UK Office of Trade Sanctions Implementation to arrive for October launch

The new UK government has finally laid the foundational regulations to establish the Office of Trade Sanctions Implementation (OTSI) statutory powers before Parliament – nine months after the new body was first announced.

The Trade, Aircraft and Shipping Sanctions (Civil Enforcement) Regulations 2024 are due to come into force on 10 October. The UK government plans to launch OTSI within the Department for Business and Trade in October. 

In December 2023, the previous government announced the creation of OTSI, which would be granted civil enforcement powers to impose penalties for breaches of certain UK trade sanctions. 

The DBT also published on 12 September a suite of guidance on trade, aircraft and shipping sanctions and civil enforcement on how and when OTSI will exercise its enforcement powers.

Layer of complexity?

There had been hope that OTSI would reduce the existing complexity in the UK trade sanctions regime, removing unfortunate loopholes and simplifying the multi-layered regime of rule-making, oversight and licensing which is currently in place.  

Instead, it appears OTSI's role will be a yet further layer of complexity, with new powers that will require firms across several sectors – including the financial services and legal professions – to review carefully and update their compliance processes to avoid the risk of significant adverse penalties.

OTSI powers mirror OFSI  

The powers conferred on OTSI mirror those of the existing Office of Financial Sanctions Implementation (OFSI) closely OTSI has the power to impose financial penalties for breaches of the trade sanctions regime, on a strict liability basis (regulation 5) and to compel the provision of information to support its investigations (regulation 17) and this is supported by a positive obligation on certain firms to make pro-active disclosure of suspected sanctions breaches (regulation 15).

Monetary penalties for civil breaches

OTSI will be able to to impose monetary penalties for a breach of the obligations imposed by the regulations including any trade sanction breach set out in other relevant regulations (regulation 5). Those penalties can be imposed on corporate entities or their directors or similar officers if responsible for the breach (regulation 8).

The extent of the fine will be determined in accordance with OTSI's new guidance, but can be as high as £1 million or 50% of the estimated value of the breach, if higher (regulation 9 (2)).

OTSI will also have lesser powers to sanction firms and deter future breaches including public censure by publishing reports of breaches and naming and shaming those involved, even where no monetary penalty is given (regulation 27) with the serious reputational consequences that brings.

Strict liability

As with OFSI, monetary penalties will be imposed by OTSI on a "strict liability" basis – that is, without any defence that the individual/ entity committing the breach did not know and had no reasonable cause to suspect an offence had been committed (regulation 6).  That means that firms will need to be proactive in ensuring that they are compliant with the trade sanctions regime, rather than turning a blind eye to the possibility that they (or their downstream suppliers) may be committing breaches.

Information requests (regulations 17)

OTSI has a broad entitlement to generally request information if it "believes" that person may be able to provide it and may "reasonably require" it for the purpose of:

• exercising functions under the regulations;
• monitoring compliance with, or detecting evasion of, sanctions regulations; or
• investigating a suspected breach of a prohibition, or a suspected failure to comply with an obligation, imposed by or under sanctions regulations.

This is a very broad discretion: there is no requirement that the "person" need to have been involved in the trade sanction breach or to have been involved in the handling of the relevant goods or technology – and the threshold for OTSI to exercise that power is low. 

Where OTSI makes such a request, the person must take reasonable steps to identify the documents or explain what steps have been taken to identify it and to obtain and keep the documents (regulation 20). It is clear that a blanket denial that such documents are in a firm's possession is unlikely to be sufficient without evidence, and – as it is criminal offence to fail to comply – this is likely to represent a significant compliance burden.

Reporting obligations (regulation 15)

Regulation 15 requires regulated financial institutions and other professional services providers such as lawyers to report if they know of, or reasonably suspect that, a third party (that is, its customers or clients) has breached any trade sanctions within OTSI's scope (regulation 15(1)).  Again, failing to comply is a criminal offence.

While there is an expected carve-out exemption for information subject to legal privilege, OTSI has made clear it will exercise its powers to challenge any "blanket assertions" in respect of privilege, if it does not believe the application of privilege has been carefully considered (regulation 29). Internal legal teams, general counsels and compliance officers will need to work carefully with their firms, and with their external counsel, to ensure that any available privilege protections are applied appropriately. Documents containing sensitive information will also need to be handled with appropriate care when considering sanctions compliance.

Osborne Clarke comment

This development is the latest in a string of measures to clamp down on sanctions compliance in the past couple of years. The extension of strict-liability enforcement powers from financial sanctions to trade sanctions was expected, but there is much about OTSI's new role that will cause concern for the industry and encourage a significant review of firms' processes and procedures.

If you have any concerns about the issues raised in the above article, or would like to discuss your existing trade sanctions policies and controls, or contractual information gather powers, please contact one of our experts.