Sanctions tracker: UK creates new trade sanctions body and introduces new Russia sanctions restrictions

There have been a number of recent significant UK sanctions developments, including the announcement of the creation of a new Office of Trade Sanctions Implementation ("OTSI") and the introduction of further Russia sanctions restrictions. We summarise these developments, and a round-up of other recent UK Russia sanctions news in this post. Since our last update the UK has also restructured its Iran sanctions regime, and OFSI has published its Annual Report, which we will address in a separate blogpost.

Creation of OTSI

On 11 December 2023, the Industry and Economic Security Minister announced the creation of OTSI. The agency will be responsible for the civil enforcement of trade sanctions, including those against Russia. The announcement confirms that OTSI is intended to help businesses comply with sanctions, as well as investigating potential breaches, issuing civil penalties and referring cases to HMRC for criminal enforcement where needed.

OTSI's powers therefore appear likely to mirror those already enjoyed by the Office of Financial Sanctions Implementation ("OFSI") in respect of financial sanctions.

OTSI will launch in early 2024, sitting within the Department for Business and Trade ("DBT"), and its remit will include activity by companies who may be seeking to avoid sanctions by selling through third countries.

Introduction of new Russia sanctions

Two new statutory instruments were published on 14 December 2023, amending the existing Russia sanctions legislation (the Russia (Sanctions) (EU Exit) Regulations 2019 (the "Regulations"). These comprise the Russia (Sanctions) (EU Exit) (Amendment) (No. 4) Regulations 2023 (the "No. 4 Regulations") and the Russia (Sanctions) (EU Exit) (Amendment) (No. 5) Regulations 2023 (the "No. 5 Regulations"). The UK government has also issued a press release in respect of the new measures.

The principal changes introduced by the No. 4 and No. 5 Regulations are summarised below.

Trade restrictions

• The introduction of new restrictions on the import or acquisition of metals (as listed in new Schedule 3BA to the Regulations, introduced by the No. 4 Regulations) from Russia and the supply or delivery of metals from Russia to a third country. Unlike some other restrictions in the Regulations, the acquisition of Russian-origin metals is prohibited irrespective of their end destination (i.e. whilst there is an import ban, it is not a feature of the 'acquisition' ban that there should be any intention that the metals be imported into the UK).
• Certain transitional provisions have also been introduced, which are of relevance both to the new metals restrictions and the pre-existing restrictions in relation to iron and steel products. Notably, there is clarification that the import restrictions in relation to metals, and a number of restrictions in relation to iron and steel products, will not apply where metals were exported from Russia before the prohibitions came into force and are not to be released for free circulation in the UK or Isle of Man (see new regulation 60GAA). Certain transitional provisions also apply in relation to relevant goods consigned from Russia before 15 December 2023 and imported into the UK before 14 January 2024 (see amended regulation 60G). As explained below (in the section on New General Licences) the DBT has also published a General Trade Licence relating to the trade restrictions on Russian iron and steel.
• The No. 5 Regulations introduce a new prohibition on the import or acquisition of diamonds and diamond jewellery (as listed in Parts 2 and 3 of Schedule 3GA to the Regulations) from Russia, together with related restrictions on technical assistance, financial and brokering services. It is also prohibited to supply or deliver diamonds or diamond jewellery from Russia to a third country.
• Certain additional items have been added (by the No. 4 Regulations) to a number of the schedules listing restricted goods, and certain other amendments have been made to align with equivalent EU restrictions (for example restrictions on the provision of technical assistance, financial services and brokering services in respect of luxury goods).

