The UK has introduced new rules under the Trade, Aircraft and Shipping Sanctions (Civil Enforcement) Regulations 2024, which mean companies could now face penalties even when they did not know and had no reasonable cause to suspect they were importing/exporting items in violation of trade sanctions.
The evolving sanctions landscape
Sanctions are policy tools employed by governments with the aim of furthering their foreign policy objectives, or effecting change in foreign jurisdictions.
While sanctions have been used for decades, the breadth of sanctions regimes has increased dramatically in recent years. The leading jurisdictions imposing international sanctions (in particular, the UK, EU and US) have rapidly developed new and creative ways of enhancing their sanctions regimes, including targeting a broader range of sectors and industries, increasing their focus on combating sanctions circumvention and making use of so-called ‘secondary sanctions’ measures.
As a result, sanctions can impact a wide variety of industries – including the food sector – in a variety of ways.
As such, businesses are increasingly faced with a need to employ enhanced compliance measures and more rigorous oversight of their global supply chains to mitigate against sanctions risks.
What are the Trade, Aircraft and Shipping Sanctions (Civil Enforcement) Regulations 2024?
The new UK regulations are just one of the latest developments in the world of sanctions compliance and enforcement, and they have broad implications. Here, we focus on two important legal updates where civil financial penalties are concerned.
Firstly, the new UK regulations state that “…any defence that the person did not know and had no reasonable cause to suspect that an offence had been committed under trade sanctions regulations is to be ignored” for the purpose of civil enforcement.
This means that violation of most UK trade sanctions is now a ‘strict liability’ offence – companies can be penalised even if they did not know and had no reason to suspect that a trade restriction could be triggered.
Secondly, the new regulations allow the authorities to issue fines either up to 50% of the value of the violation, or up to £1m (whichever is greater), meaning the potential penalties for violating trade sanctions can be very significant.
Where does risk arise for food manufacturers?
While sanctions measures that concern food products are currently more limited than those against more strategic industries (such as the military or industrial sectors), certain sanctions programmes do prohibit the exportation or supply of luxury food items (e.g. caviar or truffles), or certain seafood products.
The bigger impact, however, can be on machinery used for food production or storage, as this can also fall within the wide-ranging restrictions, which include items such as certain filtering machinery, pressure-reducing valves, or cooling equipment.
It is worth noting that all trade restrictions prohibit not just the direct supply or restricted items to the sanctioned country, but also indirect sales via third countries. In this context, transactional due diligence is of paramount importance, particularly given the legislative changes mentioned above.
Furthermore, even where particular products are not subject to specific trade restrictions, financial sanctions may still be relevant - notably, prohibitions on dealing with ‘designated persons’ (i.e. those individuals and companies who have been specifically included on sanctions lists). Importantly, sanctions against such designated persons flow down to companies they own or control, meaning it is crucial to carry out due diligence not just on counterparties but also on their ownership structure to mitigate sanctions risks. We note that violations of financial sanctions can also be penalised on a ‘strict liability’ basis.
A key difficulty is that businesses active in the food industry, including food manufacturers, often have complex supply chains which source goods from all over the world. Therefore, there is a heightened risk of dealing with sanctioned jurisdictions, and a greater risk that sanctions (whether in respect of specific products or dealings with designated persons) could be violated indirectly.
For example, sourcing goods from a jurisdiction which is subject to sanctions can put manufacturers at a greater risk of dealing (directly or indirectly) with a designated person. For the same reasons, the use of third party intermediaries, such as agents, can also lead to exposure to sanctions risk if proper due diligence is not carried out.
More recently, it has also become increasingly common for third countries, which are not subject to sanctions, to be used for processing sanctioned products or hiding links to sanctioned persons or territories. Authorities are alive to this, and it is a growing area of focus for enforcement.
What steps can be taken to mitigate risk and aid compliance?
Proper internal compliance processes can make all the difference between, on the one hand, avoiding a violation altogether or escaping an enforcement action with just a warning, or, on the other hand, facing a hefty fine (or indeed criminal enforcement). Sanctions authorities can (and do) take such compliance processes into account when considering aggravating or mitigating circumstances.In particular, knowledge of key risk areas can aid in creating robust internal compliance measures. Accordingly, any sanctions compliance policy and procedure should follow a risk assessment which identifies and addresses main areas of risk exposure.
As a rule of thumb, many businesses carry out enhanced transactional due diligence and sanctions screening against counterparties based in high-risk jurisdictions and seek – in order to identify potential links to sanctioned persons – to verify the origin and destination of goods (to ensure they are not intended for supply to/sourced from sanctioned countries).
Any good sanctions policy should also be underpinned by a training programme to help educate employees, allowing them to more easily identify risks in addition to fostering a ‘culture of compliance’.
Where third party intermediaries are concerned, inserting sanctions compliance clauses into contracts can supplement due diligence measures and provide a remedy in the event a violation were to occur.
Finally, if compliance concerns ever do arise, then expert legal advice can help determine whether a violation has in fact occurred, as well as the appropriate course of action (such as the submission of a voluntary self-disclosure).
Final thoughts
The legal landscape of trade sanctions continues to develop and international regimes are becoming increasingly wide-ranging and extra-territorial. This means that sanctions compliance can often seem a difficult area to navigate.
However, steps can be taken to build knowledge and awareness in a business and make compliance easier. If you are in doubt, legal advice can help you assess the current strength of your compliance regime, build knowledge of key risks, and provide you with the tools and strategies to build a robust strategy for continued compliance.
