A joint commitment to effective sanctions implementation

The OFAC-OFSI partnership symbolizes a continued commitment from two of the largest global financial sanctions implementation organizations to strengthen ties. On November 15, 2023, OFAC announced its intention to deepen collaboration with OFSI. As the sanctions landscape becomes increasingly intricate, the two organizations continue to work closely together to address national security threats such as Russia’s invasion of Ukraine.

Earlier in October 2023, OFAC and OFSI hosted a multi-day technical interchange in London commemorating the anniversary of the organizations’ partnership. There, the financial implementation authorities addressed cross-jurisdictional issues and sanctions implementation best practices. As two of the largest financial sanctions implementation authorities worldwide, both organizations remain dedicated to ensuring the security of financial systems, enforcement of financial sanctions, and prioritizing issues such as virtual asset misuse and cyber threats.

Collaboration to improve sanctions effectiveness

This announcement marked a shift towards joint enforcement and execution of financial sanctions. Acknowledging the threats to international security and instability resulting from global events such as Russia’s invasion of Ukraine, OFAC and OFSI remain committed to utilizing messaging to advise the private sector, financial institutions, and non-governmental organizations (NGOs) on compliance. OFAC and OFSI work closely to engage stakeholders via webinars; via the newly established reciprocal secondee program; the issuance of specific licenses; and by publishing humanitarian-related fact sheets.

Businesses can expect continued cooperation and information sharing across organizations. Both OFAC and OFSI recognize that financial sanctions are most effective when applied multilaterally. OFSI and OFAC will continue to release guidance materials, create sanctions compliance best practices, and expand their partnership to work alongside other global partners and allies.

OFAC-OFSI guidance

OFAC-OFSI published a fact sheet guiding humanitarian organizations and the private and financial sectors on how to partake in transactions that may be affected by Russia-related sanctions. The guidance notes that international organizations and NGOs providing humanitarian assistance may apply for a specific license if a general license is not available. Moreover, meeting certain conditions, United Kingdom (UK) financial institutions may process transactions involving the Joint Stock Company Russian Agricultural Bank, which is subject to a UK asset freeze, pertaining to agricultural commodity exports to, from, or transported through Russia (the same bank is subject to lesser U.S. sanctions and OFAC has issued a broad general license related to agricultural commodities, among others).

For example, the United States issued Russia-related General Licenses relating to agricultural commodities, medicine, medical devices, telecommunications, and certain internet-based communications (although we note that authorization from the U.S. Commerce Department may still be required for certain medical devices or medicine subject to the U.S. Export Administration Regulations). Specific licenses may be issued by OFAC on a case-by-case basis for transactions that are not exempt under OFAC regulations or that are not authorized by a general license. OFAC previously published advisories relating to sanctions and export controls on the Russian military-industrial complex as well as constraints on third parties attempting to evade Russia-related sanctions.

Similarly, the UK issued Russia-related General Licenses, applicable in particular circumstances, for sectors not limited to agricultural commodities (such as the provision of related insurance and other services), and fertilizers (such as the provision of related financial services or funds). It will issue additional licensing on a case-by-case basis. For instance, OFSI will prioritize additional licensing on the grounds of extraordinary costs or circumstances, food, humanitarian activity, medical and educational purposes, health, the environment, and medical goods and services.

Collaboration compliance implications

Despite differences between sanctions administration in the UK and the U.S., the OFAC-OFSI collaboration will likely make it easier for companies to navigate the sanctions compliance landscape. Similarities between the two organizations include similar legal thresholds, the ability to issue civil monetary penalties, and the issuance of general licenses.

In sum, the overall goals of this collaboration include:

1. building on the U.S. Department of Treasury’s 2021 Sanctions Review;
2. expanding OFSI’s capabilities;
3. aligning on foreign policy and national security goals; and
4. combatting economic crime such as corruption and kleptocracy.

