Part 3 of the Economic Crime Act 2022 introduces strict liability financial penalties for sanctions breaches
UK & Europe
On 11 December 2023, the UK Government announced the creation of a new trade sanctions body, the Office of Trade Sanctions Implementation (OTSI)*. OTSI will sit alongside the Office of Financial Sanctions Implementation (OFSI), the body responsible for financial sanctions civil enforcement which was established in 2016.
OTSI will sit within the UK Department for Business and Trade (DBT). The new body will have responsibility for civil enforcement of trade sanctions – including Russia-related trade sanctions – as well as the issuing of civil monetary penalties, provision of trade sanctions guidance, engaging with businesses, monitoring of compliance, and investigating suspected trade sanctions breaches1.
At present, HM Revenue & Customs (HMRC) is responsible for trade sanctions enforcement which is limited to criminal penalties. There is no mechanism in place to enforce civil breaches of UK trade sanctions. Once OTSI is created, criminal enforcement of trade sanctions will remain with HMRC and OTSI will refer cases to HMRC where appropriate (much like OFSI can refer financial sanctions breaches to law enforcement agencies to consider prosecution).
There is no mention of any remit over licencing activities in the Government’s announcement on OTSI, so it is not clear whether the new body will take over responsibility for authorising activity which would otherwise be prohibited by UK trade sanctions. Currently, licensing applications are submitted to the DBT’s Export Control Joint Unit (ECJU).
Insurers may be hopeful that OTSI does eventually have remit over trade sanctions licencing (as OFSI does in relation to financial sanctions), and that the application system becomes more suited to those seeking trade sanctions licences from the financial services sector, including (re)insurers and brokers.
The new body is currently in “set-up phase” and is expected to be launched in early 2024 once its “new legal powers are in force”2. Any queries relating to the establishment of OTSI can be submitted to DBT-OTSI@businessandtrade.gov.uk, however, for the time being trade sanctions queries should be raised with the usual channels.
The announcement on OTSI’s creation highlights that it will be responsible for investigating “activity by companies who may be avoiding sanctions by sending products through other countries”.
Circumvention has been consistently raised as an issue following the imposition of sanctions against Russia from the UK and EU, with countries like Kazakhstan, Kyrgyzstan and Armenia reportedly being used to circumvent sanctions restrictions, such as those on dual-use goods3. We can expect that this will be a key priority of OTSI once it is fully set up.
OTSI has been set up to “strengthen enforcement and clamp down on companies dodging Russian sanctions”, according to the DBT4. It is therefore likely that enforcement activity with regards to trade sanctions will increase, particularly as the standard for liability changes from criminal to civil, i.e. from “beyond reasonable doubt” to “on the balance of probabilities”.
Although HMRC does not often release details of penalties imposed for trade sanctions breaches, enforcement activity announced earlier this month provides some indication of the UK’s approach. On 1 December 2023, HMRC announced that it had issued compound settlement offers to three UK exporters totalling in excess of £77,000 for unlicensed exports of dual use goods and related activity controlled by The Export Control Order 2008 and a breach of The Russia (Sanctions) (EU Exit) Regulations 20195.
As the UK continues to introduce new Russia-related trade restrictions – with the latest legislation introduced on 15 December 2023, The Russia (Sanctions) (EU Exit) (Amendment) (No. 4) Regulations 20236 – Russia-related sanctions are likely to remain a key focus of HMRC, and of OTSI once it is created.
The details of exactly how OTSI will operate, and the powers which it will have, are yet to be announced. One key potential development to watch out for is whether OTSI will have the power to impose civil monetary penalties on a strict liability basis for trade sanctions breaches. Such powers were introduced for OFSI from June last year (see our article here).
While we await further details on OTSI’s powers and approach to enforcement, it is clear that trade sanctions compliance has become an increased area of focus for the UK Government.