On 12 September 2024, the UK government published The Trade, Aircraft and Shipping Sanctions (Civil Enforcement) Regulations 2024 (Regulations) which, among other things, set out the powers of the new Office of Trade Sanctions Implementation (OTSI), the long-awaited agency that will have responsibility for the civil enforcement of most of the UK’s trade sanctions.1 OTSI, which will sit within the UK Department for Business and Trade, will commence operations on 10 October 2024, when the Regulations come into force.2
OTSI will have powers similar to those of its financial sanctions counterpart, the Office of Financial Sanctions Implementation (OFSI). Importantly, the Regulations create new reporting obligations, including for banks and certain financial services companies.
OTSI Enforcement Powers
Civil Penalties
The Regulations grant OTSI the power to issue civil fines for breaches of trade sanctions.3 The trade sanctions covered by this new civil enforcement regime include:
- Providing or procuring sanctioned services (for example professional services such as accounting, and IT consultancy and design services).
- Moving, making available or acquiring sanctioned goods outside the UK.
- Transferring, making available or acquiring sanctioned technology outside the UK.
- Providing ancillary services to the movement, making available or acquisition of sanctioned goods outside the UK.
- Providing ancillary services to the transfer, making available or acquisition of sanctioned technology outside of the UK.
OTSI will have powers to investigate and enforce breaches related to these activities, including in respect of circumvention of the UK’s trade sanctions and failing to comply with information requests and reporting, licensing and recordkeeping requirements. This responsibility is currently held by His Majesty’s Revenue and Customs (HMRC), which will retain responsibility for the criminal enforcement of trade sanctions.
Where it is possible to estimate the value of the breach, the permitted maximum fine will be the greater of: (i) £1 million, or (ii) 50% of the estimated value of the breach.4 Where the value of the breach cannot be estimated, the permitted maximum fine is £1 million. This mirrors OFSI’s power to impose monetary penalties for breaches of financial sanctions.
Following on from the changes to the UK’s financial sanctions regime in June 2022,5 OTSI, like OFSI, will determine breaches of trade sanctions on a strict liability basis. This means that a person’s intent, knowledge or suspicion of a trade sanctions breach is irrelevant to whether OTSI can impose a civil penalty.
OTSI will impose penalties on the civil standard of proof (the balance of probabilities) and will also have the power to publish information about a breach of sanctions, both where a civil monetary penalty has been imposed and where one could have been.6 This mirrors the expanded powers granted to OFSI in June 2022,7 which allow that agency to publicly name a person who has breached sanctions, even where no other formal action has been taken against them.
A penalty can be imposed against both a natural and legal person. Where a corporate has committed an offence under the Regulations, and (i) it occurs with the consent or connivance of any director, manager, secretary or other similar officer, or any person purporting to act in such a capacity, or (ii) is attributable to the neglect on the part of any such person, a penalty can also be imposed on that individual. Since the introduction of the Economic Crime and Corporate Transparency Act 2023, the misconduct of a “senior manager” can also give rise to liability for the corporation. See our 26 February 2024 client alert “Economic Crime and Corporate Transparency Act 2023 – Key Developments”.
Information Powers
The Regulations also include extensive information gathering powers for OTSI to investigate suspected breaches of UK trade sanctions.8
OTSI will be empowered to require a person to provide information that it reasonably requires for the purpose of (i) performing its functions, (ii) monitoring compliance with, or detecting the evasion of, UK trade sanctions, or (iii) investigating a suspected breach of a prohibition or failure to comply with an obligation under UK trade sanctions.9
OTSI’s information gathering powers extend to document requests. OTSI will be permitted to (i) take copies of or extracts from any document produced and (ii) request the person producing the document to provide an explanation of it (including a present or past partner, employee or officer). Where OTSI makes a document request, the recipient must “take reasonable steps to obtain the documents (if they are not already in the person’s possession or control)” and keep the materials under their possession or control.
