The invasion of Ukraine has fundamentally changed the compliance landscape throughout the world. Nations have united in imposing sanctions and export controls. The regulations are changing at warp speed, and the stakes for complying with applicable regulations continues to increase. Risks for doing business with the wrong third party are financial, commercial and reputational in nature and pose ongoing compliance concerns.
Despite recent changes, the reality is that U.S. sanctions and complex international trade controls targeting Russia were increasing for the past several years. But even seasoned physical and financial supply chain leaders with deep experience managing operations and compliance in higher risk jurisdictions are struggling to strike a balance between keeping their business moving and keeping it compliant. They also understand that cutting off access to the physical and financial supply chain leads these actors to seek doing business in less transparent ways, upping the stakes for compliance professionals. It would take the willful suspension of disbelief to think that published global sanctions and export controls will keep problematic third parties at bay. Understanding and implementing new controls will take some work but ensuring that the operational implications are not simply shifting the risk to other areas of the business or down the road is critical.
In response to Russia's attacks on Ukraine, the U.S. government—in tandem with allies across the globe—has been publishing consecutive rounds of new sanctions within multiple days. In one day alone, 24 Belarusian individuals and entities including two significant Belarusian state-owned banks, nine defense firms, as well as seven regime-connected officials and elites were sanctioned by the U.S., according to the Office of Foreign Assets Control’s (OFAC) sanctions lists.1
Screening third parties against published sanctions lists is only one part of complying with U.S. government regulations. OFAC is clear about its ownership rule, whereby it is up to organizations to understand the relationships that third parties may have with any sanctioned subject. For any one listed person or entity, there could be any number of entities who are owned or controlled by them. If ownership is 50% or higher, either solely or in aggregate by one or more sanctioned subjects, that entity is also sanctioned. Even below that 50% ownership threshold, a red flag should be raised and risk assessment performed. Historically Russian ownership percentages shift and more of the same is expected. Ongoing ownership and control monitoring over and above the published lists will be paramount in the coming days and weeks—pay attention.
Due Diligence, Organizations and Staffing
Performing ongoing due diligence will most likely require access to content resources across a global landscape, and that is just the start. For instance, the ability to perform research in local media sources and local languages requires a skilled human resource. Experienced researchers also have abilities to uncover also known as (aka) and name aliases, which are among any number of data points that may be critical to uncovering Ukraine-conflict related risks. Beyond identifying current risks across the physical and financial supply chain, there is the matter of keeping up with those ongoing changes.
This necessary heighted due diligence comes during an ongoing and impactful supply chain upheaval, employee staffing shortages, pandemic-related closures and general marker turmoil. Seeking professional services (those who have the research expertise and data quality standards), may be a lifeline depending on internal resources available. There can be a level of comfort knowing that an outside resource, used by others in the same industry, is assisting in keeping compliance at the forefront. A conclusion can be reached, when it may have otherwise seemed inconclusive. The bottom line is that compliance responsibility does not end after an initial business partner screening. Responsibilities for full compliance, organizational reputation and professional peace of mind may be at stake.
The swift and coordinated imposition of broad-based export controls by governments and regulators has and will continue to inhibit Russia’s ability to participate in and benefit from the world’s physical supply chain. The publication of highly complex and fluid export controls applicable to both Russia and Belarus are continuous. In the past week, Russia and Belarus were hit with export controls restricting semiconductors, lasers, information-security equipment and other technology along with commodities needed by Russia for its oil refinery sector. We have seen the creation of two new foreign-direct product (FDP) rules for Russia with significant extraterritorial impact: the Russia-FDP Rule and the Russia-military end-user (MEU) FDP rule. Substantially more items are now controlled for export. With only a handful of exceptions, US-content origin items and technology classified in export administration regulations (EAR) Categories 3-9 incorporated into non-U.S. origin items, must now be counted as controlled to Russia and Belarus. Rules have expanded the scope of “military end user” control to all items subject to the EAR, including EAR99 items. Existing and specific due diligence requirements in EAR Part 744 for state-owned companies certainly still apply to Russia and Belarus. 2 Unlike sanctions, export controls do not have an immediate impact, but these can be debilitating in the long term.
