May 2019 Issue
Complex, volatile and challenging, the global sanctions landscape is an arena swarming with numerous statutes, executive orders and country-specific regulations – making compliance a minefield for companies.
Indeed, non-compliance with a sanctions regime, inadvertent or otherwise, is likely to result in severe consequences, with significant fines, reputational damage and restricted future business opportunities among the potential penalties.
Keeping track of the sanctions landscape is therefore key, as changes can be swiftly introduced – such as the updated EU Blocking Statute in the wake of the US withdrawal from the Joint Comprehensive Plan of Action (JCPOA) on Iran’s nuclear programme – leaving many companies attempting to reconcile competing sanctions objectives in a quandary.
“In recent months, companies engaged in cross-border business have increasingly become pawns in a geopolitical chess game,” says Meredith Rathbone, partner at Steptoe & Johnson LLP. “In Iran, European companies now find themselves caught between the proverbial ‘rock and a hard place’ after the US withdrew from the JCPOA, while the EU expanded its ‘blocking statute’ as part of an effort to save the deal.
“In Russia, US domestic politics and certain international developments have resulted in new sanctions, and the threat of even more, leaving multinational companies struggling to make investment decisions without knowing whether a non-sanctioned party today will turn up on a sanctions list tomorrow,” she continues. “In Venezuela, the US government has embraced regime change, leaving companies doing business there scrambling to find an orderly way to comply. And there is every indication that companies will continue to be caught in the crosshairs.”
Another illustration of the ever-evolving nature of sanctions regimes is the increased use of ‘secondary’ sanctions by the US. “Due to these secondary sanctions, we have observed companies which operate internationally maintaining standards of compliance higher than they are strictly required to,” says Polina Lyadnova, a partner at Cleary Gottlieb Steen & Hamilton LLP.
So, as the impact of changing sanctions regimes becomes apparent and the penalties for non-compliance more significant, companies need to keep abreast of an evolving landscape, minimise risks and meet their obligations.
In order to ensure compliance with extant sanctions regimes wherever and whatever their sphere of operations, companies need to develop a programme that can effectively overcome the multitude of trans-jurisdictional issues that are likely to arise.
“An effective sanctions compliance programme requires an initial assessment of the risks posed by a company’s business and its jurisdictional touchpoints,” advises Nancy A. Fischer, a partner at Pillsbury Winthrop Shaw Pittman LLP. “From a US perspective, companies should examine whether activities involve the US financial system and US nationals, among other things. They should also consider conducting regular audits, focusing on high-risk business activities based on geographic location, customer base, and products and services sold.
“Companies can look to proactively address sanctions when there is a change in operations, whether this includes acquiring a new entity or expanding into a high-risk market,” she continues. “Overall, effective sanctions programmes require commitment from senior management and a devotion of adequate resources to monitor the compliance programme on an ongoing basis.”
Having identified risks, a written compliance policy is the next, key, step. Such a policy, according to Vivien Davies, a partner at Fieldfisher, should be tailored to the specific risks a company faces and be actively implemented and enforced by senior management. “By assessing the risks posed by sanctions and tailoring a compliance programme to those risks, companies can go some way toward mitigating penalties in the event that a sanctions breach occurs,” she says.
Essentially, an effective sanctions programme is one that, in addition to being regularly reviewed and updated, is responsive to changes across the sanctions landscape, as well as necessary modifications to business models. “In a similar vein to anti-bribery and corruption policies, a sanctions policy would need to include regular audit and scrutiny of third parties, supply chains and other parties in business operations,” adds Ms Davies. “Enforcement cases over the past year continue to highlight the importance of robust screening of potential counterparties against sanctions lists.”
In the view of Nick Parfitt, head of market planning at Acuris, a baseline assessment of business risk exposure is a core component in the screening process. “Companies should also regression-test their existing client base and widen tolerances around algorithmic matching to fully demonstrate that rules, configurations and prior alert matching are commensurate with their business risk,” he suggests. “Ideally, this exercise should be conducted by a third party.”
The imposition of sanctions on transgressing companies, as well as countries, has been solid in recent months, with the Office of Foreign Assets Control (OFAC) of the US Department of the Treasury particularly active. In addition, the Office of Financial Sanction Implementation (OFSI) imposed the UK’s first monetary penalty for a breach of financial sanctions – a penalty which, although somewhat paltry, is significant symbolically.
