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As global trade surpasses £25 trillion, regulatory bodies are intensifying efforts to combat trade-based financial crime (TBFC). The upcoming launch of the UK's Office of Trade Sanctions Implementation (OTSI) in October 2024 marks a significant shift in trade compliance enforcement, presenting new challenges and responsibilities for organizations involved in international trade.
This announcement follows an increasing focus on trade sanctions enforcement, circumvention and evasion in the UK. In 2023, HM Revenue and Customs issued eight compound penalties in connection with trade sanctions violations totalling more than £2.1 million.
Beyond the financial toll, OTSI's authority to publicly disclose violations introduces a serious reputational threat that can damage long-standing relationships. In today’s increasingly sophisticated global trade environment, this makes compliance an even more high-stakes game. While OTSI's introduction underlines the importance of compliance, many organisations may find that their current systems aren't adequately equipped for this evolving landscape.
The On-the-Surface Illusion: why legacy systems fall short
Many companies believe their compliance systems are up to the task. This confidence, however, often hides deeper vulnerabilities; a phenomenon some might call an On-the-Surface Illusion. While existing systems may seem sufficient, they struggle to meet the demands of modern regulations and the complexities of today’s trade environment.
Global trade has grown exponentially, and these systems were built for a different era, one with far simpler rules. As regulations and TBFC schemes evolve, legacy systems reveal critical weaknesses that leave organisations exposed. What looks compliant during routine checks may collapse when scrutinised by increasingly sophisticated regulators.
OTSI vs. OFSI: key differences in enforcement
Understanding the limitations of legacy systems brings us to the need for clarity on how OTSI's role differs from that of the existing Office of Financial Sanctions Implementation (OFSI).
OTSI and OFSI may seem like two sides of the same coin, but their enforcement scopes are distinct. OFSI, established in 2016, focuses on financial sanctions, overseeing asset freezes and transaction blocks for entities tied to sanctions regimes. OTSI, however, will target trade sanctions related to goods, services, and technologies, with an emphasis on supply chains involving high-risk jurisdictions.
OTSI's remit greatly expands the UK’s reach into monitoring imports, exports, and dual-use technologies. This goes beyond financial transactions, requiring organisations to track the physical movement of goods and services through intricate, often global, supply chains.
Strict Liability Framework:
Both OTSI and OFSI operate under strict liability, meaning penalties apply even if the breach was unintentional. However, OTSI’s focus on trade sanctions introduces new levels of risk where violations can carry penalties up to £1 million or 50% of the transaction value.
Reputational Risk:
OTSI’s ability to publicly disclose violations adds another dimension of risk. For businesses engaged in global trade, a public breach could severely damage relationships with international partners, suppliers, and clients, amplifying the consequences beyond mere fines.
The Challenge: tracking Trade-Based Financial Crime across disparate systems
The distinct scopes of OTSI and OFSI highlight the complexities organisations face, particularly when tracking compliance across multiple, disconnected systems.
One of the greatest challenges in managing TBFC is the fragmented state of compliance infrastructure. Most organisations rely on disparate systems spread across various departments, each responsible for different aspects of trade and finance compliance. According to research from the Eastnets-Finextra report, the average institution has 3 to 4 departments handling TBFC, often using disconnected tools that don’t integrate effectively.
Trade transactions are complex by nature, involving multiple parties, jurisdictions, and layers of documentation. This complexity creates ample opportunities for criminals to exploit gaps, using techniques such as trade misinvoicing or false declarations. Disconnected compliance systems only exacerbate the problem, making it difficult for organisations to maintain a unified, real-time view of their risks.
Common Fault Lines:
- Fragmented Data: Compliance teams are often hamstrung by siloed systems that don’t share data, making it hard to identify suspicious patterns across departments.
- Siloed Operations: Lack of real-time coordination between departments delays the identification and response to potential risks.
- Inconsistent Compliance Practices: Different teams use different tools and methods, creating inconsistencies and gaps in overall compliance.
- Reactive Monitoring: Many organisations only identify risks after a violation has occurred, an outdated approach in today’s fast-paced trade environment.
- Regulatory Compliance Gaps: The fragmented approach makes it difficult to keep up with new regulations, heightening the risk of accidental breaches.
These challenges have significant implications for financial institutions that must navigate increasingly intricate regulations while managing fragmented compliance infrastructures.
What this means for financial institutions
The introduction of OTSI signals a crucial shift for organisations managing international trade. Legacy systems and fragmented compliance strategies will no longer suffice. Financial institutions and corporations need to adopt more modern, integrated approaches to stay ahead of increasingly complex regulations.
To effectively address these compliance hurdles, many organizations are turning to technology-driven solutions that offer greater integration and efficiency.
According to the Eastnets-Finextra report, 91% of organisations are planning to increase automation over the next 12 months. This shift points to the growing importance of advanced technologies like AI and machine learning, which can identify risks early and help prevent violations before they escalate. Advanced solutions typically include:
- Machine Learning for Real-Time Risk Detection: AI-powered systems can track trade flows in real-time, identifying anomalies like trade misinvoicing early on.
- Generative AI for Dynamic Risk Assessments: Generative AI models can quickly analyse market data and predict pricing anomalies, allowing institutions to address potential violations before they occur.
- Data Centralisation for Improved Collaboration: Breaking down departmental silos and centralising compliance data offers a clearer view, enabling faster, coordinated responses to emerging threats.
Implementing such advanced technologies can be a strategic move, leading us to consider the key actions executives should take in response to these developments.
Key takeaways for executives
The regulatory landscape is changing, and organisations must evolve with it. OTSI represents a significant step in the UK's enforcement of trade compliance, and institutions that rely on outdated methods risk falling behind.
- Audit Your Compliance Frameworks: Conduct a thorough review of your compliance systems to ensure they align with the latest regulatory demands. Modernisation is no longer optional.
- Leverage AI and Automation: Automating compliance processes can help detect risks earlier, allowing your organisation to respond proactively rather than reactively.
- Foster Cross-Department Collaboration: Centralising compliance efforts across departments will streamline operations, ensuring more efficient responses to violations and reducing overall risk.
Embracing AI, modernising compliance frameworks, and enhancing collaboration between departments can turn regulatory compliance from a burden into a strategic asset. OTSI’s impending launch may bring heightened oversight, but it also offers forward-thinking institutions a chance to lead through innovation in the compliance space.
