Implementation speaks louder than words: the Office of Trade Sanctions Implementation’s First Annual Review

The OTSI, which forms part of the Department for Business and Trade, was launched in October 2024 to strengthen the implementation and enforcement of trade sanctions in the UK, partially as a response to the perceived difficulties of enforcing existing trade sanctions. The OTSI operates as the designated body for investigating and enforcing suspected trade sanctions breaches relating to:

• the provision or procurement of sanctioned services,

• the movement, making available, acquisition of or transfer of sanctioned goods or technology outside the UK, and

• ancillary services associated with the movement, making available, acquisition of or transfer of sanctioned goods or technology outside the UK.

The field of UK sanctions implementation and enforcement is an increasingly crowded one, with HMRC, the Home Office, the Office of Financial Sanctions Implementation ("OFSI") and other bodies already acting under various different powers. For example, OFSI remains responsible for enforcing financial sanctions breaches and HMRC responsible for the enforcement of UK export controls, both of which may overlap at times with trade sanctions.

As we noted in our initial briefing, the OTSI was launched to some degree to investigate "companies who may be avoiding sanctions by sending products through other countries", which has been seen by many as a key weakness in relation to current international trade sanctions targeting Russia.

What does the approach of the OTSI, as set out in this annual review, mean for businesses in the UK having to navigate trade sanctions?

How the OTSI can assist

As the OTSI's first year review sets out, the new regulator aims to be a useful resource for businesses seeking to navigate the evolving field of trade sanctions regulation, in particular those exporting goods or services.

Guidance and targeted outreach is intended to assist businesses seeking to navigate ever more complex sanctions legislation. This could be of particular value to those dealing with export controls in certain sectors. However, there will often be reluctance to approach regulators first for fear of inadvertently disclosing breaches or leading to difficult compliance questions, which can make such outreach difficult.

Sectoral risks

The risks posed by sanctions and export control legislation is to some degree sector-dependent, with the defence industry and those producing dual-use products facing more concentrated risk than many other sectors.

Those producing dual-use or defence products are at an increased risk of indirectly exporting controlled goods to sanctioned actors, through third parties (as these goods are often specifically targeted given their importance to supply chains and critical industries). This is a key issue that the OTSI and other regulators are currently addressing, through both legislation and guidance, and which we explore below.

Providers of professional services will also need to be aware of specific sanctions targeting the provision of specialist professional services. Further guidance is expected to be published by the OTSI shortly (as highlighted in their annual report) to aid with the application process for licensing. Operators in these sectors should therefore be aware of best practice, and ensure that they are carrying out screening where their services may be used in higher risk jurisdictions or by higher risk clients.

This is even more important for providers of 'Software as a Service’, many types of which are restricted under the Russia (Sanctions) (EU Exit) Regulations 2019 including, but not limited to, enterprise resource planning software, customer relationship management software and business intelligence software. Where software of this nature ultimately ends up, which is often considered to be relatively low risk from a sanctions and export control perspective, can often be very difficult to track and limit, and therefore even businesses which were historically considered to be low risk should be aware of the need to exercise increased caution.

Both the UK and EU are increasingly concerned with limiting indirect exports to Russia, a method by which companies might circumvent sanctions, by requiring (or in the UK's case, recommending) "no Russia" clauses in contractual arrangements.

The OTSI notes that following the imposition of sanctions against Russia due to the war in Ukraine, "Russia has been seeking to procure goods and services via indirect routes and complex supply chains". As a result, businesses should be aware of the heightened risk that their products might be re-exported to Russia from a third country.

From December 2023, the EU's sanctions approach has included a new commitment to combat the circumvention of EU export bans, by requiring EU exporters of various higher risk goods, including firearms and aviation goods, to include a clause in their export contracts to contractually prohibit re-exportation to Russia or for use in Russia. This applies to contracts with operators based in any non-EU country (except certain countries considered to have similar export restrictions that reduce the risk of re-export to Russia). For further detail, see our earlier sanctions update on the EU's "No Russia" clause.

In contrast, the UK has not implemented a specific, mandatory requirement to include such clauses. Instead, in January this year, the OTSI published guidance encouraging the use of similar "no re-export to Russia" clauses as a component of "due diligence best practice" and means to demonstrate compliance with more general obligations, including the prohibitions on 'indirect' supplies. The guidance also includes template text as an example of how such clauses might be drafted.

The distinction between the two jurisdictions is an interesting example of how different governments might approach developing more comprehensive sanctions protection regimes. More crucially, however, it marks a key step businesses should consider, even if not explicitly required, to protect themselves from the risks posed by sanctions and export control legislation.

While the legal effect of these clauses can in some respects be questioned, such clauses do at least potentially provide important evidence of businesses seeking to take proactive steps to reduce their exposure to liabilities (which may act as an important mitigant during any enforcement action or investigation) and reminds businesses of the risks in turning a blind eye to exports generally.

Interaction with the OTSI, especially as it continues to produce guidance and support businesses in managing their approach to trade sanctions, will be key for businesses operating in higher-risk sectors.

As the OTSI expands its guidance support, through its ongoing roadshows, and its licensing remit, businesses likely to be affected by sanctions should consider proactive engagement to ensure they obtain the requisite licenses and operate in line with best practice as suggested by the regulator. The OTSI is also conducting "targeted outreach to support businesses to comply with sanctions and help them to spot circumvention ‘red flags’".

Best practice for businesses might also include insertion of "no Russia" style clauses in high-risk contracts for exports, carrying out additional screening prior to entering into commercial arrangements and generally monitoring sanctions and export control changes more closely.

Given the increase in private investment in defence, investors entering the defence sector should be aware of the risks posed not only by financial sanctions, but by wider trade sanctions and export controls, and particularly the UK and EU regulators' expansion of their approach to cover wider sanctions circumvention.

For further updates on defence investments, investors can visit our recent updates on defence investments in Europe and on sustainable defence investments.