Clifford Chance

From 10 October 2024, a new body (OTSI) will have the power to impose civil monetary penalties for breaches of certain UK trade sanctions on a strict liability basis. There are also new mandatory reporting obligations for regulated financial services firms and law firms.

On 12 September 2024, The Trade, Aircraft and Shipping Sanctions (Civil Enforcement) Regulations 2024 were published, together with statutory guidance.

The regulations come into force on 10 October 2024 and from that date, the newly formed Office of Trade Sanctions Implementation ("OTSI") (within the Department for Business and Trade) will have civil enforcement powers to enforce breaches of certain UK trade sanctions, similar to OFSI's existing powers to impose civil monetary penalties in respect of UK financial sanctions and the G7 Russian oil price cap regime.

What is in scope?

Trade sanctions include prohibitions on the movement of goods, the transfer of technology, and the provision of services to certain parties or countries. They are set out in the same statutory instruments as financial sanctions (which include asset freezing measures) but the enforcement of those sanctions is handled separately.

Whereas OFSI (within HM Treasury) has responsibility for enforcing financial sanctions and has had, since 2017, the power to impose civil monetary penalties in lieu of a criminal prosecution, there has until now been no equivalent civil penalty regime in respect of UK trade sanctions.

The new regulations give OTSI the power to impose civil penalties in respect of certain trade sanctions.

HMRC continues to have exclusive authority to enforce breaches of sanctions in relation to goods subject to strategic export controls (such as dual use and military items) and sanctions on the import and export of goods to/from the UK, the transfer of technology to and from the UK, and any related ancillary services (such as brokering and financial services). HMRC can prosecute breaches of those sanctions or enter into a settlement resulting in the imposition of a compound penalty.

OTSI's powers to impose civil monetary penalties relate to a narrower scope of trade controls, which include:

• 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
• providing ancillary services (including financial services) to the movement, making available or acquisition of sanctioned goods outside the UK
• providing ancillary services to the transfer, making available or acquisition of sanctioned technology outside the UK

OTSI also has powers to enforce breaches of related matters such as circumvention and reporting obligations.

What are the Penalties?

Where it is possible to estimate the value of the breach of the prohibition or failure to comply with an obligation, the permitted maximum penalty is the greater of £1,000,000 or 50% of the estimated value of the breach or failure to comply.

Penalties can be imposed on the basis of the civil standard of proof – the balance of probabilities.

The regulations set out the right to seek a review by the Secretary of State of any decision by OTSI to impose a penalty, and a right to appeal that decision to the Upper Tribunal.

A penalty is not the only potential outcome. OTSI also has the power to issue a "warning letter" in less serious cases, make a public disclosure, or refer the matter to other authorities (including HMRC for criminal prosecution).

Strict liability?

Regulation 6 states that when determining whether to impose a civil monetary penalty "any defence that the person did not know and had no reasonable cause to suspect that an offence had been committed under trade sanctions regulations is to be ignored".

The guidance states that most breaches of trade sanctions will therefore be assessed as ‘strict liability’ offences: "This means OTSI does not need to prove that you acted knowingly, or with intent. If you use as a defence that you did not know you’d committed a breach, or had no reasonable cause to suspect, they can disregard this when they’re deciding whether to issue a penalty."

Some offences, such as the circumventing prohibitions, still require OTSI to prove that a person acted knowingly or with intent.

Interestingly, the guidance issued by OTSI on its case assessment process, which appears substantially less developed than the equivalent guidance issue by OFSI, contains no reference to whether a person committed an offence deliberately among the listed mitigating factors it will consider.

Whereas OFSI has expressly stated that it "may assess whether or not a person knew and/or had reasonable cause to suspect as an aggravating or mitigating factor" when determining whether to impose a penalty, OTSI lists only the following mitigating factors, albeit it is expressed as a non-exhaustive list:

• timely voluntary disclosure of the suspected breach by the person or business responsible, which could lead to a reduction in civil monetary penalty of up to 50%
• timely mandatory disclosure of the suspected breach by a provider of legal or financial services
• compliance with requests for information that OTSI may send out to reporters of suspected breaches during their investigations
• compliance with any relevant recordkeeping obligations under sanctions regulations
• no record of previously having breached sanctions legislation
• good knowledge of trade sanctions and relevant compliance systems proportionate to the size, exposure to sanctions and resources of the business

It remains to be seen whether "strict liability" really will be applied literally to a party that made an innocent mistake.

Publicity?

Like OFSI, OTSI also may publish reports of the cases where it imposes a civil monetary penalty.

They may also choose to publish details of cases which they assess to be a breach of sanctions where they do not impose a civil monetary penalty.

The guidance refers to the publication of a summary only, albeit this may include the name of the subject of the enforcement action.

What are the new reporting obligations?

The regulations impose new reporting obligations on "relevant persons", comprising regulated financial services providers, law firms and money services businesses.

Regulation 15 states that: "A relevant person ("RP") must inform the Secretary of State as soon as practicable if (a) RP knows, or has reasonable cause to suspect, that a person ("P") has breached a prohibition or failed to comply with an obligation under trade sanctions regulations, and (b) the information or other matter on which the knowledge or cause for suspicion is based came to RP in the course of carrying on their business."

Reports should be made using a new online reporting portal.

The guidance states that a person should only report when they have knowledge, or reasonable cause to suspect, that a breach of trade sanctions has occurred. This knowledge or reasonable cause to suspect must be acquired in the course of carrying out your business.

Importantly, the guidance also states that "you are not required to follow specific methods or systems in conducting your due diligence."

This appears to mean that, for example, a financial services firm is not necessarily required to investigate for potential infringements proactively, but rather should report breaches when they become aware of them.

The guidance also states that "You must make an initial report as soon as practicable. You may then supplement it with further information afterwards."