Sanctions: Corporates in the hot seat

For an organisation, breaking these regulations can lead to heavy fines, export bans, the denial of access to the US banking system, reputational damage, supply chain disruption or even becoming designated as a sanctioned entity itself. For an individual, the consequences are even more severe, where criminal prosecutions can lead to fines or even imprisonment.

Why should corporates take note?

For the past two decades, the banking industry has been subject to regulatory scrutiny and suffered significant financial penalties over sanctions violations, culminating in BNP Paribas paying a record penalty of $8.9 billion in 2015.

Whilst the threat of punishment to corporates has long existed, recent years show a noticeable uptick in the size and number of financial penalties, and other consequences, across a number of sectors. For example:

• In the Technology, Media and Telecommunications (TMT) sector, we have seen the first billion dollar sanctions fine issued to a corporate organisation, which also temporarily led to the business ceasing operations altogether when its US based supply chain was faced with an export ban. We have also seen the world’s second largest smartphone maker face accusations of sanctions breaches that led to its Finance Director being arrested in Canada and facing possible extradition to the US; as well as further US sanctions which have had a major impact on its global supply chain;
• Within the extractive industry, we have seen the world’s second largest aluminium producer being targeted as a result of accusations against its majority owner, a move which led to the suspension of the FTSE 100 parent company and a 30% spike in the price of aluminium. In the oil and gas sector, the ban on the import/export of oil is increasingly used as a mechanism to cut-off funds to targeted states, most notably Iran and Venezuela. It is here that the increasing use of secondary sanctions (the practice whereby the US has attempted to restrict non-US business with targeted regimes by threatening to disconnect them from the US financial system) has been most closely felt; and
• A number of shipping companies were sanctioned for allegedly transporting Iranian oil to China and disguising this by turning off ships’ tracking systems. This is part of a trend that has seen the number of vessels sanctioned dramatically increase over the past year from c. 200 to c. 600.

What can you do to address sanctions compliance risk?

Businesses need to establish a robust, workable and monitored compliance programme to help avoid sanctions problems. It is vital to assess all parts of your supply chain and onward sale routes, and consider if any goods might be affected. Should there be a risk, you must consider how to police these goods and all related services.

In May 2019, the US Department of Treasury’s Office of Foreign Assets Control (“OFAC”) issued guidance on the essential components of a risk-based sanctions compliance program, which centered on the five principles of senior management commitment, risk assessment, internal controls, testing and auditing, and training.

We will explore industry-specific issues, best practice and the OFAC guiding principles in more detail in our next blog.