UK government introduces new trade sanctions enforcement unit

The UK government has announced the creation of the Office of Trade Sanctions Implementation (“OTSI”) in a bid to strengthen its stance against companies evading trade sanctions.

Scheduled for an early 2024 launch, the new unit is designed to increase compliance with trade sanctions in the context of the Russia-Ukraine conflict. Its powers will, however, span the entire UK trade sanctions framework, and not just those imposed on Russia/Ukraine, so any businesses with a global reach should be aware of the changes and act now to prepare.

Tougher penalties for trade sanctions evasion

Like its financial sanctions counterpart OFSI (the Office of Financial Sanctions Implementation), OTSI will have powers to issue civil penalties for trade sanctions breaches, including against companies attempting to circumvent Russian sanctions, and to refer cases to HMRC for criminal enforcement.

Currently, breaches of trade sanctions are enforced by either the Export Control Joint Unit (ECJU) or HMRC, which also has powers to issue compound penalties and/or report a matter for prosecution. However, there have been limited reported compound penalties for trade sanctions breaches in recent years, and the creation of OTSI is expected to result in more cases being investigated and higher penalties being imposed.

Impact of sanctions

Part of the new unit’s role will be to investigate the use of third countries for sanctions avoidance. Further sanctions against Russia are due to come into force shortly in an effort to address this, and several entities in Belarus, China, Serbia, Turkey, the UAE, and Uzbekistan are now covered due to their support for the regime. Since the conflict started in March 2022, Russian imports to the UK have decreased 94% from the year prior. These new targets include military, weapons, and defence suppliers and vessels operators, as well as those providing sanctioned western electronics. This follows further measures introduced in November imposed against gold and oil networks supporting the war in Ukraine, aimed at addressing the funding these resources contribute to the Russian economy. More than 1,800 individuals, companies, and groups have now been sanctioned in connection with the conflict, including oligarchs with a combined net worth of £145bn at the time the conflict started. It is estimated that sanctions have cost Russia $400bn to date.

The UK, in collaboration with international partners, has implemented an unprecedented series of sanctions against a major economy. With £20 billion of UK-Russia goods now under sanction, evidence shows a significant decline in trade, bringing it down to historic lows.

Further updates

The detail of OTSI’s powers are still to be announced, but there are several key questions which it is anticipated that OTSI guidance will address. These include: maximum penalties and how they will be calculated; whether or not companies will be credited for voluntary disclosures or if there will be any incentives or benefits for any companies that do come forward to disclose violations; the division of responsibilities between HMRC and the OTSI; and whether the OTSI will follow the current confidential approach of compounding penalties imposed by HMRC or if there will be a shift towards more publicised measures. Its counterpart OFSI has issued several civil penalties since it was given power to do so and has also used its power of disclosure to publish the identity of parties who have breached financial sanctions, and it is reasonable to expect that OTSI will follow suit.

Elsewhere, the EU and US are also ramping up their efforts to cut off Russia’s funding, with 250 further individuals and entities sanctioned by Washington this week focusing, like the UK, on sanctions evasion, energy, banking, metals, and mining. The EU, meanwhile, has a new target in non-industrial Russian diamonds, and is taking further measures against Russian oil. A renewed focus on electronics and dual-use items is identifiable in all these recent updates, but the EU has not taken steps expected by many against oil tankers being sold to Russia, requiring only that such sales are reported, not prohibited. However, in a significant compliance step, the counterparties of EU companies will be required to sign contracts prohibiting re-export to Russia, and a phased transition is expected for existing contracts. UK businesses trading with EU entities could be required to sign up to these requirements.

Now is the time to ensure your policies and processes are up to date and to stress test existing sanctions compliance programmes. If you are reviewing your own processes, taking on a new business, or responding to a potential breach, get in touch with our health, safety and corporate crime team for support.