Collaboration across the organizations will continue to grow so businesses should anticipate policy alignment between the two financial sanctions implementation authorities.

Other developments in the United States

In addition to the joint measures outlined through the OFAC-OFSI partnership, the U.S. Department of Treasury hired Treasury Chief Sanctions Economist Rachel Lyngaas who will assess the impacts of sanctions measures globally and determine the consequences of sanctions on stakeholders, partners, and sanctioned nations. Upon review, sanctions measures will be adjusted depending on the negative or positive impact.

Other developments in the United Kingdom

OFSI Red Alert

OFSI’s recent Red Alert and sanctions announcement marks a continued trend of strengthening the UK’s trade sanctions system. Because G7 partners established the Enforcement Coordination Mechanism to encourage compliance and enforce sanctions measures, there was a call on international actors to abstain from supporting Russia’s war on Ukraine. The Red Alert notes the UK’s efforts to minimize trade relations with Russia. On August 8, 2023, the UK sanctioned businesses for supplying Russia with foreign military equipment. Further, on November 8, 2023, the UK sanctioned businesses in China, Serbia, Turkey, the UAE, Uzbekistan, and Belarus for funding Russia’s invasion of Ukraine.

Lastly, the Red Alert lists transactions in the financial sector that are ‘red flags’ such as transactions connected to goods on the Common High Priority list. Forty-six entities were sanctioned for being complicit in Russia’s war on Ukraine. Among those sanctioned include the Russian military-industrial complex and third-country suppliers such as United Arab Emirates oil-related entities. Along with G7 measures to deter Russia’s access to resources to continue the war, the newly implemented sanctions signal a “no tolerance approach” to those enabling Russia’s war on Ukraine.

The Office of Trade Sanctions Implementation’s function

As we reported, the UK is creating a new trade sanctions enforcement body, the Office of Trade Sanctions Implementation (OTSI). OTSI will sit within the Department for Business and Trade and will oversee civil trade sanctions enforcement, compliance, and investigations of companies potentially in breach of sanctions. Anticipated to launch in 2024 after the development of a legal framework, the OTSI announcement marked a shift towards stricter sanctions enforcement, particularly towards Russia. Ever since the implementation of Russia-related sanctions, “goods imports from Russia to the UK have already plummeted by 94%.”

OTSI will manage:

1. enforcing civil trade sanctions;
2. business compliance with sanctions;
3. investigating possible sanctions breaches;
4. issuing civil penalties; and
5. referring cases to the HM Revenue and Customs criminal division.

OTSI maintains a particular focus on companies circumventing strict trade sanctions by sending goods to third countries. These companies will face tougher penalties in the UK under the oversight of OTSI.

Key priorities for OTSI include maximizing the impact of sanctions on Russia, improving expertise regarding sanctions enforcement and implementation, and utilizing sanctions as a deterrence mechanism. Ultimately, the implementation of OTSI will allow the UK to “move in lock-step with our allies on economic sanctions.”

Next Steps

1. Companies should monitor ongoing OFAC-OFSI collaboration efforts. 

• Future OFAC-OFSI industry panels and events are expected, particularly in connection with cybersecurity, virtual currency, financial, and fintech related sectors.
• OFAC-OFSI will continue to visit countries that present a danger of sanctions circumvention. Though previous guidance published by OFAC-OFSI highlighted Russia, we expect this collaboration to expand its sanctions focus.

2. Consider sanctions enforcement coordination and information exchange in assessing risk and evaluating possible sanctions violations.
3. Companies should continue to maintain robust sanctions policies, procedures and compliance training programs.

Hogan Lovells is well-positioned to assist with US and UK economic sanctions compliance questions or concerns.  For further information, please contact any of the Hogan Lovells lawyers listed.

Authored by Beth Peters, Aline Doussin, Aleksandar Dukic, Andrea Fraser-Reid, Daniel Shapland, and Feven Yohannes.