On December 6, 2023, the UK’s National Economic Crime Centre (“NECC”) issued a red alert concerning the export of high-risk goods that Russia is using on the battlefield in Ukraine. The red alert outlines sanctions evasion red flags for the financial services, transportation, and logistics sectors, including features of suspicious transactions, customers, requested services, and items. In addition, HM Treasury’s Office of Financial Sanctions Implementation (“OFSI”) has designated 46 individuals and entities based in Russia, Belarus, China, Serbia, Turkey, the United Arab Emirates (“UAE”), and Uzbekistan suspected of supplying the Russian military with sanctioned goods and technology.
On December 11, 2023, Industry and Economic Security Minister, Nusrat Ghani, also announced the creation of the Office of Trade Sanctions Implementation (“OTSI”), a new unit focused on the civil enforcement of UK trade sanctions that will launch in early 2024. OTSI’s remit will include the investigation and enforcement of sanctions evasion.
These developments underscore the UK government’s continued commitment to cracking down on the evasion of sanctions (particularly under the Russia sanctions regimes), as well as an increased focus on using designation powers to target behavior outside the scope of UK sanctions enforcement jurisdiction that the UK government considers undesirable from a foreign policy perspective.
The NECC, a multi-agency unit within the National Crime Agency (“NCA”), issued a red alert concerning the export of high-risk goods (the “Red Alert”). The primary objective of the Red Alert is to provide UK businesses with crucial insights into techniques suspected of being used to evade sanctions on the export of high-risk goods used by Russia on the battlefield in Ukraine. While the primary audience for the Red Alert is the financial sector, including banks, credit card operators, foreign exchange dealers, and non-bank payment service providers, its relevance extends to other industries such as customs brokerage, freight forwarding, transportation, and logistics.
In order to promote vigilance against global attempts to circumvent trade sanctions, the NECC encourages those active in the financial services sector to protect their businesses by leveraging available data sources, screening, and monitoring capabilities to detect efforts to circumvent UK trade sanctions. The Red Alert urges businesses to adopt a proactive approach to analysing transaction activity and customer attributes that may indicate red flags suggestive of potential sanctions evasion as part of a holistic assessment of the risks associated with individual transactions and customer relationships.
The Red Alert provides a non-exhaustive list of example red flags, as follows, which businesses should consider incorporating into their existing trade sanctions systems and controls:
- transactions related to payments for goods on the Common High Priority list from a recently incorporated company in known diversionary destinations after February 24, 2022;
- customers refusing to provide details on banks, shippers, or third parties, including information on end users, intended end-use, or company ownership;
- transactions involving smaller value payments from the same end user’s foreign bank account to multiple, similar suppliers of Common High Priority list items;
- customers significantly overpaying for Common High Priority list items compared to known market prices;
- purchases under a letter of credit consigned to the issuing bank, not the actual end user, without proper documentation;
- transactions involving entities with little to no web presence;
- transactions involving customers with phone numbers not matching the destination country;
- items or services not aligning with the purchaser’s line of business;
- customer names or addresses similar to parties on the OFSI consolidated list;
- transactions involving purported civil end-users but with connections to the military;
- transactions involving companies physically co-located or sharing ownership with entities on the OFSI consolidated list;
- transactions using open accounts/open lines of credit in conjunction with known diversionary destinations;
- last-minute changes in payment routing previously scheduled from a country of concern; and
- payments made from entities located at known transshipment points or involving atypical shipping routes.
