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The UK is set to launch a new trade sanctions unit with the ability to impose “significant” fines and reporting obligations on banks as part of efforts to halt the export of blacklisted items to Russia.

Last week, the UK government introduced a statutory instrument in Parliament, announcing that the Office of Trade Sanctions and Implementation (OTSI) would be fully equipped with enforcement powers by October 10.

For the first time, the UK will have a dedicated body for the civil enforcement of trade sanctions, with OTSI able to impose monetary penalties of up to £1mn, or 50% of the estimated value of a breach, whichever is higher.

According to the regulations introduced on September 12, while HM Revenue and Customs will continue to focus on the criminal enforcement of trade sanctions and monitor goods crossing the UK border, OTSI’s scope will be on the enforcement of sanctions on products and services exchanged overseas that have a “UK nexus”.

The move comes nearly a year after OTSI was first touted, with the then-Conservative government revealing the unit would focus on stifling Moscow’s ability to buy dual-use technologies and goods for its war in Ukraine.

When contacted by GTR, the UK Department for Business and Trade did not directly address whether Russian sanctions evasion would remain OTSI’s core remit following the Labour Party’s electoral win.

However, experts predict OTSI’s main focus will be on preventing the evasion of Russia-related sanctions.

“It will very much focus on Russia sanctions. As a matter of fact, it does not have the authority over anything else right now, because the kinds of sanctions provisions that it’s responsible for only appear in the Russian sanctions regime,” Jason Hungerford, a partner at Mayer Brown, tells GTR.

As detailed in the wording of the regulation, OTSI will specifically target the provision of certain professional and legal services; the moving, acquiring and making available of restricted goods – and technologies – outside of the UK; as well as the provision of ancillary services, such as financing, that facilitate the movement of restricted goods and technology abroad.

“All of this speaks to the Russian sanctions regime,” says James Ford, a senior associate at Mayer Brown.

This means that UK exporters and their overseas branches will face greater scrutiny from OTSI for sensitive items that could eventually – further down the supply chain – support Russia’s war in Ukraine, such as military and dual-use goods, as well as aviation, space, defence and oil refining products.

Meanwhile, British banks involved in trade will, for the first time, be exposed to reporting obligations.

In effect, financial institutions must notify OTSI if they know or have “reasonable cause” to suspect that third parties have violated trade sanctions.

“With this reporting obligation, there is an increased duty on banks to assess whether trade sanctions violations may have occurred in respect of their activities. The underlying need to identify these issues may require a considerable level of upskilling and training for staff at financial institutions,” says Ford.

Over £20bn-worth of goods traded between the UK and Russia – figures from 2021 – are now being captured by sanctions, including on electronics, metals, chemicals, luxury goods and jet fuel, the UK said in June.

 

The new OFSI?

Since 2016, the UK has had a specialist unit tasked with enforcing financial sanctions – the Office of Financial Sanctions Implementation (OFSI) – but no comparative body for trade. Last year, legal experts warned the UK’s trade sanctions enforcement system was “fast approaching dumpster fire territory”.

Currently, civil enforcement of UK trade sanctions “does not exist”, says Hungerford at Mayer Brown.

“The HMRC enforcement regime is criminal. They can offer to companies a compound penalty and settlement offer in lieu of referring a matter to the Crown Prosecution Service and in those cases, the sums vary considerably, from hundreds of pounds to the millions of pounds – the ones in the millions of pounds are rare.”

He tells GTR that OTSI will now have the power to impose “significant” fines on companies that breach trade sanctions, and the unit has the ability to compel firms to disclose information should it suspect a breach.

Enforcement will be tighter under OTSI. Like OFSI, it will enforce sanctions on a “strict liability” basis.

“This means that a company or individual can be held accountable even if they were unaware of the violation,” says Freya Page, a director at risk analytics platform Kharon. “The standard for imposing penalties is the ‘balance of probabilities,’ making this new enforcement mechanism more stringent​.”

Mayer Brown’s Ford says OTSI is likely to bring “greater transparency” to trade sanctions enforcement, which could help British exporters comply with sanctions.

Unlike OFSI, which will publish penalty notices and the reasons for its decision, HMRC currently discloses little information about breaches of trade sanctions – even when a firm pays a compound settlement.

“The HRMC would, for example, say a UK exporter has been fined X amount for the unlicensed export of goods; it won’t generally mention the types of goods exported or which countries the export was intended for,” Ford says.

However, some caution that OTSI’s overall effectiveness will depend on the resources allocated by the government.

“As to whether OTSI will have teeth… it certainly has the mandate to do its job, but it depends how well-resourced the agency is and whether it will be robust in bringing enforcement actions,” Hungerford says.

A Department for Business and Trade spokesperson did not respond to questions about the likely size of OTSI’s workforce, but GTR understands that this information will be disclosed in the department’s annual reports.