Exports: what you can learn from record £1m sanctions fine

As reported by ICAEW

A UK exporter paid the price when selling goods to a company incorporated in Russia operating in a third country. The case highlights the need for businesses to completely understand sanctions rules and their implications.

A UK exporter that made sanctioned goods available to Russia has been fined £1.16m – the largest ever compound settlement for a Russian sanctions’ offence. The unidentified company paid the compound settlement, an alternative to criminal prosecution, in May after breaching the Russia (Sanctions) (EU Exit) Regulations 2019, and HMRC has now released more details as a case study.

The breach involved the export of sanctioned goods to a company incorporated in Russia, but which was operating in a ‘third country’. The size of the fine underlines that fact that HMRC is likely to impose heavy penalties for violations that some might consider accidental and that ignorance of the finer details of sanctions regulations is not a mitigating factor.

Be aware of third country risks

It’s a common misconception that goods or services must be exported directly to the country in question to breach sanctions. However, many businesses incorporated in or constituted under the law of a sanctioned country will have branches or operations in third countries, or connections with individuals in those countries.

As in the above case, sanctions are violated if goods are re-exported to a sanctioned destination. "You don’t necessarily have to be shipping goods directly to Russia to fall foul of the sanctions. You can’t sell to any ‘person connected with Russia’ and, for certain goods, you can’t even sell goods that could be reasonably expected to end up in Russia,” says Ed Saltmarsh, ICAEW’s Technical Manager, VAT and Customs.

Know the end destination of your materials

Sanctions can also be breached if goods are used in the manufacture of a product that is then exported to a sanctioned country, or if the customer uses legitimately exported products for a prohibited use.

Having an export licence doesn’t necessarily mean you can ignore sanctions, says Saltmarsh, though businesses can sometimes export to sanctioned countries or export sanctioned goods with the right licence(s), issued by the Export Control Joint Unit, Office of Financial Sanctions Implementation and/or the Office of Trade Sanctions Implementation.

Dual-use goods can also catch businesses out, such as those used in weapons manufacture. “Sometimes this is things like computer chips but can be things as innocuous as particular alloys of nickel and titanium, for example."

Compliance checks are essential

Ways of circumventing sanctions are becoming increasingly sophisticated so it’s getting harder for organisations to be certain about the final destination, end user or intended use of the goods they export. This means that it’s important to conduct compliance checks, request clarification from customers where necessary, and take legal advice if there are uncertainties.

Companies should familiarise themselves with current UK sanctions regimes with particular attention to sanctions on Russia, which represent the most severe package of sanctions ever imposed on a major economy. The UK sanctions list can be used to identify banned individuals and entities.

Checks on counterparties should be repeated at regular intervals to pick up things such as changes of location or company directors. 

Creating a detailed map of supply chains will help identify any points where products pass through higher-risk areas, such as countries where enforcement might be weak.

Maintain awareness

Compliance with sanctions should be incorporated into wider staff training and employees should be made aware of common red flags. Examples might include orders where the goods don’t seem in keeping with the customer’s line of business or the stated destination, a lack of detail about the intended use or the identity of the end user, or requests for non-standard payment routes.

Companies should sign up to UK sanctions email alerts to receive prior warning of new sanctions before they take effect and if necessary get legal advice on whether current or planned trade arrangements comply with the sanctions. This is particularly important for those producing evolving technologies, such as AI-powered software, as these are likely to attract more controls in the future.

Compliance procedures should be fully documented and records kept of all the steps taken so these are readily available in the event of an investigation.

Finally, if past violations come to light, a voluntary disclosure often means less severe penalties are imposed. It’s advisable to take legal advice on the best course of action.