Ever-changing Russia sanctions require constant due diligence.
Economic and trade sanctions can be a powerful way to punish military aggression and the countries, organizations and people who support it. But sanctions also offer an ever-present challenge to banks and companies that engage in international trade.
These challenges have escalated since March when the U.S. and its allies began imposing round after round of new sanctions on Russia in response to its most recent invasion of Ukraine.
The scope and targets for the latest sanctions are expansive. While some unilaterally ban trade with entire countries, (Iran and North Korea, among others), sanctions that target corporations, government bodies and individuals are more fluid and difficult for companies to track.
And yet track them they must. Every company is responsible for having up-to-date knowledge of the sanctions rules, regulations and targets administered and enforced by the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC). Because sanctions can change daily — as has been the case with Russia — constant corporate due diligence is vital.
For many companies, that includes knowing all the participants in an international transaction or contract. For example, a U.S. company may sell products to a European company that later resells them to a company owned by a sanctioned Russian oligarch. Likewise, a company that produces a dual-use product is responsible for seeing that it is not used for an illicit purpose. For example, a PVC pipe produced for irrigation might be used as a rocket launcher when placed in the wrong hands. In other words, ignorance of the end customer is not an excuse for non-compliance.
While the funds a company uses to complete a transaction involving a “rejecting sanction” are returned to the sender, those for a “blocking sanction,” are held in a blocked account until OFAC agrees to their return — a process that can take years. That is just one example. There are countless others that only an expert in compliance may identify.
The value of a robust compliance process
The war in Ukraine may not end anytime soon. The sanctions in place today could look different a week from now and will evolve in new directions in the months ahead. Meanwhile, the global economy continues to expand and grow more interconnected.
As bad actors are held to account by countries around the world, we can expect two things. First, sanctions in all their forms are here to stay. Second, companies making or receiving payments from sanctioned regions need a robust compliance process, including experienced legal counsel, to perform the ongoing due diligence needed to remain in compliance with evolving regulations.
A strong compliance process can save companies both time and money in the long run, while helping to keep them out of harm’s way. OFAC, along with the Commerce Department’s Bureau of Industry and Security are two of many U.S. regulatory bodies offering resources that support these efforts. Other countries have their own regulations and resources.
As a financial institution, we at Commerce Bank are unable to provide advice on sanction-related questions. But because we work hard to stay abreast of and comply with all the rules, regulations and guidance of the regulators governing our industry, we understand the critical importance of compliance. We can attest that vigilance, awareness and preparation are key.
The opinions and other information in the commentary are provided as of August 30, 2022. This summary is intended to provide general information only, and may be of value to the reader and audience.