Given the litigation in the English courts regarding the territorial jurisdiction of similar powers in the context of anti-corruption investigations,10 it remains to be seen how expansively OTSI will seek to interpret these powers. However, since the Regulations expressly permit OTSI to pursue a breach of an offence under the Regulations that takes place entirely outside of the UK, we expect OTSI to take a broad view of its powers and enforcement remit.
The Regulations do not mandate a time limit for responding to such a request and instead permit OTSI the flexibility to impose such a deadline. Similar information gathering powers are available to OTSI in connection with activity performed under UK trade licences.
It is an offence for a person to not comply with an information request made by OTSI under the Regulations. This includes, (i) without reasonable excuse, refusing or failing to comply with a request within the time and manner specified, (ii) knowingly or recklessly giving false information, (iii) destroying, mutilating, defacing, concealing or removing any document within scope of the request, or (iv) otherwise intentionally obstructing the exercise of the powers under the Regulations.
A person who fails to comply with the information request could be liable in England and Wales to a term of imprisonment for up to six months, an unlimited fine, or both.
Reporting Requirement
In a provision that will be significant for banks and some financial services firms, the Regulations also introduce a mandatory obligation on certain “relevant persons,”11 including providers of legal and financial services, to report actual or suspected breaches of trade, aircraft and shipping sanctions to OTSI.12 Again, in England and Wales, a failure to report is a criminal offence, with a maximum penalty of a term of imprisonment for up to six months, an unlimited fine, or both.
OTSI’s Approach to Enforcement
The UK government has published guidance to accompany the Regulations (Guidance) that sets out how OTSI will assess potential breaches and details the potential outcomes once OTSI has determined that a breach has occurred.
According to the Guidance, the following are the potential outcomes to an investigation:
- A warning letter (which can include a continuing obligation to keep OTSI informed about certain information, such as the improvement of due diligence processes.
- Referral to an organisation’s regulator.
- Referral to other organisations, as relevant (e.g., Companies House, which has the power to remove a person as a company director, or the Insolvency Service).
- Public disclosure.
- A civil monetary penalty.
- Referral to HMRC, where OTSI feels that HMRC’s criminal enforcement powers, including referral for prosecution, are more appropriate.13
The public disclosure of trade sanctions violations will be in marked contrast to HMRC’s approach to date, which has been to maintain the confidentiality of the parties to enforcement actions.
The Guidance also outlines a number of mitigating factors that OTSI will consider in determining the enforcement action to take once a breach has been established, including:
- Timely voluntary disclosure of the suspected breach by the person or business responsible (which, the Guidance notes, could lead to a reduction in civil monetary penalty of up to 50%).
- Timely mandatory disclosure of the suspected breach by a provider of legal or financial services14
- Compliance with requests for information that OTSI may send out to reporters of suspected breaches during their investigations.
- Compliance with any relevant recordkeeping obligations under UK sanctions regulations.
- No record of previously having breached sanctions legislation.
- Good knowledge of trade sanctions and relevant compliance systems proportionate to the size, exposure to sanctions and resources of the business.
The Guidance is less prescriptive and detailed than the equivalent OFSI guidance. For example, OTSI’s Guidance gives the agency greater latitude to determine the level of the fines that it will issue in the future.
Key Points
The creation of OTSI is a clear signal of intent that the UK government is focused on enforcing breaches of the UK’s trade sanctions. This is consistent with the position of the EU and the US governments, which are also seeking to prevent the circumvention of trade sanctions and export controls related to Russia, including through overseas third parties. In this respect, OTSI will build on enforcement work of the HMRC, which announced in May 2024 that seven UK exporters had agreed to pay a total of over £2.3 million in fines between January and March 2024 for violations involving unlicensed exports of certain military and dual-use goods.
Given OTSI’s focus and the new strict liability regime, we can expect more enforcement, particularly in relation to the provision of services and where the relevant activities take place wholly outside of the territory of the UK.
Companies and individuals subject to the UK’s sanctions will need to consider their conduct accordingly. In particular, they will need to review, and where necessary enhance, their compliance policies and procedures if they do not sufficiently cover the UK’s trade sanctions. Not only will robust compliance procedures help to ensure that violations do not occur, but, where they do, they will be considered a mitigating factor by OTSI when considering enforcement action. “Relevant persons” will also need to ensure that they have incorporated their new reporting obligations into their existing policies and procedures.
