Operating Parameters for the UK Office of Trade Sanctions Implementation Are Finally Announced

It has been nine months since the creation of the UK Office of Trade Sanctions Implementation (OTSI) was announced, as a sister regulator to the Office of Financial Sanctions Implementation (OFSI), dealing with trade sanctions breaches. However, it has only been in recent weeks that the parameters for the operation of OTSI have been made public, with the Trade, Aircraft and Shipping Sanctions (Civil Enforcement) Regulations 2024 (TASS) being laid before Parliament. We now know that beginning October 10, 2024, OTSI will have civil powers to enforce breaches of certain UK trade sanctions.

To accompany TASS, the government has published statutory guidance, an explanatory memorandum, and further guidance on how trade sanctions will be enforced by OTSI. The impression given by these documents is that the intention behind OTSI will be to mirror OFSI in its business engagement and enforcement actions.

The updated approach by the UK is in part aligned with the commitment to support Ukraine, as set out in a joint statement issued last week from representatives of the United States, Australia, Canada, New Zealand, and the United Kingdom governments, following U.S. Secretary of State Antony Blinken’s visit to the UK. Among other foreign policy concerns, the U.S. and UK reiterated their intention to assist Ukraine, restrict Russian revenues, and put pressure on Russia’s war machine.

Following the enactment of TASS, OTSI will be the new civil enforcer for trade sanctions, while His Majesty’s Revenue and Customs will retain the responsibility for criminal prosecution of any breaches of trade sanctions, with the National Crime Agency retaining responsibility for the criminal enforcement of aircraft and shipping sanctions.

As a civil enforcer, OTSI will be able to impose monetary penalties based on the civil standard of proof, which establishes liability on the balance of probabilities. The financial penalty available to OTSI matches that of OFSI, allowing OTSI to impose fines per breach of up to the value of the greater of £1 million or 50% of the estimated value of the breach or failure to comply with trade sanctions.

As with OFSI, OTSI will have powers to resolve matters in a number of ways, including by issuing warning letters or publishing information about breaches, whether with or without an accompanying fine. This will allow OTSI to constructively engage with business on potential breaches and ultimately determine how to manage breaches which are not so egregious as to require substantial fines.

It has also been made clear that OTSI will be able to take into account various factors, in a similar way to OFSI, when determining fines. This can include consideration of timely voluntary disclosure of a suspected breach, levels of cooperation with OTSI, a prior record of compliance with trade sanctions, and good internal compliance systems intended to manage sanctions risks within the relevant business.

Another important factor in the ability of OTSI to impose civil penalties on those breaching trade sanctions, is that TASS also introduced effective strict liability for breaches, by removing the defense of a person not knowing or not having a reasonable cause to suspect that an offense is being committed. As such, there is no need for OTSI to prove that a person knew or should have known that they were committing a breach, and instead the fact of a breach is sufficient for civil liability to be imposed.

TASS has also introduced further reporting obligations for relevant persons under the sanctions legislation, including those in the financial services, legal, and money services sectors. This requires such relevant persons to report suspicions of breaches of trade sanctions by third parties and mirrors the reporting obligations that already apply to financial sanctions, with failure to comply with these reporting obligations giving rise to criminal liability and a potential penalty of up to six months in prison or a fine.

These OTSI powers will come into force on October 10, 2024, and businesses must be ready to adapt to a climate of increasing and easier trade sanctions enforcement. It is clear that the UK government is focused on sanctions enforcement more broadly, and while it may take some time for OTSI to bring enforcement actions under these new powers, it is clearly just a matter of time before OTSI shows its teeth with respect to trade sanctions enforcement. Companies should review their trade sanctions risks and compliance policies and procedures to ensure that they are complying with trade sanctions and to demonstrate the work they are doing to maintain such a position.

© Arnold & Porter Kaye Scholer LLP 2024 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.