The following is an excerpt from McGuireWoods’ recent contribution to the Global Investigations Review’s (GIR’s) The Guide to Sanctions – Second Edition published in July 2021. Authors Alex Brackett, Pat Rowan and Jason Cowley, each partners in the firm’s Government Investigations and White Collar Litigation department, penned a chapter on the Impacts of Sanctions and Export Controls on Supply Chains. The full publication is available here.
Compliance strategies
Sanctions and export controls can be highly dynamic in the speed with which they can be implemented and adjusted. Accordingly, businesses operating with international supply chains need to be prepared to be equally nimble. Fortunately, there are relatively straightforward and scalable strategies that companies can deploy to ensure they have a robust and effective compliance framework through which to operate, as detailed below.
Classification and risk analysis
It is imperative that companies moving goods and technologies across borders fully understand the potential restrictions that may apply to those transactions. That understanding starts with a clear understanding of which goods and technologies fall under which applicable export control regimes. Companies should understand which regimes apply (e.g., are they subject to control as military items, dual-use items or purely commercial items), where their products are classified within each applicable regime and what licensing, reporting and other requirements might apply to their export.
Once applicable classifications are well understood, companies should conduct supply chain risk analysis to determine whether and where they might face challenges in securing licenses or other export authorizations, and whether and where they might face heightened risk of sanctions impacting their supply chains. Among other things, companies must know the source of their raw materials and other goods and have some understanding of how their suppliers conduct business. As part of the risk analysis, contracts should be reviewed to ensure that appropriate contractual language is employed and that the company is properly exercising its rights under each contract. Not only will such a risk analysis help identify and avoid potential pitfalls, but it can also serve as a baseline for demonstrating that a company’s compliance program is being reasonably risk calibrated.
Resource allocation
Companies operating across borders leave sanctions and export control compliance as an afterthought at their own peril. Companies should allocate adequate resources to this compliance function, both internally and through the use of outside advisers. The larger and more sophisticated the company and its global activities, the more enforcement authorities will expect to be invested in related compliance efforts.
Training
It goes without saying that a company’s workforce can only address compliance risks if it is aware of and attuned to those risks. Training is therefore imperative, not only for those expected to serve as frontline compliance gatekeepers, but also for anyone in a function that touches on the supply chain. Personnel in finance and accounting, sales and marketing, logistics and fulfilment, and – critically – management should all have at least a baseline understanding of how sanctions and export controls work and impact the company and its supply chain, so that they can be positioned to identify, report and escalate red flags indicating potential violations as early as possible.
Due diligence
Due diligence is an increasingly important consideration when dealing with higher-risk markets, as illustrated by the challenges presented in connection with developing sanctions regimes such as those relating to Xinjiang. Just as a company should understand its goods and technology through classification, so too should it understand its counterparties and third-party partners through some level of due diligence. While the level and type of due diligence can and should be calibrated to the relative risks presented by the market, transactions and type of parties involved, it should not be ignored altogether. Further, an effective third party due diligence program can protect a company not just against sanctions and export control risk, but also against bribery and corruption risks, money laundering risks and business risks, including potential exposure to undue financial or reputational risks associated with human rights abusers or unqualified (or underqualified) partners and counterparties.
Screening
Screening is an often overlooked but mission-critical compliance strategy in the context of sanctions and export control compliance. Not only is it necessary to determine whether a company might be dealing with a designated sanctions target or export-restricted entity, but whether it can also be readily automated and built into existing business infrastructure such as enterprise resource planning platforms and payment systems.
Conclusion
The last decade has seen an unprecedented evolution of sanctions as a favored tool for execution of foreign policy goals. Sanctions regimes are increasingly multi-pronged in terms of the entities responsible for enforcement, and increasingly diverse in terms of the manner in which they are designed and deployed. It is incumbent on companies operating in international markets to keep pace. A well designed sanctions compliance program best positions companies to absorb new sanctions regimes and requirements, and to avoid inadvertent violations.
About McGuireWoods’ Government Investigations & White Collar Litigation Department
McGuireWoods’ Government Investigations and White Collar Department is a nationally recognized team of over 60 attorneys representing Fortune 100 and other companies and individuals in the full range of civil and criminal investigations and enforcement matters at both the federal and state level. Our senior team is comprised of a deep bench of former federal officials, including a former Deputy Attorney General of the United States, former U.S. Attorneys, more than a dozen federal prosecutors, and an Associate Counsel to the President of the United States. Strategically centered in Washington, our Government Investigations and White Collar team has been honored as a Law360 Practice Group of the Year and has earned the trust of international companies and individuals through some of the most notable enforcement matters over the last decade.