Photo: Reuters
Photo: Reuters

Opinion | Doing business is not easy under a sanctions regime

Businesses must pay compliance more attention if they are to mitigate the risks of global sanctions

On a red-eye flight earlier last year, I chanced upon an article about a company being fined nearly $1 million for violations of North Korea sanctions regulations. The company’s business? Eyelashes. The violations were discovered during a self-audit, which revealed that the company’s third-party suppliers sourced some materials from North Korea. Eyelashes may be far from my normal course of business but the sanctions violations are not.

It’s difficult to recall a week that has passed without an announcement of new economic sanctions. From Iran and Venezuela to Russia and Syria, they have become a foreign policy tool that is vastly preferred over military action or quiet diplomacy. The recent imposition of sanctions on Turkey, which were lifted less than two weeks later, are an example of how prominently sanctions are used in today’s foreign policy and how rapidly the sanctions landscape can change. Recent actions to enforce sanctions have affected the engineering, manufacturing, shipping, software development, and even the beauty industry.

Their expansion as a foreign policy tool appears to be growing at a relentless pace, in terms of scale, scope and complexity. With each new imposition, policymakers are telling us something new about today’s most significant international conflicts; how allegiances and battle lines are being redrawn, and what crises might be looming.

US President Donald Trump signed three executive orders last month, targeting more sources of revenue used by the Iranian regime. Among others, they target the metals industry, including the largest steel, aluminium, and iron manufacturers in Iran.

On the one hand, recent US sanctions are intended to intensify the maximum-pressure campaign on Iran. On the other, they are making it increasingly difficult for the so-called E3 (UK, Germany, and France) to preserve the Iran nuclear deal in its current form. The 14 January triggering of the Nuclear Deal Dispute Resolution Mechanism by the E3, which came in response to Iran’s announcement that it would no longer observe ceratin commitments of the 2015 deal, offers some insight into the political complexities faced by all parties.

However, sanctions are not just a bellwether of politics. They must be enforced to have any meaning at all.

Beyond the well-crafted announcements of sanctions, financial institutions and global companies must navigate the complex legal, regulatory, and geopolitical landscape associated with sanctions to quickly determine what they require, whether their customers or supply chains are in the crosshairs, and how to effectively comply with them. If they get it right, they can help deprive those who are subject to sanctions—in some cases, terrorists, organized crime groups, and those carrying out human rights abuses—of the resources that keep them in business.

If they get it wrong, they face severe consequences: significant financial penalties, public embarrassment and reputational damage; all possible and very real outcomes. US businesses that fall on the wrong side of sanctions compliance face serious financial penalties: as of August 2019, the US treasury department’s office of foreign assets controlhad fined 16 companies nearly $1.3 billion for sanctions violations in 2019 alone. This is more than 17 times the value of fines issued in all of 2018.

It’s not just the financial ramifications that organizations need to be wary of. Public embarrassment and reputational damage are both possible. In the case of the beauty company mentioned earlier, the brand had long been associated with creating cruelty-free products and this particular sanction violation raised the ire of its loyal customer base.

To be successful in today’s economic environment, every industry must pursue rigorous sanctions compliance programmes and invest in the development of compliance officers. The nature of sanctions is fundamentally changing and the impact on the work of compliance officers is far reaching.

Sanctions have entered previously unchartered territory. With the rise of secondary sanctions—which are designed to prevent third-parties from engaging with sanctioned countries on the basis that they will lose access to the sanctioning country—a vast number of new compliance and risk concerns have emerged, especially for those considered to be non-US actors. Globally, the scope and scale of this risk is often not appreciated enough, given the absence of a direct US connection of the business. For example, recent secondary sanctions added to North Korea as part of the National Defense Authorization Act 2020 could impact Asian businesses without a US footprint. For sanctions compliance officers, these challenges can be daunting.

Policymakers have high hopes riding on the power of sanctions to address some of the world’s greatest challenges. Yet, the complexity, lack of clarity, and conflicting laws that accompany sanctions have acted as a catalyst for some to question the effectiveness of unilateral sanctions. Overuse of sanctions, legal sovereignty, impact on global markets, and management of unintended consequences are all hotly debated topics. Until a global consensus is reached, this debate will continue.

In the meantime, for businesses operating globally, the stakes just keep growing on how to navigate the geopolitical, reputational, and compliance challenges of the global sanctions environment.

Rohit Sharma is president and managing director of the Association of Certified Anti-Money Laundering Specialists (ACAMS)

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