It has been one year since Russia invaded Ukraine. Since then, several countries, including the UK, have imposed sanctions in response.

Aimed at curtailing the Russian economy and with a stated purpose of “massive consequences”, the intent of the sanctions went far beyond those of 2014 when Russia annexed Crimea. The resulting restrictions are wide ranging, imposing prohibitions or restrictions on individuals, organisations, banks and monetary exchanges, as well as on imports and exports of goods, services and technology.

One year on, there is political debate about the effectiveness of the sanctions. However, closer to home the impact is undeniable: global western businesses “self-sanctioned” by winding down operations or leaving Russia while others had to seriously consider the cost of compliance on any investment with Russian connections.

In the UK, organisations have had to get to grips with a new and constantly evolving sanctions climate. Brexit has added another complication, with the UK introducing its own sanctions regime. Although most restrictions mirror the EU regime, there are subtle differences for those affected by UK sanctions.

Some organisations have had to grapple with both the EU and UK regimes, with many struggling to find the additional resources needed to ensure compliance. They have also had to try to extricate themselves from contracts in the most cost effective and risk-free way possible. The ever-changing situation has also placed a considerable ongoing compliance burden on companies, with many facing the challenge of putting in place proportionate measures to ensure that they do not fall foul of the sanctions.

As the UK continues to announce measures aimed at destabilising the Russian economy in response to the conflict, we look at the developments in the UK sanctions regime in the last year and look ahead to what can be expected in 2023 and beyond.

Current restrictions

Any business operating internationally will be no stranger to the restrictions placed on Russia since its annexation of Crimea in 2014. The energy sector was heavily impacted, with the most notable restrictions being on the export of goods and services for Russia’s oil exploration and production projects and a ban on services for deep water, Artic Circle or shale projects.

March 2022 saw harsher trade, financial, shipping, aviation and immigration restrictions on Russia. Financial sanctions were also placed on individuals and organisations connected with Russia and the Russian government. An asset freeze was placed on all Russian banks, making it difficult for businesses to receive payment for work done, even if that work was legitimate and not in breach of sanctions.

Not all dealings with Russia are banned, but organisations have had to assess whether potential commercial and reputational risks are worth taking in the current climate. Many big players in the energy sector have severed all ties with Russia, taking the view that they cannot tolerate the risks being connected with Russia brings.

Most recently, heavy restrictions have been placed on Russia’s largest revenue stream: oil and oil products. There is a ban on the import of Russian oil and oil products, and on maritime transportation and associated services which facilitate maritime transportation of Russian oil and refined oil products. These restrictions have been in place since December 2022 and February 2023 respectively.

There is an exception to the maritime transportation of Russian oil and oil products to and from third countries provided the price paid for the oil is below a price cap. This is to prevent Russia from selling oil at global market prices, but at the same time enables Russian oil to reach the third countries that need it.

Enforcement

It is a criminal offence to breach any trade or financial sanctions. Penalties include unlimited fines and imprisonment for up to seven years (financial sanctions) or 10 years (trade sanctions). A breach of an export licence condition carries a penalty of an unlimited fine, two year’s imprisonment, or both. The Office of Financial Sanctions Implementation (OFSI – being the regulator responsible for investigating breaches of financial sanctions on behalf of HM Treasury) can impose civil monetary penalties for such breaches.

Strict liability

Summer 2022 saw a significant change in the way that a breach of financial sanctions can be enforced in the UK. In a move that has been deemed as emulating the US approach to enforcement, it is no longer a requirement for OFSI to prove that an individual or organisation had knowledge that it was in breach of financial sanctions. It is enough that the offending party has dealt with a listed entity or individual for a breach to be established, and any steps taken by that party to satisfy itself that it was not dealing with a listed entity or individual will not be considered a defence.

The change only applies to OFSI’s ability to impose civil penalties, and the knowledge test will continue to apply for criminal offences. However, any due diligence undertaken could be considered as mitigation when imposing a civil penalty and could result in a reduction. It is therefore as important as ever to ensure your compliance and due diligence processes are and remain effective.

Fines

OFSI imposed its largest civil penalty of £20.47m in 2020 for a breach of the Ukraine financial sanctions regime. We have not seen as high a penalty as that since then, but penalties have been imposed by OFSI in 2022 on companies which dealt with a designated person without a licence.

HM Revenue and Customs (HMRC) has continued to issue compound penalties, which is a penalty in lieu of prosecution where a party accepts it has breached export control or sanctions rules, for breaches of controls on strategic goods and sanctions. Between December 2021 and February 2022, it issued penalties of between £1,000 and £2.7 million to eight UK exporters for unlicensed exports of military or dual-use goods. That trend continued throughout 2022, with compound settlements totalling around £4.1 million being agreed between May and December 2022.

What to expect in 2023 and beyond

Last month, the International Trade Select Committee announced an inquiry into UK trade sanctions on Russia. The inquiry will explore the role of the Department of International Trade in developing, implementing and enforcing trade-related sanctions, including controls on military and dual-use goods, and travel bans and asset freezes on Russia.

It will look at the impact of the Russian sanctions on UK businesses, supply chains and consumers, and the effectiveness of the UK government’s guidance. The committee has called for evidence to the inquiry which can be submitted here up to 17 March. The outcome could mean further changes to UK sanctions as well as the way they are enforced by all government departments.

The UK continues to make additions to the UK sanctions list in respect of Russia. As more and more individuals and organisations are added to the list, it will be as important as ever for businesses operating internationally to ensure that they can respond to these changes quickly by keeping their compliance policies and procedures up to date. Carrying out regular awareness training for relevant personnel will be key to ensuring compliance.

OFSI has announced it is set to increase its resources to over 100 staff by the end of its financial year and continues to strengthen its partnership with its US counterpart, the Office of Foreign Assets Control (OFAC). OFAC is prolific in its implementation and enforcement of US sanctions breaches, and OFSI’s plan to share best practice and co-ordinate with them signals its strong intention to get tougher on breaches of UK sanctions rules. The European Commission is also working with member states to establish a single point of contact for enforcement and implementation issues with cross-border dimensions.

The cooling of M&A activity with any Russian connections is expected to continue. While some deals may be permissible, they remain highly complex from a compliance standpoint.

Get in touch

Sanctions implementation enforcement against the backdrop of conflict is a marathon, not a sprint. With the war in Ukraine showing no signs of halting, international sanctions focussed on Russia look set to continue. The UK, EU and the US are all likely to impose further restrictions to encourage Russia to cease its actions to destabilise Ukraine.

Get in touch if you need advice on whether your business could be affected by current sanctions rules, or if you would like to discuss your general approach to compliance.

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