On September 12, 2024, the UK government laid a new statutory instrument before parliament, The Trade, Aircraft and Shipping Sanctions (Civil Enforcement) Regulations 2024 (the "Regulations"), which creates new strict liability civil enforcement powers for breaches of UK trade sanctions, as well as aircraft and shipping sanctions. Statutory guidance has been published alongside the Regulations. These new powers will come into effect on October 10, 2024, following a 28 day period for businesses to familiarize themselves with the new civil enforcement regime. The new trade sanctions civil enforcement regime will be administered by a new sanctions agency, the Office of Trade Sanctions Implementation ("OTSI"). The Department for Transport ("DFT") will be responsible for administering the new aircraft and shipping sanctions enforcement powers.
This is a significant development and will materially increase the trade sanctions enforcement risks for UK companies and other companies operating within the UK, particularly those engaged in trading goods subject to UK sanctions, financial institutions, cross-border service providers, and those active in the aircraft and shipping sectors. While we anticipate the initial focus of enforcement efforts to be on breaches of the UK's trade, aircraft, and shipping sanctions targeting Russia, the new enforcement powers are applicable across all UK geographic and thematic sanctions regimes containing pertinent sanctions prohibitions.
New Civil Enforcement Powers
The Regulations create powers to bring civil enforcement action against:
- UK persons (e., UK nationals or UK incorporated entities and their foreign branch offices) for conduct undertaken anywhere in the world; and
- any person for conduct undertaken in the UK or its territorial sea.
The Regulations permit the imposition of civil monetary penalties where it is determined on the balance of probabilities (i.e., more likely than not) that a breach of UK trade, aircraft, or shipping sanctions has occurred. However, as regards trade sanctions, OTSI is not permitted to impose a civil monetary penalty when a suspected trade sanctions offence is capable of being criminally investigated by HM Revenue and Customs ("HMRC") unless it has first been referred to HMRC, or treated by HMRC as having been so referred.
These penalty powers enable the imposition of civil monetary penalties on a per breach basis, as follows:
- Trade sanctions breaches – OTSI can impose a maximum civil monetary penalty of the greater of £1,000,000 or 50% of the estimated value of the breach (when it is possible to estimate a breach's value), or £1,000,000 in other cases; or
- Aircraft or shipping sanctions breaches – DFT can impose a maximum civil monetary penalty of the greater of £1,000,000 or 50% of the estimated value of the aircraft or ship used in connection with the breach (when it is possible to estimate the value of the aircraft or ships as at the time of the breach), or £1,000,000 in other cases.
When a breach involves conduct occurring over an extended period of time, there is the potential for very significant financial penalties to be imposed under the new civil enforcement regime.
Proceedings for an offence under the Regulations can be brought within a period of 12 months from the date that evidence sufficient to justify the proceedings comes to the prosecutor's knowledge. However, proceedings cannot be brought more than three years after the commission of the particular offence.
Expansion of Reporting Obligations for "Relevant Persons"
The Regulations also impose reporting obligations on certain categories of person, which we anticipate will offer an important source of potential investigation targets to OTSI and DFT.
Trade Sanctions
The Regulations also expand the reporting obligations imposed on banks and others FCA-regulated firms, as well as providers of legal and notarial services, currency exchanges, money transmitters, and businesses that cash cheques that are made payable to customers (each a "Relevant Person – Trade Sanctions").
Relevant Persons – Trade Sanctions that know, or have reasonable cause to suspect, that a person has breached UK trade sanctions or failed to comply with an obligation under UK trade sanctions regulations is required to notify OTSI as soon as practicable where that information comes to the Relevant Person – Trade Sanctions in the course of its business.
Aircraft and Shipping Sanctions
Additionally, the Regulations expand the reporting obligations imposed on aircraft operators, airport operators, persons that charter aircraft or ships by way of a business, masters and pilots of ships or fishing vessels, and harbour authorities (each a "Relevant Person – Transport Sanctions").
Relevant Persons – Transport Sanctions that know, or have reasonable cause to suspect, that a person has breached a prohibition or failed to comply with an obligation under aircraft or shipping sanctions are required to notify OTSI as soon as practicable where that information has come to the Relevant Person – Transport Sanctions in the course of its business, as follows:
- chartering an aircraft or ship by way of business;
- carrying on business in connection with acting as an airport operator or a harbour authority; or
- carrying on paid or unpaid activities for business or leisure in connection with acting as a pilot in command, an aircraft operator, or a master or pilot of a ship.
Penalties
Failure to comply with these requirements is a criminal offence punishable by a fine for companies and a fine and up to six months' imprisonment for individuals.
OTSI's Enforcement Remit and Guidance
OTSI's enforcement remit is broad and will cover the investigation of, and pursuit of civil enforcement actions relating to, the following:
- the provision or procurement of sanctioned services (g., professional and business services under the UK's Russia sanctions regime);
- moving/transferring, making available, or acquiring sanctioned goods and technology outside the UK, as well as the provision of ancillary services (g., financial and brokering services, as well as technical assistance);
- the failure of Relevant Persons – Trade Sanctions to comply with mandatory breach reporting obligations;
- circumvention of trade sanctions;
- failure to comply with notification requirements associated with exceptions to trade sanctions;
- failure to comply with trade sanctions-related information requests (g., intentionally obstructing an information request from OTSI);
- failure to comply with the conditions of a trade sanctions licence; and
- failure to comply with the recordkeeping requirements of a general licence.
The inclusion of services ancillary to trade sanctions prohibitions within OTSI's civil enforcement remit notably increases the risk exposure of banks, insurers, and other financial institutions that provide funds or financial services that directly or indirectly relate to trade in sanctioned goods, technology, or services and are not otherwise authorized by an exception or trade sanctions licence.
In many respects, OTSI's civil enforcement powers mirror those already exercised by HM Treasury's Office of Financial Sanctions with respect to financial sanctions. OTSI has published civil enforcement guidance to assist businesses in understanding how it intends to make use of its new civil enforcement powers once they come into effect in October 2024.
Key takeaways from the guidance are:
- OTSI can dispose of investigations into trade sanctions breaches in a number of ways, including issuance of a warning letter, referral to a regulatory body, civil monetary penalty, or referral for criminal investigation and possible prosecution;
- OTSI can choose to "name and shame" those who breach UK trade sanctions when a decision not to impose a civil monetary penalty has been taken;
- OTSI can offer reduced penalties of up to 50% for timely voluntary disclosure of trade sanctions breaches by suspected offenders;
- sound knowledge of trade sanctions and the development and maintenance of relevant compliance systems that are proportionate to a company's size, resources, and sanctions risk profile may be considered by OTSI as a mitigating factor when determining how to dispose of trade sanctions breaches; and
- when a civil monetary penalty is imposed for a breach of trade sanctions it is possible to request a ministerial review of the penalty, as well as appeal the penalty to the Upper Tribunal (echoing the approach adopted bv OFSI in relation to the civil monetary penalties regime for breaches of financial sanctions).
Conclusion
The introduction of strict liability civil enforcement powers is likely to reshape the enforcement landscape for breaches of UK trade sanctions, significantly increasing the trade sanctions enforcement risks for UK companies and non-UK companies with operations in the UK that are involved in the cross-border trade of goods, technology, and services subject to UK trade sanctions. Affected businesses should consider urgently reviewing their risk assessments and the continued adequacy of sanctions compliance policies, procedures, and other controls in light of the imminent introduction of strict civil liability.
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