From October, the Office of Trade Sanctions Implementation (OTSI) will be empowered to investigate breaches of trade sanctions and impose corresponding civil monetary penalties. We examine the powers OTSI will have, how it will interact with other UK sanctions authorities and what impact it may have.
Many will have become familiar with references to OFSI, the Office of Financial Sanctions Implementation, which deals with the civil enforcement of financial sanctions. Its sister agency, OTSI, is now being launched (albeit a few months later than planned).
[We wrote about the government’s announcement of OTSI in December 2023.]
OTSI will be responsible for civil enforcement of certain trade sanctions with accompanying powers to impose monetary penalties. The Trade, Aircraft and Shipping Sanctions (Civil Enforcement) Regulations 2024 (the TASSCE Regulations), which come into force on 10 October 2024, provide OTSI with its remit and powers. Whilst OTSI, which is part of the Department for Business and Trade, will deal with trade sanctions, the Department for Transport will lead on the civil enforcement of aircraft and shipping sanctions.
Civil monetary penalties may be imposed by OTSI in circumstances where, on the balance of probabilities (being the civil standard of proof), it is satisfied that a breach of a trade sanctions has occurred. The maximum penalties permitted will be the greater of £1m and 50% of the estimated value of the breach or failure to comply.
Section 6 of the TASSCE Regulations provides for penalties to be imposed on a strict liability basis, meaning that any defence that a person did not know or had no reasonable cause to suspect that an offence had been committed under trade sanctions regulations is to be ignored. The ability to impose civil monetary penalties on a strict liability basis mirrors the power that OFSI has in respect of financial sanctions.
The TASSCE Regulations provide OTSI with broad powers to request information which it requires to:
OTSI can apply civil or criminal sanctions for non-compliance with such information requests. As with OFSI, OTSI will also be able to issue warnings and can publish information about breaches even in cases where they do not impose a monetary penalty.
OFSI has only used this power once to date; in August 2023 it published a disclosure notice on an entity which permitted a cash withdrawal of £250 to be made from a business account held by a company owned or controlled by a designated person. Much of the commentary around this notice expressed surprise that such a low level breach was singled out for public “naming and shaming”.
As well as OTSI being empowered to proactively request information from those they believe may be able to provide it, certain entities will be subject to reporting obligations with regards suspected breaches of trade sanctions. As for OFSI, the list of entities subject to the mandatory reporting requirements includes regulated financial institutions, certain other financial services providers and legal or notarial services providers. This includes law firms, although there remains an exception for information subject to legal professional privilege.
Although OTSI will lead on the enforcement of most trade sanctions, certain trade sanctions fall outside of its remit and are dealt with by Ofcom and HMT, with whom OTSI will therefore need to establish relationships to facilitate information exchange.
In respect of criminal enforcement, HMRC will retain its powers to criminally enforce breaches of trade sanctions, with the National Crime Agency retaining responsibility for the criminal enforcement of aircraft and shipping sanctions.
If HMRC consider a criminal penalty necessary, they will refer the matter to the CPS for prosecution. In certain circumstances, HMRC can offer an entity suspected of a breach the opportunity to enter into a compound settlement, which is a civil mechanism for settling suspected criminal breaches.
The TASSCE Regulations grant OTSI the power to publish reports as it sees fit about the imposition of civil monetary penalties. This is in line with OFSI’s powers. Whilst aligning with OFSI, it puts OTSI at odds with HMRC who publish very limited information about their enforcement work, particularly when the enforcement concludes in a compound settlement, in which case the parties to the settlements are anonymised. The last compound settlement in respect of a breach of The Russia (Sanctions) (EU Exit) Regulations 2019 was issued in August 2023, with a settlement of just over £67,000; no details about the company in breach were published.
If OTSI follow OFSI’s lead and publish reports on each monetary penalty imposed, it appears that law enforcement will end up in a position where civil breaches are widely publicised with full identifying details of the wrongdoer, whereas a person who has committed a potentially more serious breach would avoid publicity as a result of entering into a compound settlement with HMRC. There does not appear to be a public policy rationale for this inconsistency in approach; the situation appears to have arisen by accident rather than by design and may therefore be open to revisiting in the near future.
Since Russia’s invasion of Ukraine in February 2022, financial and trade sanctions have been placed firmly on the map in the UK for corporates, financial institutions and others who do business here. OFSI’s profile and workload have increased exponentially since that date, and although its enforcement action remains patchy the agency has helped focus the minds of corporates and individuals in seeking to comply with the ever-increasing web of UK sanctions prohibitions. As we noted when OTSI was first announced, the UK Government is hoping that OTSI will now do the same. As the then Sanctions Minister stated: “[OTSI will] further strengthen the UK’s sanctions system and allow us [the government] to maximise the impact that trade sanctions have on those who continue to flout the global rules”.
The ability of OTSI to fulfil its mandate will depend in part on the information and resources made available to it. As noted above, it has been granted significant powers to compel the provision of information, and we expect to see it using those powers to gather intelligence and build cases. It may seek to impose a civil monetary penalty or disclosure notice in fairly short order to mark its arrival on the scene and set an example on the compliance front.
Businesses operating under trade sanctions risk will therefore need to take additional care in ensuring they have effective systems and controls in place to both prevent breaches, and identify reporting obligations in respect of any suspected breaches. Meanwhile, the example of OFSI indicates that it may well take many months if not years for OTSI to establish itself as an accomplished enforcement agency. Throughout that process its role, structure and powers will all inevitably be subject to further debate and change.
Lorna Emson, Helen Harvey and Francis Bond are in the white collar defence and investigations practice of MacFarlanes, London, with a particular focus on matters involving fraud and financial crime and the overlap between civil and criminal procedures. www.macfarlanes.com
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