The UK Strengthens Enforcement of Trade Sanctions: Art Market Update

The UK Strengthens Enforcement of Trade Sanctions
Written by Rena Neville, Head of FCS Compliance – Art Division

In early 2024, the UK is launching the Office of Trade Sanctions Implementation (OTSI) to combat anyone attempting to evade Russian trade sanctions. The aim is that the department will compliment the existing Office of Financial Sanctions Implementation and it’s priority will be to crack down on company’s attempting to evade trade sanctions. This in contrast to the Office of Financial Sanctions Implementation (OFSI) whose remit centres on financial sanctions. Industry and Economic Security Minister, Nusrat Ghani, announced the news on December 11, 2023.

In addition to “cracking down” on trade sanction breaches, the OFTI is expected to provide guidance and support to the commercial sector. The new department has authority to issue civil penalties for trade breaches and referral power to HMRC for criminal enforcement.

It seems likely that the origins of the new unit are in part a response to a Red Alert issued by the National Crime Agency (NCA). The NCA has in the past cautioned both financial institutions and other members of the UK regulated sector about techniques and attempts by Russia to use intermediary countries to procure sanctioned goods.

For anyone interested in learning more, the techniques can be found in a Red Alert report published by the National Economic Crime Centre in December 2023. Although works of art are not included in the Red Alert categories of goods, the methods used to evade trade sanctions are similar to methods used by those attempting to launder money using the art market.

The Report identifies 12 indicators for the financial sector that are used to breach the trade sanctions. These indicators, or “red flags”, may be instructive to art market participants. Similar indicators may well be used to take advantage of legitimate art market participants. The twelve indicators are:

1. A recently formed company: Transactions related to payments for goods on the Common High Priority list, from a company incorporated after 24 February 2022 and based in known diversionary destinations.
2. A reluctance to disclose: A customer who lacks or refuses to provide details of banks, shippers, or third parties, including end users, intended end-use, or company ownership.
3. Multiple small value transactions: Transactions involving smaller value payments, all from the same end user’s foreign bank account, to multiple, similar suppliers of Common High Priority list items.
4. A lack of price sensitivity: A customer that significantly overpays for a Common High Priority list item, compared to known market prices.
5. A lack of disclosure: Purchases under a letter of credit that are consigned to the issuing bank, and not to the actual end user. In addition, supporting documents, such as a commercial invoice, do not list the actual end-user.
6. Lack of digital footprint: Transactions involving entities with little to no web presence, such as a website or a domain-based email account.
7. Inconsistent facts: Transactions involving customers with phone numbers which include country codes that do not match the destination country.
8. Unusual/ uncharacteristic behaviour: The item or service (commodity, software, service or technology) does not fit the purchaser’s line of business.
9. Similarity to OFSI list: The customer’s name or its address is similar to one of the parties on the OFSI consolidated list.
10. Customer’s with high risk associations: Transactions involve a purported civil end-user, but research indicates customers with counterparties that have connections with the military, such as an address that is a military facility or is co-located with military facilities in a country of concern.
11. Customers associated with OFSI entities: Transactions involving companies that are physically co-located, or have shared ownership, with an entity on the OFSI consolidated list.
12. Complex Payments: Transactions that use open accounts/open lines of credit when the payment services are conducted in conjunction with known diversionary destinations.

NNECC Red Alert is available on the pdfNCA website (251 KB).

^{Article written January 2024.}

UPCOMING ART MARKET TRAINING DATES

For any training dates after April, please click here.