UK sanctions enforcement: challenges and developments

Briefing

07 January 2025

7 MIN READ

1 AUTHOR

State of play

Despite the increasing scale and prioritisation of UK sanctions as a foreign policy and security tool over the past two years, instances of public enforcement of the Russia sanctions programme in the UK by the Office of Financial Sanctions Implementation (OFSI) have been notable by their absence.

In the nearly three years since Russia invaded Ukraine, OFSI has only taken two actions under the Russia sanctions programme: a publication notice that did not attract a fine; and a GBP 15,000 fine in respect of 26 payments made in breach of sanctions totalling GBP 15,000, and where the activity was ‘serious’, ‘harmed’ the objective of the sanctions regime, and other aggravating factors were present.^{1 2} This is in stark contrast to a recent GBP 29 million fine imposed by the Financial Conduct Authority (FCA) against Starling Bank for, amongst other things, deficiencies in its sanctions compliance systems and controls.³ In particular, Starling Bank had been failing to screen customers against the full UK Consolidated List. As part of this review, ‘a number’ of potential breaches of UK sanctions by Starling Bank were also identified but OFSI has not yet taken any public action in relation to these potential breaches. This demonstrates that where there is appetite, it is possible for sanctions to be enforced in a timely and proportionate manner, but OFSI remains slow to react.

EU Member States are much more aligned with the proactive enforcement approach of the FCA in their enforcement of sanctions. Dutch and German authorities have both imposed custodial sentences for breaches of sanctions this year, and each of Luxembourg, Estonia, Lithuania, Poland and the Netherlands have imposed fines ranging from hundreds of thousands to millions of euros.

The reason for the discrepancy between OFSI’s enforcement record, and that of other UK and EU regulators is not clear, particularly in circumstances where OFSI’s enforcement team headcount increased by 175% in 2023 and it had 172 cases under active investigation as of April 2023.⁴ That said, the US, which has historically been the best resourced and most aggressive international sanctions authority, has itself also only imposed two penalties under the current Russia sanctions framework, so it could simply be that the lag time for enforcement has not yet elapsed.

In light of this, it is likely that we will see a significant wave of enforcement action over the next 12 months. This is furthered by Freedom of Investigation requests made by the BBC which have revealed that OFSI currently has 37 live investigations into breaches of the Russian oil price cap alone.⁵

Recent developments and the creation of OTSI

In line with this, it is apparent that the UK expects there to be greater enforcement going forwards. On 10 October 2024, the UK launched a new competent authority for certain trade sanctions, the Office of Trade Sanctions Implementation (OTSI). OTSI will have licensing responsibility in respect of a limited subset of trade sanctions, and will be able to impose civil monetary penalties for the majority of trade sanctions breaches as an alternative to the criminal penalties that will continue to be able to be imposed by HM Revenue & Customs (HMRC). HMRC is retaining sole competence for the enforcement of trade sanctions breaches that involve the movement of goods across the UK border, or which relate to military and dual-use goods.

The launch of OTSI represents a significant investment by the UK government in strengthening the trade sanctions enforcement regime. OTSI’s new monetary penalties powers will, in theory, make enforcement easier because they can be imposed on a strict liability basis (essentially discounting the complete defence of lack of knowledge or reasonable cause to suspect). Whether or not this will translate into further penalties, however, remains to be seen.

In the meantime, financial institutions and certain other regulated bodies will face an increased compliance burden. The strict liability provisions will mean that more robust due diligence will need to be performed, and failing to comply with new mandatory reporting obligations in respect of trade sanctions may also attract civil monetary penalties.

Impact on sanctions compliance

The recent changes to the UK sanctions enforcement framework mean that all affected persons should review both the legislation⁶ and guidance⁷ published thereafter, their sanctions compliance policies and procedures to ensure that they adequately address the additional risks created in respect of trade sanctions.

Those affected by the new reporting obligations should equally ensure that they have mechanisms to identify potential trade sanctions breaches and processes to ensure these are reported ‘as soon as practicable.’

The increased scrutiny being applied to trade sanctions breaches mean that serious consideration should be made to making voluntary disclosures in the event of identified breaches and mandatory reporting obligations mean that it is more likely that such matters will come to the attention of regulators. While there is not generally a ‘first mover’ advantage in the UK, it may be that opportunities to take advantage of discounts and arguments in mitigation for making voluntary disclosures might be lost. Periodic sampling of historic transactions can provide peace of mind.

Footnotes