Learning from OFAC sanctions violations

By: Neal Ysart

A RECENT Deloitte report analyzing sanction violation settlements issued by the Office of Foreign Assets Control (OFAC), a branch of the US Department of the Treasury, presents a sobering picture for companies based in the Philippines, especially considering the magnitude of the potential financial penalties. Just within the period of the analysis (between January 2022 and April 2024), 34 settlements with the OFAC amounted to over $1.6 billion in financial penalties. This figure only scratches the surface, as it does not encompass the additional costs of organizational disruption or reputational damage.

Impact on Philippine businesses
Despite being geographically distant from the US, Philippine companies are not immune to the need to comply with sanction requirements. Given the OFAC's global reach, companies in the Philippines shoulder a legal and regulatory obligation to implement robust controls to ensure compliance. This means they must have mechanisms in place to ensure they avoid any transactions with individuals, companies, or countries that appear on the OFAC's various sanctions lists. This includes buying or selling products, providing or receiving services, and transferring or receiving funds to or from sanctioned parties.

It's a complex situation, and remaining compliant is no small feat — particularly given the current global geopolitical environment where requirements change rapidly, with new sanctions often being imposed with immediate effect. Compounding these challenges is the criminal intent of those seeking to evade sanctions, routinely deploying deceptive tactics to conceal their identities and masking the true beneficiary or purpose of their transactions.

Regional tensions and geopolitical events can often trigger a cascade of new sanctions — a scenario that we've seen recently because of the conflicts in Gaza and Ukraine. Closer to home, the rising tension in the Taiwan Strait and the ongoing territorial dispute in the South China Sea involving China and several other claimant countries, including the Philippines, adds another layer of sanction risk, which could have significant ramifications for Philippine companies. As the US continues to demonstrate its support for its allies like the Philippines and Taiwan, the extension of US sanctions against Chinese interests is a real possibility in the event the dispute escalates further.

For the Philippines, any such extension could have important implications.

The economic interplay
The economic relationship and supply chain between China and the Philippines are deeply intertwined, spanning various sectors such as manufacturing, infrastructure, real estate, energy, and technology. Philippine companies rely heavily on Chinese suppliers for raw materials, critical components, and intermediate goods essential for their operations. Conversely, Chinese companies view the Philippines as a strategic partner, sourcing resources and finished products to fuel their own economy.

China's investment in the Philippines has also been substantial, with significant capital flowing into sectors including infrastructure, manufacturing, real estate, energy and technology.

The challenges
The potential imposition of more US sanctions on Chinese interests is likely to be a concern for any business operating in the Philippines. Sanctions can often be imposed with immediate effect, leaving businesses no time to respond effectively, resulting in significant difficulties when seeking to remain compliant.

This creates a number of potential issues:

• Significant supply chain disruption. Given the deep integration of Chinese suppliers in the supply chains of many Philippine industries, sanctions could lead to sudden disruptions. Companies may find themselves unable to procure critical components or materials, jeopardizing production and operations.
• Financial repercussions. In the event of non-compliance, access could be restricted to financing from US institutions or any entity that adheres to US sanctions regulations. This could lead to liquidity issues, increased borrowing costs and challenges in maintaining financial stability.
• Legal and compliance risks. As the Deloitte report shows, non-compliance with OFAC sanctions requirements can result in severe penalties, including hefty fines and loss of access to the US financial system. This necessitates stringent compliance measures to avoid inadvertent violations.
  Sensible steps that can be taken now:
• Perform a comprehensive preemptive sanction risk assessment. First and foremost, companies in the Philippines should assess sanction risk now so that they can respond more effectively in the event that US sanctions against Chinese interests are extended in the future. Preparing in advance can prevent companies from being caught off guard. This could mean assessing what industries and goods are most likely to be impacted and identifying alternative suppliers. It would also be prudent to anticipate potential import/export restrictions, which is another tool being increasingly utilized by US authorities.
• Prioritize and tailor your compliance program. Our analysis found that in 88 percent of cases, when determining the financial penalty, the OFAC considered a robust compliance program tailored to the organization's size and complexity a significant mitigating factor. A comprehensive compliance program can help manage the risk of sanctions violations and, in the event of a breach, could be taken into consideration when determining any settlement.
• Provide comprehensive and regular training. Compliance training programs should not be seen as a one-time event but as an ongoing process that evolves alongside regulatory changes, emerging risks and organizational requirements. Regular training sessions, tailored to employees' roles, can help foster a culture of accountability and awareness, reducing the likelihood of sanctions violations.

Conclusion
In a world where we have seen geopolitical tensions result in new sanctions being rapidly introduced, staying ahead of the curve is not just a strategic advantage — it's a necessity.

Hopefully, the dispute in the South China Sea won't deteriorate further. But if it does, and US sanctions against Chinese interests are extended, it could create a complex puzzle for companies in the Philippines to solve, and hence, it would be prudent to consider this scenario in advance.

As the old adage goes, "An ounce of prevention is worth a pound of cure." Thinking about the risks now, rather than waiting for potential sanctions to be imposed, can help companies in the Philippines manage their risk more effectively and increase the chance of remaining compliant.

To access Deloitte Philippines' report, "Paying the price: Why violating OFAC sanctions can be a costly lesson for global businesses," please visit this link: https://www2.deloitte.com/ph/en/pages/financial-advisory/articles/ofac-sanctions-costly-lesson.html.

As published in The Manila Times on 3 June 2024. The author is the Deloitte Forensic Philippines Leader.