has historically rested with HMRC. HMRC can refer cases to the Crown Prosecution Service (CPS) for a potential criminal prosecution, or issue administrative (or "compound") penalties to settle an investigation that would otherwise be referred to the CPS.
HMRC will retain its ability to take criminal enforcement action: OTSI (which will be part of DBT) will be able to refer cases to HMRC where needed. However, the introduction of OTSI will mean that there is an additional option for enforcement of trade sanctions, namely the imposition of civil penalties.
The detail of OTSI's powers in this respect is yet to be published - new legislation is expected in 2024. However, those drafting the legislation may take inspiration from the powers which the UK's financial sanctions authority, the Office of Financial Sanctions Implementation (OFSI), already has in respect of financial sanctions breaches. OFSI can impose a civil monetary penalty of up to £1 million or 50 per cent of the value of the relevant funds or resources (whichever is greater) if it is satisfied, on the balance of probabilities (i.e. the civil standard of proof), that a breach has occurred.
The establishment of OTSI is consistent with the UK Government's increased focus on trade sanctions, as well as on sanctions evasion and circumvention, in particular trade sanctions targeting Russia. Statements from the G7 indicate an international focus on evasion and circumvention, and a number of recent UK publications have highlighted trade sanctions circumvention/evasion typologies, as well as lists of "high risk" battlefield/military items.
Recent UK sanctions packages have introduced new measures restricting trade in Russian metals and diamonds, as well as expanding existing trade restrictions in areas such as luxury goods. The UK Government estimates that over £20 billion of UK-Russia goods trade is now sanctioned and that goods imports from Russia are down 94% in the year following the Ukraine invasion.
Banks and other financial institutions have, for obvious reasons, traditionally focussed their sanctions efforts on financial sanctions rather than trade sanctions.
However, the vast majority of the UK's trade sanctions are accompanied by an associated prohibition on the provision of "financial services or funds" in respect of the relevant goods or technology. This brings trade finance activities squarely into scope. According to the WTO, 80-90 per cent of world trade relies on trade finance. This places those financial institutions in an unenviable position when it comes to sanctions compliance.
Trade transactions are complex. They involve multiple parties and most are international. Financial institutions deal with documents and funds; they are not involved in the transport or delivery of the underlying physical goods. Effective screening of transactions, which is often conducted under significant time pressure, requires experienced individuals who are able to review and digest vast quantities of complex information to identify red flags.
The unprecedented increase in the volume and complexity of new Russian trade sanctions since February 2022, and the speed at which they were introduced, will have increased the compliance burden on financial institutions involved in trade finance exponentially. The introduction of a new unit within the Government with a specific mandate to provide guidance to business and support compliance in this area may be welcome news to those financial institutions.
However, any sanctions regime is only as good as its enforcement. Minister Nusrat Ghani has stated that the introduction of OTSI will be a "game-changer" for the UK and "key in the Government’s delivery of its Economic Deterrence Initiative", which was announced in March last year.
As part of this initiative, the Government said that an extra £50 million in funding would be made available to improve enforcement of the UK’s sanctions regime.
For OTSI to be effective, it will firstly need to be staffed. There is doubtless significant expertise already within DBT, and more widely within Government, in particular the Foreign, Commonwealth & Development Office (which is responsible for overall UK policy on sanctions) and the Department for International Trade.
However, more personnel will almost certainly be required. Sanctions, and in particular trade sanctions, is a highly technical area. We understand that the market for sanctions professionals is currently very tight given the intensified sanctions focus for many industries since February 2022.
The UK has traditionally lagged behind its ally, the US, in sanctions enforcement activity: OFSI has increased its headcount significantly since February 2022 but has taken only three enforcement actions in that same period (only one of which relates to Russia). Although the creation of OTSI will increase the UK Government's capacity to take enforcement action against those who breach trade sanctions, if it follows in OFSI's footsteps it may be some time before we see any marked increase in public enforcement activity.
Nevertheless, financial institutions should use this as a reminder to review their trade-related policies and controls to ensure that they are robust and effective.
By Sophie Law, senior associate at Ashurst