“One of the biggest cases of 2018 was the $1.34bn settlement entered into by Société Générale with multiple regulators, including OFAC, for processing US dollar transactions over a five year period involving countries, persons or entities subject to US sanctions,” says Vanessa Wilkinson, an associate at Fieldfisher. “Société Générale exercised a reckless disregard for US sanctions, which is a reminder that all companies should check whether they could be caught by US sanctions even if they operate outside the US.”
The scope and severity of sanctions regimes are, however, clearly not the only deterrent for global businesses. “In addition to the actual financial and legal penalties that may be imposed, companies face significant reputational risk for actual or perceived non-compliance,” says Ms Lyadnova. “Further pressure is coming from business peers or counterparties. Banks, in particular, are under a closer lens for sanctions compliance and, thus, transpose their sanctions compliance policies onto their counterparties in more stringent ways.”
A greater focus on financial institutions was demonstrated in 2018 when a Tier 1 bank was heavily fined for sanctions violations. “The size of such fines should focus the minds of senior management at companies that have potential exposure to sanctioned jurisdictions, and put the topic at the top of their compliance agenda,” suggests Mr Parfitt. “At the very least, ‘look-back’ exercises and compliance reviews should be carried out to assess the effectiveness of current controls.”
Additional penalties imposed in recent months include an OFAC settlement with AppliChem GmbH for alleged violations of the agency’s Cuba sanctions programme and, in a much smaller OFAC case, a settlement with Kollmorgen Corporation for Iran-related sanctions violations by the company’s recently acquired Turkish affiliate.
“OFAC has high compliance expectations and it is increasingly clear that a ‘check-the-box’ compliance exercise is not sufficient,” says Ms Rathbone. “Risk-based compliance is still referenced, but sanctions laws can be enforced on a strict-liability basis and companies have been penalised even when they have taken seemingly reasonable steps to avoid violations.”
To a large extent, the complexion of the sanctions compliance landscape in the years ahead will depend on the geopolitical outlook, with the UK’s departure from the EU likely to be a key disruptor, among others.
“Brexit has the potential to have a wide impact on global sanctions regimes,” believes Ms Davies. Although there is a wide expectation that the UK and EU will align on sanctions policy, Brexit will give room for the UK to take a different approach and change how sanctions are implemented and enforced.
“However, if the UK departs from the EU approach, an additional layer of compliance will be added for UK businesses with interests in the EU, which would also increase the costs of compliance,” she continues. “If the UK were to impose additional sanctions, companies would have to comply with a new and separate UK sanctions regime, in addition to already complying with sanctions regimes imposed by the EU, UN and US.”
According to Ms Lyadnova, a UK sanctions policy independent of the EU would have the potential to fragment the sanctions landscape. “We are yet to see the UK sanctions regime, but even if the UK fully adheres to EU sanctions policy, at least in the interim, regimes would still diverge not least due to the differences in terminology used by the UK Sanctions Act as opposed to EU regulations, as well as likely divergence in implementation,” she suggests.
In the face of constantly evolving sanctions regimes, companies are under constant pressure to optimise their screening systems and alert review processes to ensure they meet their compliance obligations. With stakes high and penalties severe, non-compliance is simply not an option.
“We have observed companies committing more resources, including personnel, to sanctions compliance and more frequently seeking expert legal advice to help them navigate a complex environment,” says Ms Lyadnova. “This trend is likely to continue if the penalties and numbers of designations continue to increase, if not in number, but in severity.”
Given that level of severity, even the most sophisticated companies can ill afford to overlook sanctions-related risks. “If a company engaged in cross-border business does not have a sanctions compliance programme, it needs one,” advises Ms Rathbone. “If a once ‘state-of-the-art’ compliance programme has not been updated it is probably no longer state-of-the-art. The landscape is constantly changing, with the consequences of complacency too significant to rest on one’s laurels.”
In an increasingly complex and often inconsistent sanctions environment, in which even inadvertent transgressions are heavily penalised, companies need to carefully navigate a challenging landscape full of exacting regimes. With failure likely to be costly, compliance is most assuredly king.
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