Sanctions January Update: new UK enforcement unit, further guidance on ownership and control and OFSI's Annual Review

On 11 December 2023 the UK announced the introduction of the OTSI, a parallel agency to OFSI, focused on the civil enforcement and implementation of trade sanctions.

The OTSI, which currently remains in a 'set-up phase', is expected to start work in early 2024 (with further guidance on the OTSI's precise role anticipated to be released in due course).

As it stands, the website for the new body makes it clear that the OTSI, as is the case for the OFSI, will have the power to issue civil monetary penalties, and will be the designated body for investigating suspected trade sanctions breaches along with engaging with businesses in relation to compliance with UK trade sanctions (including producing guidance).

The criminal enforcement of trade sanctions offences will remain the responsibility of HMRC, and it is expected that the Export Control Join Unit will remain the administrator of the UK’s system of export controls and licensing for military and dual-use items.

It was made clear as part of the UK Government's press release that a particular focus of the OTSI will be "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.

While the introduction of the OTSI is unlikely to dramatically change the approach of the UK to sanctions and export control enforcement, it demonstrates that the Government is seeking to take more of a sophisticated role in how sanctions are monitored and enforced. It may also lead to further guidance being produced which, as we have seen recently in relation to the concept of ownership and control, would be welcome news for many businesses seeking to navigate the intricacies of overlapping sanctions regimes.  

As set out in our previous article, the concept of ownership and control has been a topic of significant interest since the judgment in Mints v PJSC National Bank Trust and anor [2023] EWCA Civ 1132 ("Mints") opened-up the question of how widely the concept should be interpreted.

The judgment in Mints concluded that because of how widely drafted the Russia (Sanctions) (EU Exit) Regulations 2019 ("Russia Regulations") are, the "absurd consequence" was that Putin could be "deemed to control everything in Russia" and therefore almost every state-owned business in Russia, and potentially even wider commercial entities, could be indirectly caught by the UK sanctions regime.

While these comments were given as an aside to the main judgment – and are not legally binding – they represented a wider approach than is frequently taken by businesses in the UK to the concept of ownership and control. Following Mints,  the Foreign, Commonwealth and Development Office  released an initial clarificatory statement, whilst indicating that it intended to expand on its position, potentially through further guidance.

This further guidance was subsequently published  on 17 November 2023, and states specifically that "there is no presumption on the part of the UK government that a private entity is subject to the control of a designated public official simply because that entity is based or incorporated in a jurisdiction in which that official has a leading role in economic policy or decision-making" and that a "person should only be considered to exercise control over certain private entities where this can be supported by sufficient evidence".

Therefore, although it remains the case that businesses need to be careful when carrying out ownership and control analysis and there is significant room for interpretation in the threshold set out in the Russia Regulations (which remains unchanged in this respect), the new guidance does at least emphasise that the concept of ownership and control is not necessarily as wide as the potential interpretation countenanced in Mints.

OFSI released its Annual Review in December 2023, which has a general emphasis on the UK strengthening its approach to sanctions – including improving the implementation of existing sanctions regimes, helping to implement new regimes and increasing OFSI's capacity by recruiting additional staff.

In 2022-2023, OFSI recorded nearly 500 suspected breaches of financial sanctions (in comparison to approximately 150 recorded in 2021-2022). Although the increase was expected, given the significant volume of sanctions in relation to Russia, it also demonstrates that OFSI is potentially receiving more voluntary self-disclosures as a result of improved monitoring by businesses (as well as enhancing its own ability to identify suspected breaches). Part of this may be the result of increased cooperation with international partners, such as the United States Office of Foreign Assets Control ("OFAC"), which is specifically referenced as part of the Annual Review in a number of places.  

While the number of recorded suspected breaches has increased significantly over the last few years, there are still relatively few civil enforcement penalties imposed by OFSI (with only one disclosure penalty issued in 2023, compared to 17 monetary penalties by OFAC). Therefore, while the UK still has not demonstrated a track record of enforcing sanctions as strictly as the US, the direction of travel is clear and, as noted in the Foreword, OFSI is working towards "transitioning to a proactive enforcement model," which strongly suggests that the number of UK civil enforcement penalties will likely increase in the coming few years (including those that may be imposed by the new OTSI).