Law firms have hitherto focused on financial sanctions – checking whether a client or counterparty is a designated individual or entity. But trade sanctions, which restrict entire sectors and the movement of goods, services, and technology, have been largely overlooked in legal sector compliance. That is changing.
The SRA has issued new guidance that from October 2024, the Office of Trade Sanctions Implementation (OTSI) has new enforcement powers under the Trade, Aircraft and Shipping Sanctions (Civil Enforcement) Regulations 2024. This means that trade sanctions breaches can result in significant civil penalties on a strict liability basis, with fines reaching up to £1 million or 50% of the estimated breach value – whichever is higher.
What are trade sanctions, and why do they matter?
Unlike financial sanctions, which freeze assets and restrict dealings with specific individuals or entities, trade sanctions apply to entire categories of goods, services, and technologies. For example, sanctions might prohibit the export of high-tech components to certain countries or restrict legal advisory services related to sanctioned industries.
This has major implications for law firms, particularly in:
- Corporate structuring and M&A: Ensuring transactions do not involve sanctioned sectors.
- Litigation and arbitration: Avoiding cases that could facilitate sanctioned activities.
- Trade finance and commercial contracts: Advising on compliance risks in supply chains.
- Trusts and company services: Preventing structures that could be used to evade trade controls.
The legal sector’s reporting obligations
There is a mandatory requirement for legal professionals to report suspected breaches of trade sanctions to OTSI. If UK customs are involved, HMRC may be the relevant reporting body. Failure to report could itself constitute a criminal offence. This raises questions about how firms will manage client confidentiality and legal professional privilege while ensuring they comply with reporting duties.
A gap in compliance – and why it needs fixing
Trade sanctions have historically been treated as a niche issue for law firms, primarily relevant to large international firms. This approach is perhaps outdated. With OTSI now enforcing trade restrictions in the same way OFSI enforces financial sanctions, every law firm handling corporate transactions, commercial litigation, or regulated industries needs to consider the impact of trade sanctions.
The challenge is that most law firm compliance teams have spent years refining their approach to financial sanctions but may not have the same level of expertise in trade restrictions. This means policies and training need urgent review.
An obvious blind spot is that standard “sanctions checks” tend to focus purely on financial sanctions. Trade sanctions compliance involves having a broader understanding of the sanctions that are currently in place that apply to your clients, practice area, transactions etc. The sanctions list supplied by the Foreign, Commonwealth & Development Office is a valuable tool.
We know that the SRA expects firms to have a firm-wide sanctions risk assessment. This needs to include trade sanctions as well as financial sanctions.
What firms should do next
- Update risk assessments: Firms should expand their compliance frameworks to include trade sanctions, particularly in high-risk areas like corporate services, litigation, and cross-border transactions.
- Train staff: Fee earners need awareness training on how trade sanctions affect legal practice and where the risks lie.
- Strengthen due diligence: Standard client and matter checks should incorporate trade sanctions screening, particularly for international work.
- Review reporting procedures: Firms need a clear policy on reporting breaches to OTSI while managing client confidentiality obligations.
Sanctions compliance is evolving – law firms must keep up
Trade sanctions are no longer an afterthought. With the new enforcement regime, law firms must treat them with the same seriousness as financial sanctions compliance. Those that fail to adapt could find themselves facing significant penalties.
