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Science of compliance

Companies that defy economic embargoes face huge fines or the removal of export permissions. As sanctions become increasingly complex, businesses must be alert to inadvertent breaches, warns Tom Blass.

In about 430 BC, the Athenian Assembly imposed a ban on trade with merchants from the nearby town of Megara, giving the reason that the inhabitants had offended the goddess Demeter. The real cause, intention and consequences of the Megarian Decree have been debated by classicists from Thucydides onwards; Athenian merchants, said Aristophanes in The Acharnians, cared little for all that, merely grumbling that it was no good for the trade in pigs, fish and figs.

Economic sanctions – and attendant controls on the export of weapons of war and other goods – have played a part in international conflicts from long before the Continental Blockade during the Napoleonic era via the US Civil War, the Cold War, Apartheid, the Cuban embargo, to present-day Russian sanctions. In a world weary of war, their use remains one of the few arrows in the quiver of foreign policy. 

Compliance mode

But in recent years, sanctions have presented less of a 'stop' sign to companies seeking to do business than a complex set of obstacles. These touch every aspect of international commerce – not only exports and investment, but e-commerce, human resources, M&A due diligence, R&D, insurance and finance. Meanwhile, sanctions compliance (particularly the provision of legal advice, and listed party screening ‘solutions’) has become an industry in and of itself. 

Almost invariably, the imposition of – or failure to impose – sanctions is controversial for any number of reasons. For one, they often fail to achieve their objectives; for another, they’re difficult to police and enforce, and for every sanctions regime there are doubtless many breaches, whether wilful, reckless or inadvertent. But the many companies that take their compliance obligations seriously do so mindful of both the value attached to good citizenship and the possibility of huge penalties being imposed for failure. 

Indeed, the acronym OFAC (the Office of Foreign Assets Control, a branch of the US Treasury) looms so large in the imagination of sanctions compliance officers that some admit to night terrors on account of it. 

It is OFAC that compiles the list of specially designated nationals with whom US companies – and non-US companies over whom the US asserts jurisdiction by dint of a listing on the New York Stock Exchange or other US connections – must not do business. And it is OFAC that pushes companies to settle for alleged breaches, including BNA Paribas, which paid $8.9bn to US regulators; Schlumberger, fined $230m; and China’s ZTE, which agreed in March to pay more than $1.2bn for breaches of US sanctions on Iran and North Korea. 

And it is not only the US that enforces sanctions. EU member states are increasingly taking a robust stand (albeit with very varying degrees of robustness), as are some Asian regulators. Hefty fines are not the only available penalties; removal of export privileges can hit a company just as hard. Indeed, it is in partly this multi-jurisdictional dimension – what is not permitted by whom, and where – that makes the job of the compliance professional so interesting, and earns lawyers their fees. 

Additionally, sanctions have become more nuanced as their architects look to create mechanisms that avoid ‘collateral damage’. Embargoes such as the Oil for Food Programme, levied on Iraq between the first and second Gulf Wars, are now regarded as a textbook example of how not to impose sanctions.

Smart sanctions

Officials now talk about the use of ‘smart’ sanctions, which, like precision-guided missiles, more accurately target specific government agencies, companies or individuals in an attempt to shield ordinary civilians from the blanket effects of an embargo. 

So while the sanctions imposed after the appropriation of Ukraine have had a major impact on US and EU business with Russia and certain industry sectors, notably oil and gas, have been particularly hard hit, Russia is not under an embargo per se.

But companies transacting with Russian partners are obliged to ensure that they are screening third parties carefully, that lending agreements are within the required parameters and that they are receiving all the requisite assurances from partners to minimise risk of diversion (for example, that goods bound for Russia proper will not be forwarded to Crimea). 

Compliance also means forward planning and speculation. Were there to be an increasing escalation in tensions between the West and Russia, which industries, sectors or entities would most likely be targeted? What might a ramping up of sanctions mean for existing deals? Would force majeure apply in the event that contracts had to be broken?

Happy to talk

Conversely, smart companies are asking themselves whether they are in a position to take advantage of any relaxation in the sanctions regime – maintaining channels of communication and collaborating where it is safe to do so without incurring the risk of non-compliance. ‘There’s no crime in talking’ is a useful bon mot. 

Doing so means having adequate screening mechanisms in place to ensure transactions are not undertaken with sanctioned parties, and having contractual agreements in place with third parties – suppliers and service providers – to provide indemnities against their potential breaches. 

One complaint against the way that sanctions mechanisms have been orchestrated is that while the law provides opportunities for legitimate trade, it is difficult to take advantage of those opportunities. For example, even prior to the signing of the agreement with Iran to relax sanctions in return for guarantees on the country’s nuclear programme, companies could export certain goods (such as medicines and medical devices) provided they obtained the relevant authorisations. 

But frequently they were prevented from doing so because banks refused – or were reluctant – to provide the necessary trade finance or process financial transactions, fearful that doing so would put them on a collision course with OFAC, or simply because the associated administrative costs were too high.

Regulators say they take steps to discourage such ‘de-risking’ by banks and other service providers. Nonetheless it exacerbates the phenomenon by which companies take a blanket approach to doing, or not doing, business in certain parts of the world. Good compliance does not mean over-compliance. It means making thorough (that is, more than tick-box) risk assessments; careful due diligence; choosing agents, suppliers, distributors carefully; understanding the logic underpinning regulatory actions; and taking stock of a supply chain. 

A question of good practice

All this, of course, is good business practice anyway. Indeed, sanctions compliance has much in common with other areas that might loosely be termed trade security issues, such as with anti-corruption legislation, anti-money laundering and business integrity. Each demands that companies take steps to ‘know their customer’ and have robust ethics training and reporting systems in place.

Also, it has become a truism that where there is a problem in any one of these areas, the whiff of another is probably close by. (As an eminent former government official-now-lawyer once told WorldECR, separate compliance areas may have their own disciplines, but ultimately ”they’re like skaters in a park working with each other toward the same, or similar, end goals”.)

Ultimately, those goals are that the world becomes a safer place, or they at least go some way to countering ever-flourishing threats, which is worth remembering if the complexities of a piece of legislation ever strikes you as cumbersome or counterintuitive. 

It is true that at time of writing, there is at least a perceived lack of trajectory and clarity in US foreign policy (it is not yet apparent which parts of the Obama legacy will remain intact, extended or dismantled), and the spirit of multi-lateralism has been eroded or sidelined further by the prospect of Brexit.

But such uncertainty is all the more reason for businesses to stay alert to the kinds of compliance obstacles that typically spring seemingly out of nowhere – and not merely grumble, like those ancient merchants of Athens, when they do. 

Tom Blass is the editor of WorldECR (The Journal of Export Controls and Sanctions) and Trade Security Journal (www.worldecr.comwww.tradesecurityjournal.com).

This article is sourced from fDi Magazine
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