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In response to the Russian invasion of Ukraine, new sanctions/restrictive measures have been issued by the U.S., EU, UK, Switzerland, Canada, Japan, South Korea, Taiwan, Singapore, Iceland, Australia and New Zealand. As a result, Russia is now the most heavily sanctioned country in the world.
On March 15, 2022, the U.S. Department of Commerce hosted a webinar with several speakers giving presentations on what these measures involve and how they could potentially affect any U.S. company that imports or exports goods, services or technology.
A key point made during this webinar was that violations of these sanctions are prosecuted as felony violations of federal criminal law, and it is vital that companies understand that the standard of prosecution is not intent.
“A company or individual’s conduct may be considered a civil violation even if there is a lack of knowledge that a transaction was prohibited,” explained Edward Heath, a partner with the law firm Robinson + Cole and one of the speakers at the webinar. “Put another way, the government doesn’t have to prove intent or prove knowledge or even that you should have known. They simply have to prove that a violation has occurred.”
Indirect violations
Under the current sanctions against Russia, Belarus and the breakaway republics of Ukraine, the import of any goods, services or technology, either directly or indirectly, is prohibited. Also, the exportation, re-exportation, sale or supply of any goods, services or technology, either directly or indirectly, is prohibited.
“Technology” includes data sharing or providing information. Providing any kind of support, service or guidance violates these sanctions.
Company owners are generally aware that they are prohibited from making any new investments in the sanctioned regions and that trade is prohibited. What they are frequently unaware of, however, is the “indirectly” portion of the sanctions. This one word can cause serious legal problems for companies that engage in any sort of international trade.
Selling a product to a buyer in China may appear to be a legal transaction, but if that buyer then turns around and sells your product to a buyer in a sanctioned country, your company will be guilty of indirectly violating sanctions and could face federal criminal charges.
“Any dealings with Ukraine or any country bordering Russia carries increased risk and should be scrutinized very carefully,” said Heath. “For example, if you’re selling your product to Latvia or a known transshipment country like Dubai, you want to scrutinize that transaction carefully to make sure it isn’t being passed on to one of the sanctioned regions.”
OFAC
All U.S. economic and trade sanctions programs are administered and enforced by the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC). Every business owner should be familiar with the 2019 OFAC Compliance Framework, as it lays out guidelines for companies to follow when creating a sanctions compliance program (SCP). Although such a program is not mandatory, OFAC “strongly encourages organizations subject to U.S. jurisdiction, as well as foreign entities that conduct business in or with the United States, U.S. persons, or using U.S.-origin goods or services, to employ a risk-based approach to sanctions compliance by developing, implementing, and routinely updating a sanctions compliance program (SCP).”
The reason OFAC encourages all companies to develop a SCP is because U.S. sanctions apply to all U.S. companies and citizens regardless of where activities may occur or through whom they may occur. “You can’t do through others what you’re not allowed to do directly,” Heath explained. “You cannot conduct a transaction through a third party as a ‘work-around’ to avoid sanctions.”
OFAC notes that many sanctions violations occur due to a misunderstanding of the regulations. Something as seemingly innocuous as referring business opportunities to a sanctioned country is considered a violation.
“Consider whether your organization has the structure in place to assess your Russian and Ukrainian touch points—the due diligence you need to do on customers, vendors and suppliers as well as the training that your personnel needs to spot the red flags and ensure nothing slips through,” Heath counseled.
He also noted that these sanctions will likely lead to increased trade between Russia and China and encouraged companies to subject any dealings with China to increased scrutiny to avoid inadvertently facilitating sanctions violations.
Compliance
To limit the risk of indirectly violating sanctions, experts recommend companies thoroughly examine their customers, suppliers, intermediaries and counterparties and take a risk-based approach when designing or updating a SCP for their staff to use. They should conduct a routine risk assessment to identify potential OFAC issues, particularly during any company mergers or acquisitions.
OFAC notes that “Senior Management’s commitment to, and support of, an organization’s risk-based SCP is one of the most important factors in determining its success. This support is essential in ensuring the SCP receives adequate resources and is fully integrated into the organization’s daily operations, and also helps legitimize the program, empower its personnel, and foster a culture of compliance throughout the organization.”
Resources are available online to help companies avoid running afoul of these sweeping sanctions. A good place to start is by researching “2019 OFAC Compliance.” Read the PDF file the U.S. Department of Treasury has posted titled “A Framework for OFAC Compliance Commitments.” This document provides an overview of what elements need to be contained for a company’s SCP to be considered “effective.”
Failure to ask the right questions and do your due diligence is no defense against prosecution. Ultimately, the best safeguard for your business and employees is having an internal compliance system. If your company imports or exports any products, you should assume there is at least some risk of an indirect violation and take the time to implement an effective SCP if you don’t already have one in place.
Jesse Madden is the editor of InTents magazine. She can be reached at JMMadden@ifai.com.
This article was written at the end of March 2022. Given the speed with which the situation has been unfolding, it is possible that some of the details it contains may have changed. Please consult the government agencies listed for the most current information.
SIDEBAR: Sanctions compliance resources
The government has several resources available to help companies navigate the rapidly changing landscape of international trade.
U.S. Department of Treasury, Office of Foreign Assets Control (OFAC): home.treasury.gov/policy-issues/office-of-foreign-assets-control-sanctions-programs-and-information
U.S. Department of Commerce, Bureau of Industry and Security (BIS): bis.doc.gov/
U.S. State Department Directorate of Defense Trade Controls: pmddtc.state.gov/ddtc_public
If you have any concerns about suspicious inquiries that come to your firm, you are encouraged to contact your local BIS Export Enforcement Office: bis.doc.gov/index.php/enforcement/enforcement-field-offices