A decade ago, sanctions compliance appeared focused on banks and other regulated financial services. In recent years, however, that spotlight has become a floodlight across many industries. Why? Globalization and digitalization are two factors that have enabled incredible growth, but in expanding geographic reach, businesses’ reliance on third parties has grown too.
- Organizations undertake mergers or acquisitions to enter new markets but lack visibility into activities of subsidiaries and their agents.
- Companies engage representatives to act on their behalf as resellers or trading partners.
- Supply chains have become both more complex and less transparent.
Under these circumstances, financial services institutions are ahead of the game. They typically have mature sanctions compliance programs already in place.
Other industries may have integrated sanctions checks into their existing anti-bribery and corruption compliance process, but recent sanctions enforcement actions suggest more robust risk management processes are warranted.
EU furthers commitment to sanctions enforcement
At the start of 2021, the European Commission pledged to strengthen EU sanctions implementation and enforcement. In addition to conducting a review of current and emerging practices used to circumvent sanctions, such as cryptocurrencies, the Commission also committed to building the Sanctions Information Exchange Repository—a database to make reporting and sharing of data easier between Member States and the Commission.
Based on the findings, the Commission suggested that legislative proposals or updated guidelines could be introduced this year.
Sanctions compliance and risk by association
What’s more, it’s also noteworthy that a number of recent enforcement actions in the EU focused on organizations outside of the financial services industry, as evidenced by a December 2021 verdict against a fuel supplier. This focus on non-financial institutions isn’t just taking place in the EU, either. Midway through 2020, the UK’s Office of Financial Sanctions Implementation published guidance aimed at maritime shipping and related sectors, signaling a shift in focus. In the US, OFAC has likewise intensified its focus on supply chains and other third party networks
OFAC mentions “supply chain” five times in its “A Framework for Compliance Commitments” and further indicates that supply chains are a root source of compliance failures. Enforcement cases certainly speak to the risks associated with extensive third-party networks.
- A US-based marine transportation services provider was the subject of an enforcement action after it was discovered that subsidiaries entered into charter party agreements with vessels owned by an Iranian SDN.
- Similarly, a US-based technology firm earned OFAC’s attention because of the actions of resellers/ OFAC noted that a sanction violation might have been avoided if the offending company had expanded due diligence to its trading partners, which had well-publicized business ties to sanctioned countries.
And OFAC’s reach goes beyond US companies. During a 2021 roundtable with Financier Worldwide, Eytan J. Fisch, Partner at international legal firm Skadden, noted, “OFAC continues to place greater focus on enforcement against non-financial institutions and foreign companies whose activities are subject to US jurisdiction.” Fisch goes on to suggest that “… the cornerstone of an effective sanctions compliance program is an adequate assessment of direct and indirect sanctions risks, including customers, products, services, supply chain, intermediaries, counterparties, transactions and geographic locations.”
Keeping pace with sanctions requirements—especially when your visibility needs to go beyond direct connections to less obvious associations—is not easy to accomplish with a manual process. Another roundtable participant, Novartis Pharma Services AG Nicholas Bentley, notes, “Over the last five years, implementing a technological solution to assist with sanctions compliance has evolved from being a technological luxury option for larger multinationals, to an essential compliance system for any company conducting international business.”
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