On the same day, 46 new designations were made under the Russia and Belarus financial sanctions regimes. These new designations target entities suspected of being involved in the circumvention of sanctions on the export of high-risk goods, which Russia is using on the battlefield in Ukraine. The new designations include 31 Russian individuals and entities linked to designing and manufacturing drones and missile parts and importing and supplying key electronic components, as well as Chinese, Serbian, and UAE incorporated companies that are, or are associated with, entities that are “carrying on business in a sector of strategic significance to the Government of Russia;” namely, the energy and defence sectors. Those designated include:
- a Belarusian entity (JSC Display Design Bureau), a defence organization linked to manufacturing military technology for the Belarusian regime, which has directly facilitated Russia’s war in Ukraine;
- a Serbian company (AVIO CHEM), which has sent multiple shipments of aircraft parts and accessories to Russian entities;
- an Uzbek company (MVIZION), which acted as an intermediary to import parts into Russia;
- a Turkish entity (Smart Trading Limited) involved in the supply of sanctioned electronics to Russia;
- three Chinese entities (Asia Pacific Links Limited, Sinno Electronics Co., Limited, and Xinghua Co., Limited) involved in supplying sanctioned goods critical to Russia’s war efforts; and
- four UAE-based entities (K&O Ship Management, Oil Tankers (SCF) Management, Radiating World Shipping Services LLC, and Star Voyages Shipping Services LLC) using opaque corporate structures and deceptive shipping practices to facilitate unfettered trade in Russian oil.
As indicated in a press release accompanying the designations, these actions indicate the UK government’s willingness to use its designation powers to target third-country entities that support Russia’s war efforts and “signals the UK’s no tolerance approach to those enabling Russia’s illegal war, wherever they may be.” These newly sanctioned persons are now subject to an asset freeze, and, in the case of individuals, a UK travel ban.
The announcement of the creation of OTSI, a new trade sanctions enforcement unit, is most immediately intended to enhance the UK government’s efforts to curb companies evading Russian sanctions, although its remit will cover the civil enforcement of trade sanctions more generally. Trade sanctions are controls on (i) the import, acquisition, export, supply, delivery, transfer, and making available of specified types of goods and technology, as well as certain ancillary services related to those goods and technology, and (ii) the provision or procurement of certain services.
OTSI will have the power to investigate breaches, issue civil penalties, and refer cases to HM Revenue and Customs (“HMRC”) for criminal enforcement where appropriate. It also appears likely that OTSI will follow OFSI’s lead in looking to engage with industry and provide guidance on compliance with UK trade sanctions in addition to its enforcement role.
The implementation and administration of UK trade sanctions, including licensing, currently is undertaken by the Export Control Joint Unit (“ECJU”) and the Import Licensing Branch (“ILB”) within the Department for Business and Trade (“DBT”). It appears likely that the ECJU and ILB will continue to have responsibility for trade sanctions licensing, as the press release announcing OTSI’s creation made no mention of licensing falling within its proposed remit.
The investigation and enforcement of possible trade sanctions breaches currently is undertaken by HMRC under the auspices of The Customs and Excise Management Act 1979, which permits the imposition of a maximum penalty of seven years’ imprisonment and/or a fine, rising to a maximum period of ten year’s imprisonment with respect to trade sanctions imposed under UK sanctions regulations as a result of a provision of The Sanctions and Anti-Money Laundering Act 2018. HMRC enforcement powers currently include the power to impose civil monetary penalties (so-called compound penalties). HMRC recently announced its imposition of a compound penalty of £67,001.31 in August 2023 in relation to the attempted export of goods in breach of the UK’s Russia trade sanctions. It appears that HMRC will retain responsibility for investigating the most serious trade sanctions breaches and referring them to the Crown Prosecution Service for criminal prosecution, when appropriate, as the press release announcing OTSI’s formation referred to its role solely in civil enforcement of trade sanctions breaches.
The creation of OTSI underlines the UK government’s desire to crack down on breaches of UK trade sanctions, particularly in relation to Russia. In announcing OTSI, Ms. Ghani stated that “we are leaving no stone unturned in our commitment to stopping Putin’s war machine. That means clamping down on sanctions evaders and starving Russia of the technologies and revenues it needs to continue its illegal invasion * * * Today’s announcement will help us do that, and send a clear message to those breaking the rules that there is nowhere to hide.” It also suggests that increased trade sanctions enforcement is to be expected, particularly for those who circumvent trade sanctions.
OTSI is slated to launch in early 2024, as legislation will be required to bring it (and its powers) into effect. For more information on these developments, contact the authors of this post, Alexandra Melia or Elliot Letts, in Steptoe’s Economic Sanctions team in London.