On 12 September 2024, pursuant to the Sanctions and Anti-Money Laundering Act 2018, the UK Government introduced new legislation, The Trade, Aircraft and Shipping Sanctions (Civil Enforcement) Regulations 2024 (the "Regulations"), to grant new powers to the UK's Department for Business and Trade's Office of Trade Sanctions Implementation (OTSI) and the Department for Transport (DfT) to impose civil penalties on a strict liability basis in relation to violations of trade sanctions and aircraft and shipping sanctions, respectively.
These new powers will come into force on 10 October 2024.
Enforcement of Trade Sanctions
OTSI was announced by the UK Government on 11 December 2023 as a new body responsible for the investigation and civil enforcement of trade sanctions related to:
- Providing or procuring sanctioned services;
- Moving, making available, or acquiring sanctioned goods outside the UK;
- Transferring, making available or acquiring sanctioned technology outside the UK; and
- Providing related ancillary services thereto (e.g., technical assistance, brokering and financial services).
HM Revenue & Customs (HMRC), which was formerly responsible for enforcement in these areas, will retain responsibility for criminal enforcement of all types of trade sanctions, and will retain responsibility for civil enforcement of trade sanctions related to:
- The import and export of goods and the transfer of technology to or from the UK (including the provision of ancillary services, such as technical assistance, brokering and financial services); and
- The export of goods and technology subject to strategic export controls from the UK, notably military and dual-use items.
Financial Penalties for Violations of Trade Sanctions
- Scope of Liability: A civil monetary penalty can be imposed on any person or business that must comply with UK sanctions (i.e., any person or business located within UK territory; and any UK national and UK incorporated business, wherever they are located or operate in the world). Where a violation is committed by a business, OTSI can hold officers of that business personally liable and impose a penalty against them (as well as the business) if the violation is either committed with the officer's consent or involvement or is attributable to the officer's neglect.
- Penalties: For violations of relevant trade sanctions, OTSI will be able to impose a maximum civil monetary penalty of up to the greater of £1 million or 50% of the estimated value of the breach.
- Strict Liability: The penalty regime under OTSI will operate on the basis of strict liability. In order to impose a penalty, OTSI only needs to establish on a balance of probabilities that the violation occurred and does not need to prove the person acted knowingly or with intent. This means that unlike for criminal prosecution for trade sanctions violations, there is no defence where the person can prove that they did not know and had no reasonable cause to suspect a violation would occur.
- Penalty reduction: OTSI can offer a reduction of a financial penalty of up to 50% where the person submits a voluntary disclosure of the violation. Other mitigating factors can also result in a reduction of the financial penalty.
- Appeals: A person subject to a financial penalty may request a review by the Secretary of State. On review, the penalty may be upheld, varied in amount (upwards or downwards), or cancelled.
These overarching points are broadly the same as the existing regime for imposing civil monetary penalties for violations of UK financial sanctions, which is enforced by HM Treasury's Office of Financial Sanctions Implementation (OFSI).
Other Enforcement Powers of OTSI
In addition to imposing civil monetary penalties, OTSI will be able to (as relevant):
- Issue a warning letter (which can also include a continuing obligation to keep OTSI informed about certain information, such as improvements to due diligence processes);
- Refer cases to HMRC for criminal investigation;
- Report individuals and businesses to other regulators, if applicable;
- If a company is involved in a breach, refer the case to Companies House or the Insolvency Service, which could result in the company being wound up and/or the disqualification of its directors; and
- Use their powers to publish information about breaches. Such information may include the identity of the violator, a summary of the facts of the case, the value of transaction, the size of the penalty and why OTSI chose to impose a penalty, and (potentially) any compliance lessons that merit being addressed.
Under the previous enforcement regime maintained by HMRC, public disclosure of information related to penalties for violations of trade sanctions was limited, typically only including the value of the penalty and type of sanctioned product (e.g., if the item was dual-use). The broader scope for OTSI to publicise information relating to breaches of relevant trade sanctions should provide opportunities for greater learnings and insights as to the expectations of OTSI, which corporates can then use to benchmark their own compliance programs.
Investigatory Powers
Under the Regulations, OTSI will have the power to make formal information requests to investigate suspected breaches of relevant trade sanctions. OTSI can specify the format and timescale within which such information must be supplied.
Failure to comply with an information request from OTSI can constitute a criminal offence. This includes:
- Refusing or failing to comply within the time and manner specified, without providing a reasonable excuse, or if no time has been specified, failing to comply within a reasonable time;
- Knowingly or recklessly giving false information, or producing a document containing false information;
- Deleting, destroying, mutilating, defacing, concealing or removing any document with intent to evade OTSI's investigation; and/or
- Intentionally obstructing OTSI from obtaining the information.
Mandatory Reporting Obligations
The Regulations also include new reporting obligations on "relevant persons" to submit a report to OTSI as soon as practicable if, through the course of carrying on their business, they know or have reasonable cause to suspect that a person has committed a breach of relevant trade sanctions.
"Relevant persons" includes financial institutions regulated under Part 4A of the Financial Services and Markets Act 2002, law firms and notaries, and money service business (including businesses operating currency exchange and money transfer services).
Reports must include:
- Details of the information or other matter that the knowledge or suspicion is based on; and
- Any information held about the business or person suspected of breaching trade sanctions, by which they can be identified.
Failure by a relevant person to comply with the reporting obligation is an offence which can lead to penalties, including criminal prosecution.
Aircraft and Shipping Sanctions
The Regulations also provide new enforcement powers to the DfT in relation to the UK's aircraft and shipping sanctions, which can include sanctions attached to particular vessels and aircraft, and restrictions on the ownership, registration, movement and use of ships and aircraft in certain countries. The powers granted to the DfT substantively mirror those given to OTSI and OFSI and include:
- Penalties: The DfT will be able to impose a maximum civil monetary penalty of up to the greater of £1 million or 50% of the estimated value of the aircraft/ship at the time of the breach or failure to comply. As above, DfT has broad enforcement power and can also choose to issue a warning letter or refer the case for criminal prosecution.
- Strict Liability: Similarly, the penalty regime under DfT will operate on the basis of strict liability. In order to impose a penalty, DfT only needs to establish on a balance of probabilities that the violation occurred and does not need to prove the person acted knowingly or with intent.
- Penalty reduction: DfT can offer a reduction of a financial penalty of up to 50% where the person submits a voluntary disclosure of the violation. Other mitigating factors can also result in a reduction of the financial penalty.
- Appeals: As per fines imposed by OTSI, parties subject to a penalty by the DfT may at first request a formal review and then seek an appeal. On review/appeal, a penalty may be cancelled, upheld, or varied upwards or downwards.
- Publications: The Regulations grant the power for the DfT to publish details of any monetary penalties imposed. The DfT guidance suggests that this will include who the penalty has been imposed on, the facts of the case, details of the sanctioned assets, and any other information required to give an understanding of the case.
- Mandatory Reporting: The Regulations impose obligations on "relevant persons" to report known or suspected breaches of aircraft and/or shipping sanctions to the DfT. In this context, "relevant persons" is defined to include (i) operators of airports and aircraft; (ii) charter companies; (iii) pilots in command of aircraft; (iv) harbour authorities; and (v) ship masters and pilots.
The UK Government now has two additional administrative bodies, OTSI and DfT, in addition to OFSI, which can impose significant financial penalties for violations of UK sanctions on a strict liability basis. For companies that operate in the UK or that have employees who are UK nationals, the granting of these new powers to OTSI and DfT should serve as another signal that the UK Government continues to take sanctions compliance very seriously.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.