A Strengthened Trade Sanctions Enforcement Landscape

On 12 September 2024, the UK Government introduced long-anticipated secondary legislation establishing the enforcement powers of the new UK trade sanctions civil enforcement body, the Office of Trade Sanctions Implementation (OTSI) and introducing new trade sanctions reporting requirements for certain entities, including those in the financial and legal sectors.

The publication of The Trade, Aircraft and Shipping Sanctions (Civil Enforcement) Regulations 2024 (TASS) was accompanied by:

• statutory guidance on the measures;
• an explanatory memorandum; and
• a new collection of guidance on OTSI's remit and intended approach to UK trade sanctions enforcement.

Separately, TASS also enhances the government's powers to investigate and enforce against breaches of shipping and aviation sanctions. These powers will fall within the remit of the Department for Transport (DfT), which has also published new guidance outlining its new approach.

The measures come into force on 10 October 2024.

 

OTSI and TASS – what you need to know

TASS and the creation of OTSI fundamentally change the landscape for investigation and enforcement of trade sanctions in the UK by strengthening the UK Government's powers to take action in response to breaches and potential breaches of UK trade sanctions.

Here are nine key features of the new regime:

1. OTSI is a brand-new authority. For the first time, there will be an enforcement authority in the UK charged with pursuing civil investigations and enforcement action for breaches of a wide range of UK trade sanctions. As outlined in its guidance, OTSI's remit will largely be the identification and enforcement of sanctions breaches that do not involve goods or technology crossing the UK's borders. This could, for example, include investigation and enforcement of breaches of professional services bans, or of the provision of technical assistance in relation to sanctioned goods located outside the UK.


2. OTSI's creation is not a political development. It was announced under the prior UK Government in December 2023 and its remit, as implemented through TASS, broadly echoes the priorities for OTSI that have been in the public domain since that time.


3. OTSI will complement, not replace, HMRC. OTSI and its portfolio of powers plug a perceived gap in the UK's sanctions enforcement capability. Previously, enforcement of trade sanctions in the UK sat with HM Revenue and Customs (HMRC). HMRC has (and continues to have) enforcement powers in relation to the import and export of controlled goods and technology across UK borders and the enforcement of the UK's strategic export controls in respect of military and dual-use goods and technology. HMRC will retain its prior capabilities, including its criminal enforcement capability in relation to all UK trade sanctions and export controls. How OTSI and HMRC work together in practice will be a key area to watch.


4. OTSI will impose penalties on a strict liability basis. OTSI, like the UK's civil financial sanctions enforcement authority, the Office of Financial Sanctions Implementation (OFSI), now has the power to take civil enforcement action on an effectively strict liability basis, without regard to whether a person knew or had reasonable cause to suspect its activities were in breach of trade sanctions. Here, OTSI has arguably gone a step further than OFSI, stating in guidance that it will assess “most” breaches of trade sanctions on a strict liability basis.


5. OTSI and OFSI have similar enforcement powers, including a “name and shame” power. OTSI's civil enforcement powers broadly mirror those of OFSI. The quantum of civil monetary penalties that OTSI has the authority to impose (the higher of 50% of the value of the breach or GBP1 milion) mirror the quantum available to OFSI. Like OFSI, OTSI also has the authority to resolve a finding of breach with a range of outcomes other than a civil penalty, including a warning letter, a “name and shame” public announcement and referral to a professional or conduct regulator. HMRC's compound settlements for breaches of UK trade sanctions and export controls will continue to be issued on a confidential basis i.e. the company subject to the enforcement action will not be named in the public domain.


6. Directors are personally liable for trade sanctions breaches. Again mirroring powers available to OFSI, TASS authorises OTSI to impose a monetary penalty, personally, on any “director, manager, secretary or other similar officer” of an entity that has breached sanctions, where that breach is attributable to the relevant individual's neglect or was committed with their consent or connivance. This penalty may be imposed in addition to any penalty imposed on the entity itself. This effective expansion of personal liability for corporate conduct amplifies a broader trend in the UK of corporate liability reforms imposing responsibility for an entity's affairs on a broader group of senior individuals than was traditionally the case under English law, such as the separate reform to the “directing mind and will” principle implemented under the Economic Crime and Corporate Transparency Act 2024.