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1 See our 22 January 2024 alert “UK Announces Creation of New Trade Sanctions Enforcement Agency and Introduces Further Sanctions Against Russia” for a discussion of the UK government’s announcement of the creation of OTSI.
2 This client alert is for informational purposes only and does not constitute legal advice. Complex assessments often have to be made as to which sanctions regime applies in any given instance, given the multinational touch points of many entities and individuals. In that regard, given the complex and dynamic nature of these sanctions regimes, there may be developments not captured in this summary. Moreover, while the summary was accurate when written, it may become inaccurate over time given developments. For all of these reasons, you should consult with a qualified attorney before making any judgments relating to sanctions, as there are potentially severe consequences for failing to adhere fully to sanctions restrictions.
3 There are some exceptions to this jurisdiction, including:
- Sanctions on the maritime transportation of certain oil and oil products in the UK’s Russia sanctions regime (which are subject to OFSI’s civil enforcement powers).
- Sanctions on the provision of internet services in the UK’s Russia and Belarus sanctions regimes (which are subject to OFCOM’s civil enforcement powers).
- Certain trade sanctions that either fall within HMRC’s enforcement remit as the UK’s customs authority or because enforcement of the trade measures is reserved to HMRC within sanctions regulations, such as sanctions in relation to import and export of goods into and out of the UK.
- Aircraft and shipping sanctions, which will be administered by the Department for Transport (DfT). See the DfT’s “Guidance: Transport Sanctions: Civil Monetary Penalties.”
4 See Regulations 9 and 10 of the Regulations. A similar position applies in relation to sanctions breaches concerning aircraft and shipping-related sanctions. However, in those cases the “estimated value” will be the value of the aircraft or the ship at the time of the breach.
5 Section 54 of the Economic Crime (Transparency and Enforcement) Act 2022, which came into force on 15 June 2022, introduced a strict liability test for civil monetary penalties arising from sanctions breaches in the UK. Previously, a person could only be liable for a sanctions breach if they “knew” or had “reasonable grounds to suspect” that their activity was in breach of sanctions laws.
6 See Regulation 13 of the Regulations. The same position applies in relation to aircraft and shipping sanctions.
7 These powers were introduced by virtue of section 56 of the Economic Crime (Transparency and Enforcement) Act 2022, which came into force on 15 June 2022.
8 The DfT will be similarly empowered in relation to the UK’s aircraft and shipping sanctions.
9 See Regulation 17.
10 See R (on the application of KBR Inc) v. the Director of the Serious Fraud Office (2021) UKSC 2.
11 See Regulation 15(4) and 16 of the Regulations. A “relevant person” for the purposes of the trade sanctions is: (i) a person that has permission under Part 4A of the Financial Services and Markets Act 2000(8) to carry on one or more regulated activities (permission to carry on a regulated activity); (ii) an undertaking that by way of business (a) operates a currency exchange office, (b) transmits money (or any representation of monetary value) by any means, or (c) cashes cheques that are payable to customers; and (iii) a firm or sole practitioner that provides legal or notarial services to other persons, by way of business. For aircraft and shipping sanctions, a “relevant person” includes airport operators, pilots, harbour authorities and ship masters.
12 See ibid. at Regulations 15 and 16. The Regulations make clear that an information request cannot require the production of privileged information.
13 An explanatory memorandum to the Regulations confirms that criminal enforcement of non-compliance with trade sanctions will remain the responsibility of HMRC, while the National Crime Agency will lead on criminal breaches of aircraft and shipping sanctions.
14 As noted above, pursuant to Regulation 15 of the Regulations, as “relevant persons,” providers of legal or financial services will now be obligated to report suspected breaches of trade sanctions to OTSI.
This memorandum is provided by Skadden, Arps, Slate, Meagher & Flom LLP and its affiliates for educational and informational purposes only and is not intended and should not be construed as legal advice. This memorandum is considered advertising under applicable state laws.