The UK's newly announced Office of Trade Sanctions Implementation: what is it and how does it affect your business?

Yesterday (11 December 2023), the UK’s Minister for Industry and Economic Security, Nusrat Ghani, announced the creation of a new unit responsible for the civil enforcement of the UK’s trade sanctions, described as the Office of Trade Sanctions Implementation (OTSI).

The announcement states that OTSI’s remit will include helping businesses comply with trade sanctions and investigate potential breaches, issuing civil penalties and referring cases to His Majesty’s Revenue and Customs (HMRC) for criminal enforcement where needed. OTSI’s remit will include civil enforcement of UK trade sanctions targeting Russia but will not be Russia-specific; it will also be responsible for civil enforcement of UK trade sanctions under other regimes and targeting other jurisdictions.

 

Why is OTSI noteworthy?

The creation of OTSI reflects an important departure from the UK’s historical approach to the enforcement of trade sanctions in at least two significant respects:

1. Currently, breaches of trade sanctions in the UK are subject exclusively to criminal enforcement by HMRC. Although HMRC has the authority to levy civil compound penalties on companies in lieu of prosecution, they can only do so where a breach is first established to a criminal standard. There is not currently a mechanism for purely civil enforcement of UK trade sanctions. That will change once OTSI is established.
   
   
2. OTSI will be a completely new body which will work alongside and supplement (but not replace) HMRC in the enforcement of trade sanctions. The Government’s press release notes that OTSI will "reinforce existing work the government does to ensure UK trade sanctions are adhered to”. Despite this sign of continuity, it does not appear that OTSI will form part of or report to HMRC, which traditionally has had exclusive conduct of the investigation and enforcement of trade sanctions breaches. Rather, the fact the announcement comes from the Minister for Industry and Economic Security suggests that OTSI may be under her remit. Further details on where OTSI will sit and the framework in which it will operate are expected in the coming months with the Government stating that OTSI will be launched early next year “once the new legal requirements are in place”.

 

Will OTSI focus on Russia?

The press release notes OTSI will not exclusively have conduct of Russia-related matters. However, it equally makes clear that a desire by the UK Government to strengthen enforcement against companies and individuals circumventing the UK’s extensive programme of Russia trade sanctions is closely linked to and likely driving this development. For example, Minister Ghani’s comments state that the establishment of OTSI aims to help “starv[e] Russia of the technologies and revenues it needs to continue its illegal invasion”. By contrast, to date, HMRC has not been especially prominent or public in its enforcement of the most recent Russia trade sanctions imposed since 2022 (although HMRC has briefly announced two compound penalties which do appear to be linked to breaches of these Russia trade sanctions (see here)).

 

Will OTSI be like OFSI?

OTSI’s exact powers and approach will become clearer in the weeks and months ahead. In one important respect, however, the announced creation of OTSI will bring the model of trade sanctions enforcement in the UK more in line with the model of financial sanctions enforcement in the UK: the division of labour between civil and criminal enforcement. In the area of UK financial sanctions, there is already a dedicated unit responsible for the civil administration and enforcement of financial sanctions – the Office for Financial Sanctions Implementation (OFSI) – which is separate from the authorities with conduct to investigate and/or prosecute criminal breaches – the National Crime Agency (NCA) and the Crown Prosecution Service (CPS).

We will be watching closely to see what OTSI’s role and remit will be once further details on the unit are published. In particular, we will be watching whether its approach to enforcement will broadly mirror OFSI’s approach to enforcement, or whether there will be material differences. One area to closely monitor is whether OTSI will have powers similar to those which OFSI obtained for the first time last June, i.e. to impose civil fines on a strict liability basis and to ‘name and shame’ persons found to have violated sanctions even in circumstances where a financial penalty is deemed disproportionately harsh.

• In relation to the potential for OTSI to enforce on a strict liability basis, although there are not currently provisions in UK sanctions which enable this, there are provisions in the recent Economic Crime and Corporate Transparency Act 2023 (the Act) which (once in force) will authorise Ministers to make regulations authorising the imposition of monetary penalties for breaches of sanctions on a strict liability basis. We will be watching to see if implementing regulations for this part of the Act will be introduced at the same time as or ahead of any further measures authorising the creation of OTSI.
  
  
• In relation to the ‘name and shame’ power, there is currently a contrast between the level of detail published by OFSI about its enforcement actions and the more limited information HMRC currently discloses about its compound penalty decisions. We will be watching to see whether OTSI will have expanded powers to publish additional details about companies and entities which have been determined to have breached sanctions.

More generally, it will be interesting to see whether OTSI copies OFSI in other ways, for example in issuing guidance and engaging with industry. The press release could be read to suggest that OTSI will have a more open approach to communications in that it will be "helping businesses comply with trade sanctions”.

 

What should I do now?

The creation of OTSI is a significant development in UK trade sanctions and has the potential to significantly change the UK enforcement landscape. Compliance professionals, in-house legal teams and others with responsibility for sanctions compliance should:

1. watch for when OTSI is formally launched in “early” 2024;
   
   
2. continue to make prevention and detection of Russia trade sanctions circumvention an area of compliance focus in 2024. As noted in our previous article, there are a number of signals in the UK (and beyond) that competent authorities and regulators are focusing on this area and intend to take a more aggressive approach on enforcement; and 
   
   
3. take appropriate steps to assess your UK trade sanctions risks, taking into account:
• the jurisdictions you are selling to/through, particularly those where there is a higher identified risk in guidance of diversion of these products to Russia. Although jurisdictions of potential concern may change, the UK Government red alert published last week identified entities in Belarus, China, Serbia, Turkey, the UAE and Uzbekistan as continuing to support Russia’s war;
• your customers, taking appropriate steps to make sure your KYC and vetting procedures are up to date and calibrated to account for Russia risk; and
• your internal policies and procedures, to ensure your business and staff are aware of and can spot key red-flags that might indicate particular transactions/customers pose a higher trade sanctions and/or circumvention risk.

 

How can we help?

DLA Piper’s Trade & Government Affairs team has extensive experience assisting companies in developing robust internal sanctions compliance procedures, undertaking due diligence to ensure financial and trade sanctions are not breached; and responding to investigations and enforcement action.

Please do not hesitate to contact us.