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The UK government is readying the launch of a trade sanctions enforcement unit, vowing to impose “tougher penalties” on British businesses it finds trading restricted goods and services with Russia.   

The Office of Trade Sanctions Implementation (OTSI) is slated to start operations in early 2024 and will support the national tax, payments and customs authority, HM Revenue and Customs, in enforcing restrictions on Russian trade.   

The move comes amid broader UK government efforts to stop the Russian military from acquiring dual-use technology and machinery products, and to hamper its ability to export commercial goods for profit.   

“We are leaving no stone unturned in our commitment to stopping Putin’s war machine. That means clamping down on sanctions evaders and starving Russia of the technologies and revenues it needs to continue its illegal invasion,” says the UK’s Minister for Industry and Economic Security, Nusrat Ghani.   

OTSI will be responsible for civil enforcement of trade sanctions and is expected to refer certain cases to HMRC for criminal investigations, while at the same time helping British businesses to comply.    

The Department for Business and Trade has warned that companies founding to be “dodging strict trade sanctions, including those imposed since the war in Ukraine, will face tougher penalties” once OTSI is launched.   

“We will provide further detail on the maximum penalties OTSI will be able to impose at a later date,” a UK government spokesperson tells GTR.    

As part of its remit, OTSI will investigate attempts to dodge trade sanctions by sending products through third countries in order to disguise the ultimate buyer in the supply chain.   

This form of sanctions evasion has become a particular area of concern since accusations Russia has been routing trade through ex-Soviet nations as well as China and Hong Kong.   

A Department for Business and Trade spokesperson declined to comment when asked the expected staff size of the agency.   

Goods worth US$20bn traded between the UK and Russia in 2021 are now being captured by sanctions, including electronics, metals, chemicals, luxury goods and jet fuel, the government says.  

 

A new OFSI? 

The announcement comes amid growing concern over enforcement of trade sanctions compared to their financial sector equivalent, with the latter covered by the Office of Financial Sanctions Implementation (OFSI) since 2016.   

Anna Bradshaw, a partner at law firm Peters & Peters, says there has been a “real disconnect” between trade and financial sanctions policing.  

The HMRC tends to resolve trade sanctions cases in a civil manner through so-called compound settlements, which are usually worth “thousands of pounds, rather than millions,” Bradshaw tells GTR.  

“Unlike OFSI… the HMRC does not disclose your name, nor the circumstances of the breach, so the reputational damage is better contained,” she adds.   

“It is really difficult to justify a completely different approach for trade sanctions when you compare it to the approach taken to financial sanctions, which for better or worse, is the exact opposite.”   

It is now three years since OFSI’s first major enforcement action, a £20.4mn fine handed to Standard Chartered for breaching restrictions on loans to Russian financial institutions.  

But critics argue the creation of OTSI will not necessarily give teeth to the UK’s trade sanctions enforcement.   

“On balance, my view is that the UK trade enforcement system is fast approaching ‘dumpster fire’ territory,” says Ross Denton, senior counsel at Van Bael & Bellis.   

In a LinkedIn post, he says the UK government should instead look to create a “well-funded and intelligence-led single criminal trade investigations agency” rather than creating a new civil enforcement agency.  

“This will require primary legislation which will take up parliamentary time that could be devoted to other issues, but in my view the UK needs to up its enforcement activity, particularly given the role of the UK security services globally and the need to show Russia that it cannot defeat or evade Western sanctions.”   

Bradshaw says OTSI will likely focus on “low-level breaches”, suggesting a “sea change” to trade sanctions policy will only come if the government also tightens reporting rules for importers and exporters.   

“Reporting obligations, whereby you suspect a sanctions breach has taken place, is currently limited to financial sanctions and does not extend to trade… That is clearly a bit of a gap,” Bradshaw tells GTR.   

Still, there are hopes the new agency will boost engagement between companies and sanctions operators.  

“If OTSI can help to build the knowledge amongst UK companies and individuals that the trade sanctions are as important as the financial sanctions, then that should increase compliance without needing enforcement,” says Daniel Martin, a partner at law firm HFW.