Financial services restrictions and reporting obligations

• The No. 4 Regulations introduce an amendment to Regulation 17A of the Regulations (which imposes restrictions on the establishing of correspondent banking relationships and processing of payments to/from designated persons) to confirm that such "processing" includes the clearing and settlement of payments, but does not include the act of crediting a payment, for the first time, to a UK credit or financial institution, where the payment is credited to an account in the institution's name and is not held on behalf of or for the benefit of an underlying customer of the institution. The restrictions have also been extended to apply to the processing of payments in currencies other than sterling.
• The No. 4 Regulations also introduce an exemption from the "processing payments" restrictions permitting the transfer of funds by the institution between accounts where both accounts are held in the UK, neither are held for a customer, and the transfer is made for the purposes of compliance with Regulation 17A.
• Separately, a new reporting requirement has been introduced for "relevant firms" in respect of "prohibited persons" (entities such as the Central Bank of Russia to whom it is prohibited to provide financial services relating to foreign exchange reserve and asset management under Regulation 18A). Specifically, firms must inform HM Treasury as soon as practicable if they know or have reasonable cause to suspect that they hold funds or economic resources for a prohibited person. There is also an annual reporting requirement as to the nature and amount of any such funds/economic resources.
• Designated persons (which in this context means persons who are subject to an asset freeze) who are UK persons are also now required to inform HM Treasury of the nature and value of any funds or economic resources which they own, hold or control in any jurisdiction, and the location of those funds/economic resources. Non-UK designated persons have an equivalent reporting requirement in respect of funds or economic resources owned, held or controlled in the UK (see new Regulation 70A, inserted by the No. 4 Regulations).

Licensing grounds

• A new licensing ground regarding divestment has been added to Schedule 5 of the Regulations (by the No. 4 Regulations). OFSI may grant a licence to enable anything to be done by a UK entity to enable that entity to undertake a "relevant transfer" – a transfer of funds or economic resources located in Russia and owned, held or controlled by the UK entity, in order to enable that entity to divest itself (either wholly or partially) of those funds/economic resources, where the funds or resources are transferred to a "person concerned", defined as the Government of Russia or a Designated Person. Broadly speaking, the introduction of an express licensing ground is to be welcome, but as drafted this does appear to have some odd limitations – for example, it contains a quite narrow concept of 'divestment' and does not address the involvement of a Designated Person in any role other than as transferee.
• A licensing ground has also been introduced which will permit OFSI to issue a licence to enable a UK entity to acquire an interest in that entity from a Designated Person or the Government of Russia, provided the sole consideration for the acquisition is a transfer of funds, and the funds are credited to a frozen account in the UK or a similar sanctioning jurisdiction. Again, the drafting is a little odd, as it does not appear to address (for example) a UK shareholder buying out the interest in a UK entity of a co-shareholder who is a Designated Person, as it seems to envisage the acquisition by an entity of an interest in itself; we assume this may be a drafting error.
• Finally in relation to divestment, and as a parallel to the licensing grounds above, OFSI may now also licence a UK entity to do anything to enable another person (B) to undertake a "relevant transfer", which is a transfer of funds or economic resources located in Russia and owned, held or controlled by B, where the transfer is to a "person concerned" and is undertaken in order to enable B to divest itself, either wholly or partially, of those funds or economic resources. Similarly, OFSI may licence a UK entity to undertake activities to enable B to acquire an interest in itself from the "person concerned".
• In Schedule 5 Part 1C (the licensing grounds in relation to the regulation 17A(2) 'processing payments' restrictions), a new licensing ground has also been introduced to "to enable anything to be done in connection with a licence which the Treasury has decided to issue for another purpose specified in this Schedule".

The No. 4 Regulations came into force on 15 December, with the exception of the provisions relating to the new reporting requirements, which will come into force on 26 December 2023. The No. 5 Regulations will come into force on 1 January 2024.

Ownership and control guidance

Following the recent Court of Appeal decision in the Mints case (discussed in our previous post) and the statement from the Foreign Commonwealth & Development Office (the "FCDO") in response, the UK government has issued new guidance on the ownership and control test in the context of UK asset freezing measures.

The new guidance clarifies that:

• the FCDO does not intend sanctions measures targeting public officials to prohibit routine transactions with public bodies including taxes, import duties or the purchase/receipt of permits and licences;
• if the FCDO considers that a (designated) public official exercises control over a public body, they would look to designate the public body at the same time; and
• 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.

