As tensions between Russia and the US and European states rise to levels not seen in decades, compliance teams are readying themselves for a busy period ahead

The occupation by Russian forces of the Crimean peninsula in 2014 ushered in a new wave of U.S. and European sanctions. OFAC’s 50 Percent Rule came to prominence, whereby sanctions applied to named individuals and entities also apply to entities controlled or owned by them.

Meanwhile breaches by Exxon Mobil, Cobham Holdings and Standard Chartered Bank showed the challenges of doing business in a rapidly changing regulatory environment.

That period of rapid change in 2014 could feel pedestrian in comparison to what may be around the corner. But what will worry large organisations more, is that any new sanctions will come on top of an already complex and burdensome array of controls and restrictions that affect all aspects of their value chain.

2022: Bears and Eagles complicate the Year of the Tiger

While 2022 so far has been dominated by tensions with Russia, 2021 was dominated by frictions between China and the US.

Organisations had to adapt to new import controls and sanctions against Chinese officials, an expansion of the investment ban on Chinese firms with military affiliations and most recently the diplomatic boycott of the Beijing Winter Olympics.

Many recent measures have focused on the alleged human rights abuses in China’s Xinjiang region. However, we are also seeing a renewed focus on protecting US-originated data and technology from ending up in the hands of foreign military end use in sensitive jurisdictions, including China, Russia and Venezuela.

Certain sectors, such as the technology, aerospace and defence industries, and financial services firms, are more exposed than others. These same sectors will find themselves front and centre of any sanctions programs that emerge from the current Ukraine crisis.

However, as the US government strengthens its warnings about the growing risks of having supply chain and investment links to restricted entities in China, businesses in any sector whose operations are linked (even indirectly) to blacklisted firms run a high risk of violating the law. 

In the current market, complacency is just not an option. Any organisation that has a global value chain - from suppliers to customers - needs to ensure it is keeping up with the pace of change in regulatory activity to avoid running the risk of huge financial and reputational damage. Here’s how we anticipate the situation will evolve in 2022. 

Sanctions will remain a critical US foreign policy tool 

Since taking office, President Biden has not shied away from using sanctions to further his foreign policy goals. In December 2021, the U.S. announced new sanctions on several Chinese biotech companies and government entities in Xinjiang in its latest effort to crack down on human rights abuses in the region, as well as suspected efforts of obtaining sensitive military products and technology. 

China has repeatedly denied all allegations of human rights abuses in Xinjiang, and last year the Chinese government adopted the “Anti-Foreign Sanctions Law,” in retaliation to a spate of U.S. actions. And we can expect to see Biden’s campaign against human rights abuses continue. 

The current Ukraine crisis has shown how important sanctions will be to managing US-Russian relations - not to mention Iran, Myanmar, Venezuela, and many other jurisdictions where sanctions are key to foreign policy objectives.

The major issue for compliance teams in the current market is keeping up with the pace of change in regulatory activity.

From textiles to technology, polysilicon to plastics, a whole host of sectors are at risk of directly or indirectly doing business with blacklisted entities. Sanctions compliance is simply not the place to cut corners; firms need to ensure they have the fullest possible picture of any third party that they work with in high-risk jurisdictions to ensure they are remaining compliant. 

Growing scrutiny on military end use

The introduction of more stringent export controls is intended to counteract suspected efforts to obtain sensitive technology for military use through civilian supply chains. This is not a new problem; but regulations are getting tougher in this space. 

In 2020, the Bureau of Industry and Security (BIS) added a cluster of new rules to the Export Administration Regulations (EAR) for U.S. entities selling to companies in China, Russia and Venezuela.

In practical terms, the new rules require enhanced due diligence to identify potential military affiliations of Chinese and third-country customers, distributors, procurement agents, and other intermediaries with respect to all dual-use exports to China. Expect to see more and similar such rules in the US - and Europe.

The path to trade compliance  

Managing global trade compliance during turbulent times, whilst also keeping your supply chains moving, can be achieved with the right tools and data. There are some practical steps firms can take to ensure business continuity and robust compliance:

  1. Identify Red Flags - Relying on official lists alone will only get you so far. Whether screening for sanctions or military end users, you should also be looking at associated entities in order to identify other potential risks and red flags. Making sure you have access to quality, timely data will help to ease that burden, and help you get a lot further towards meeting your regulatory obligations.  
  2. Do Your Due Diligence - Once you have uncovered a potential red flag, you have a duty to investigate. This should include identifying the final destination for an item, which means that businesses need to be aware if a buyer is planning on re-exporting goods from a middle jurisdiction to one of the three countries affected by the EAR’s new rules. Under the new rules, businesses may want to consult third-party experts to review the classifications and to double-check that their customers are, in fact, civilian enterprises.
  3. Keep ahead of the curve - Risks are never static. The use of negative news from reputable, licensed sources can be instrumental when identifying and managing supply chain risk and trade compliance in real-time. Adverse media monitoring is now recognised by regulators as an integral part of the third-party due diligence process, and helps organisations keep on top of potential risks as they emerge.
  4. Value your teams - compliance professionals will be critical to your business through 2022. Retaining talent is always a priority, but in the current market it will require genuine commitment

Gavin Proudley is head of Third Party Risk Proposition, Dow Jones Risk & Compliance