A View From the Exchange: 'OTSI Reporting Obligations: The Devil is in the Detail'

From this Thursday 10 October, FCA regulated firms must report to the new Office of Trade Sanctions Implementation (OTSI) if they know or have reasonable cause to suspect a person has breached trade sanctions* (*in respect of which OTSI has enforcement powers). 

The consequences are significant – it is a criminal offence to fail to comply. Firms therefore need clarity on their obligations. However, understanding which trade sanctions breaches fall within OTSI's remit (and therefore need to be reported) is complex.

OTSI has no civil enforcement powers in relation to trade sanctions reserved for HMRC, including those concerning the import and export of goods, the transfer of technology to and from the UK, and military and dual-use goods and technology. OTSI's remit is limited to trade sanctions concerning services and overseas trade with a UK nexus (e.g. a UK company making goods or technology available outside the UK).

This creates difficulties for FCA regulated firms (along with money and legal services providers subject to the reporting requirement). Firms will need to identify in-scope transactions and ensure that due diligence procedures are in place to satisfy the reporting obligation. This is particularly challenging when financial services firms will often have minimal information to assist in identifying a trade sanctions breach. OTSI's reporting obligations guidance currently only states that firms "are not required to follow specific methods or systems in conducting [their] due diligence". In addition to the risk of breaching the reporting requirement, firms could also breach trade sanctions if they provide financial services (e.g. payment transmission services) in connection with the prohibited trade. Of course, other existing forms of financial crime liability may apply alongside the new trade sanctions regime. Firms may also need to consider filing a suspicious activity report in addition to an OTSI report or in relation to conduct which falls outside of OTSI's reporting obligation, but which raises money laundering concerns.

The narrowness of the reporting obligation also highlights a broader divergence in the UK trade sanctions regime. OTSI has no power to impose a civil monetary penalty for a large swathe of trade sanctions (for which there is also no mandatory reporting obligation). For these trade sanctions, the only enforcement route is a criminal investigation by HMRC and potential prosecution or compound settlement. This can be contrasted with the Office of Financial Sanctions Implementation (OFSI), which has the power to impose civil monetary penalties for all financial sanctions. 

Sanctions is a complex area and having a clear reporting process and enforcement regime is critical to ensuring compliance. It is hoped that further guidance from OTSI, and potentially legislative change, will bring greater clarity to this area.

Author: Tom Stroud