7. “Relevant persons”, including financial institutions, must report trade sanctions breaches to OTSI. TASS imposes a new requirement on regulated financial firms to report to OTSI certain information that gives them knowledge or reasonable cause to suspect a breach of trade sanctions has occurred. This is a sweeping new requirement. If implemented by firms in a similar manner to UK financial sanctions reporting requirements, this obligation will materially expand the volume and quality of information about potential trade sanctions violations provided to enforcement authorities.


8. OTSI is readying itself to investigate. The Explanatory Memorandum makes clear that the UK government is focusing closely on trade sanctions investigations and enforcement. For example, TASS grants OTSI broad new powers to demand information, and OTSI guidance suggests it has given thought to how it may deploy this power, listing specific types of documents it may ask for. OTSI's new powers also include the power to share information obtained through such demands with other parties, reinforcing the trend towards a “matrix model” of sanctions enforcement in the UK that suggests a high level of collaboration and communication within and across a range of authorities. OTSI is also taking steps to encourage self-disclosure, by offering a 50% discount on penalties for self-reporting or for timely mandatory disclosure.


9. OTSI will respect legal privilege, but will challenge blanket assertions. The statutory guidance accompanying TASS makes clear that “reporting obligations and requests for information do not apply to information to which legal professional privilege is attached”. However, the statutory guidance also emphasises how important it is to “carefully ascertain whether legal privilege applies” and flags that OTSI “may challenge a blanket assertion of legal professional privilege where it is not satisfied that such careful consideration has been made”. The list of documents OTSI may ask for includes several categories of documents such as “due diligence reports” and “risk assessments” which may be less likely to be protected under the UK's legal professional privilege than under the law of other common law jurisdictions such as the US.

 

What should you do now?

TASS and the establishment of OTSI represents a significant strengthening of a UK's trade sanctions enforcement framework.

Looking ahead to 10 October, we offer four key questions for senior executives, legal counsel and compliance teams to ask themselves and their organisations, to test their readiness for the new regime.

1. Is your organisation a “relevant person”? If so, it will have mandatory reporting obligations starting on 10 October 2024. Although OTSI guidance states that “relevant persons” are not required to follow any particular methods or systems in conducting due diligence to identify reportable breaches of trade sanctions, organisations may wish to review their existing methods or systems for identifying and tracking potential trade sanctions issues closely and assess whether they are proportionate to satisfy their obligations, and OTSI's expectations.


2. Is your organisation “investigation ready”? OTSI appears prepared to issue information requests and to have clear expectations about what it expects from organisations in return. Organisations may wish to review the list of documents OTSI “might” request (here) and consider where these documents are located or which teams might have access to them. OTSI now has broader powers to investigate and take enforcement action. Depending on your organisation's risk profile, it may also be appropriate to consider broader investigation readiness steps such as considering who and what teams hold responsibility for managing sanctions enquiries and how potential trade sanctions issues are reported and tracked.


3. Do your teams understand legal professional privilege? It is clear that OTSI will respect legal professional privilege, provided there are no blanket assertions. It may be an appropriate moment to take a fresh look at privilege protocols and refresh training for teams more likely to handle information requests or reporting obligations.


4. Is your trade sanctions compliance programme up to date? Taken together, the changes discussed in this alert alter the landscape for trade sanctions enforcement in the UK: reporting obligations on entities including financial institutions, a strict liability enforcement regime, strong incentives for self-reporting potential breaches and a new enforcement authority with a new mandate. We recommend organisations take a fresh look at internal policies and procedures governing trade sanctions risk assessment and compliance, including policies and procedures addressing responses to allegations of trade sanctions breaches, in light of these developments.

If you would like to further explore trade sanctions risk and compliance and how TASS and OTSI may affect your organisation, please contact Chloe Barker, Katie Palms, Daniel Jones, Lydia Rogers or Gaurav Kapoor in our UK Trade and Government Affairs team.