The Law Society has also updated its sanctions guidance, including with the addition of a joint note with the Bar Council on the ownership and control test.  Although that note was finalised before the publication of the FCDO guidance mentioned above, the Law Society notes that substantial uncertainty still remains in this area, as highlighted in the joint note.

Indeed, the proposition that the law in this area remains unclear is reinforced by the latest judgment touching on ownership and control: Litasco SA v Der Mond Oil and Gas Africa SA and Locafrique Holding SA [2023] EWHC 2866 (Comm). In this judgment, Foxton J considered the Court of Appeal's obiter remarks in Mints regarding President Putin's potential ability to control all companies in Russia, and noted that "I believe the better interpretation of Regulation 7(4) is that it is concerned with an existing influence of a designated person over a relevant affair of the company…not a state of affairs which a designated person is in a position to bring about. Were matters otherwise, it would follow that President Putin was arguably in control, for Regulation 7(4) purposes, of companies of whose existence he was wholly ignorant, and whose affairs were conducted on a routine basis without any thought of him. Further, I note that the Chancellor endorsed part of Mr Rabinowitz KC's summary of the effect of Regulation 7(4), namely that it applies "when the designated person 'calls the shots'" ([229], [232]), not the wider formulation at [114] ("if the designated person calls the shots, or can call the shots")...".

Whilst this interpretation (which supported a conclusion that President Putin did not control Litasco, as had been argued by the Defendants) will broadly be welcomed, the varying approaches taken in each case to the meaning of "control" underlines the unsatisfactory nature of the regulation 7 test.

New Russia designations

On 6 December the FCDO announced the addition of 46 names to the UK's designated person list including Russian weapons manufacturers and defence importers, as well as businesses operating in Belarus, China, Serbia, Turkey, the UEA and Uzbekistan exporting military equipment and parts to Russia. Please see OFSI's notice for details of the new asset freeze targets.  

On 15 December, the UK added Novicombank to the Russia asset freeze list.

Red alert – exporting high risk goods

On 6 December, the National Crime Agency announced the publication of a new red alert to financial institutions and other members of the regulated sector in relation to attempts to circumvent sanctions.

The red alert (issued jointly with partners such as HMRC, the FCDO and OFSI) provides information on common techniques suspected to be in use to evade sanctions on the export of high-risk goods. It lists a range of red flags which might indicate an attempt to evade sanctions, which companies should carefully consider in order to ensure that any such red flags are appropriately identified and resolved.

Although the red alert has been issued to the regulated sector, it will also be relevant to other firms involved in global supply chains, and will be relevant to their sanctions compliance controls and processes.

New general licences ("GLs")

OFSI have published two new GLs in the period covered by this update:

• a payment processing wind-down GL (GL INT/2023/4078352) which permits the processing of payments from or via a "newly designated bank" (i.e. any bank designated for the purposes of Regulation 17A (correspondent banking restrictions) in the future and, in respect of non-sterling payment processing, Sberbank; and
• a GL permitting the making of payments such as council tax and non-domestic rates to local authorities by designated persons (GL INT/2023/3781228).

The DBT has also published a General Trade Licence relating to the current trade restrictions on Russian iron and steel which permits transactions involving pallets and similar platforms for handling foods, and relevant processed iron or steel products manufactured or produced before 21 April 2023 or already in the UK. The UK government has also issued guidance for importers relating to the iron and steel restrictions.

Memorandum of understanding between OFSI and FCA

A new memorandum of understanding (the "MOU") was entered into between OFSI and the Financial Conduct Authority (the "FCA") on 21 November 2023.

This replaces a prior MOU dated April 2019 and sets out the arrangements for cooperation and the exchange of information between OFSI and the FCA.

Festive greetings

We would like to wish all our readers a restful and happy festive season (hopefully without the introduction of new sanctions legislation).