Managing the operational compliance of export controls in such an unstable environment is not for the inexperienced trade compliance or supply chain manager. Historically, export controls become effective only once posted on the federal register’s website. However, last week the U.S. Department of Commerce issued a press release announcing new and sweeping export controls for Belarus, yet the rules had not yet been published. And once published, readers found export controls applicable to Russia had been included in the regulations applicable to Belarus—simply to get them published in a timely manner. A very close reading of the 89-page export control order was necessary to ascertain all relevant compliance implications. Experience managing compliance during times of uncertainty will be critical.
The U.S. Department of Commerce’s Entity List
Similar to the sanctions lists published by OFAC, the U.S. Department of Commerce’s Entity List prohibits all exports to all named parties on that list, which are coming at a fast clip. Maybe too fast. Trade compliance managers should be aware that the rules take effect once the parties are published; unfortunately, many third-party screening providers have been unable to keep pace. Last week the Department of Commerce’s own Consolidated Screening List service was not updated with the names and addresses of the parties they had published earlier in the week. Manually including recent export blacklist additions may be necessary until screening vendors and the U.S. government’s screening service can catch up.
Pay Attention or Pay Later
Global crackdowns on Russia and Belarus along with the occupied and influenced territories of Ukraine, are strangling their economies and financially ring-fencing oligarchs as well as influential members of their respective governments. Cutting off access to global financial and physical markets may very well lead these actors to seek doing business in far less transparent ways. In fact, Belarus’ ongoing support and suspected diversion of controlled goods to Russia was the primary rationale for placing highly restrictive export controls measures on Belarus as well. The Russian economy is heavily dependent on trade to generate revenue, impacts from current and future export control restrictions could certainly push Russian export flows into the black market.
International organizations and banks are facing challenges trying to comply with the new sweeping sanctions and export controls imposed by Europe, the U.S. and other countries. The published export controls were so complex that many organization’s “standard reaction was to stop all Russia-related activity until they could sort out what was prohibited and permitted,” said Kevin Wolf, a former official of the U.S. Department of Commerce who now advises companies on export controls at law firm Akin Gump Strauss Hauer & Feld LLP.3
The logistics of delivering products to and from Russia are now more complicated as shipping ports around the Black Sea have closed, airfreight services by most carriers has been suspended and Russian airspace is closed. For companies still conducting business with Russia, getting paid is becoming all but impossible. Canada has pulled Russia from the Most Favored Nation status, resulting in punitive import tariffs of 35-150%, and many other countries are expected to follow suit.4
What Does the Future Hold?
While there are additional sanctions and export control levers still available, nothing enacted thus far has stopped the Russia’s military invasion of Ukraine. Anti-financial crime professionals should continue to actively consult with regulators, sanction and trade compliance professionals within applicable industries. Firstly, ensure that your existing business partners are not posing any new risk to your organization related to the slate of new sanctions and export controls. Secondly, for any parties that do pose risk and are off-boarded, ensure they do not turn up elsewhere in your supplier ecosystem looking to divert otherwise unavailable goods and finances to Russia. The more we live by the rules now, ever changing that they are, the better we can do our part in collectively influencing a critical behavioral change toward peace and stability in places where we want to do business now and in the future.
Cinda Coldwell, CAMS, manager, Dow Jones Risk & Compliance Partnerships, Cleveland, Ohio, USA, firstname.lastname@example.org, LinkedIn
Anne Marie Lacourse, consultant, Dow Jones Risk & Compliance, Washington, D.C., USA, email@example.com, LinkedIn
- “Office of Foreign Assets Control - Sanctions Programs and Information,” U.S. Department of the Treasury, https://home.treasury.gov/policy-issues/office-of-foreign-assets-control-sanctions-programs-and-information
- “Unofficial electronic EAR files created by BIS,” U.S. Department of Commerce, https://www.bis.doc.gov/index.php/regulations/export-administration-regulations-ear
- Kate O’Keeffe, “Export Controls Against Russia Add to Uncertainty for Business,” The Wall Street Journal, March 2, 2022, https://www.wsj.com/articles/export-controls-against-russia-add-to-uncertainty-for-business-11646245942?page=1
- “EU considers suspending Most Favoured Nation status for Russia at WTO,” Institute of Export & International Trade, March 4, 2022, https://www.export.org.uk/news/597891/EU-considers-suspending-Most-Favoured-Nation-status-for-Russia-at-WTO.htm
A very informative article on current events