US Sanctions: Navigating Through an Increasingly Complex and Dynamic Landscape.

Rising geopolitical tensions affecting the business environment

There has been a notable increase in our client base of organizations requiring assistance to assess and navigate increasing geopolitical tensions. This primarily relates to tensions between the West, Russia, or China; but also includes Iran, Venezuela, and other regional hotspots.

This demand is the result of the fact that doing business abroad offers exceptional strategic and financial rewards, while bearing substantial risks. For example, generating deep sales, investing strategically, and leveraging supply chains in frontier markets, increasingly asks for support through tailored programs that:

1.) Identify local opportunities.

2.) Deliver actionable insights.

3.) Ensure compliant clean hands.

4.) Protect from aggressive competitors and local threats.

Sanctions risks

Due to the current political climate, one of the leading risks our clients want assistance in understanding are the current, and potential, US Sanction Programs. This is due to:

- US Sanctions becoming increasingly complex, and the consequences of noncompliance, ever more severe.

- Responsible US administrative bodies, such as the Office for Foreign Assets Control, operate with a global mindset. And especially the U.S. Attorneys for certain Districts of New York have jurisdiction over prosecuting any national globally, once a US nexus is established. For example, in the case of international bribery payments or money laundering that utilize the US Dollar system. (Unknown to many, this is most often the case despite using other currencies; due to the central role of US correspondent banks and/or the global US Dollar clearing functions in New York).

However, this generates a competitive advantage for those who are aware of the legalities. Staying US sanctions compliant, means corporations can benefit from legitimate business opportunities.

Who needs to worry about US sanction compliance?

Based on legislative (US Congress) and executive (US President) actions, special US offices from the US Departments of State, Treasury, and Commerce, administer sanctions and export control programs. These rules, regulations, and target lists, as well as the conduct and expectations of these special offices, develop a wide global reach, impact, and jurisdiction.

The US jurisdiction for US Direct Sanctions binds any US Person globally (individual or entity). These very same sanctions bind any foreign person with a US nexus. Such a nexus might come from working for a US business or persons, working via the US territory, and/or utilizing US systems or infrastructure.

In addition, any foreign person globally (not already covered above) is subject to so called US Secondary Sanctions, as far as those exist (they do, but to a much more limited degree). This works via an indirect approach, banning foreign business or persons from doing business with US persons or US markets, if they are engaged in specific dealings with US targets, such as Iran. Thus, it basically leaves foreign business actors a choice: do business with them or us.

Within the above layers of US reach (direct and indirect jurisdictions), specific sanctions programs can vary substantially. For example, doing certain business with otherwise targeted entities might be permitted in the form of Sectoral Sanctions (see below). Thus, increasing the ever more complex reality of what is permitted.

Therefore, it is vital to understand:

1. What type of transactions or assets are covered.

2. What type of target (either comprehensive or individual).

3. The subsequent obligations.

These obligations can vary from having to passively avoid or reject business, to having to actively freeze, block and/or report to specific US bodies.

If both passive and active preventive functions fail and non-compliance occurs, organizations are challenged to do the right thing. In such a case reactive obligations and recommendations exist. For example, proactively acting in accordance with voluntarily disclosure standards is highly recommended, to reduce chances of harsher punishments.

Types of US Sanctions and US Export Control

To help reduce the complexity, we group and map the main US sanctions in the following layers:

A. Comprehensive Blocking Sanctions

Often called Direct or Primary Sanctions, these target assets from and dealing with whole jurisdictions (like the traditional embargo of countries or regions). These sanctions still exist with Cuba and Iran being long term examples, and have been broadened in recent years with the addition of Crimea in 2014.

B. Targeted Blocking Sanctions

These ban assets from and dealing with specific individuals or entities. For example: officials, businesses, NGOs, banks, oligarchs, vessels, aircrafts. Usually in the form of Specially Designated Nationals (SDN) lists, these targeted versions of Blocking Sanctions continue to be on the rise.

C. Sectoral Sanctions

Due to other sanctions being perceived as too blunt, these are the most recent and sophisticated type of targeted sanctions. These sanctions don’t intend to totally ban targets and their assets, but to merely limit specific types of dealings with designated entities, in strategically picked sectors. These often have the goal of putting pressure on a specific country and regime.

Examples of sectoral sanctions include:

● Russian Oil Sector

This bans US banks and businesses from financing or dealing with listed Russian energy companies where specific "frontier oil projects" are concerned. At the same time, unrelated business with many of the same targeted entities is possible.

D. Financial Systems Sanctions

These specifically ban certain financial services, such as correspondent accounts.

E. Ownership/Control Rules

These focus on any non-explicit target, that is owned or part-owned (at least 50%, sometimes even 33%) by one or more listed targets, under any previously mentioned sanctions.

F. Foreign Sanction Evader Lists

These target and ban middlemen and third parties, suspected of or known to breaking US sanctions or export controls. Avoiding such sanction evaders is vitally important when using logistics companies, and when selling to distributors or alleged end-users.

G. US Export Control Regimes

Finally, while not being sanctions, US Export Control Regimes exist for civilian, dual-use and military items and technologies of US origin. These export regimes create obligations for anyone trading with these US products, as well as with foreign products that include US components or technology beyond a certain threshold.

Export compliance should be separated from any sanctions compliance, however, there is the potential for creating much synergy; if certain best practices are applied

Why is US sanctions compliance so critical?

Complying with US sanctions and export controls is critical to avoid severe strategic, legal, reputational, and financial risks. These include:

- Losing good standing and market access.

- Violating contract clauses.

- Paying large fines or settlements.

- Potential criminal prosecution in case of intentional violations, with long term prison sentences.

Whereas legally a strict liability standard is applied in US sanctions law, leading to civil penalties even without awareness of less adequate conduct or violations.

However, when responding to violations, the responsible US offices, prosecutors, and courts consider how serious the responsible persons and entities took the issue of sanctions compliance. The type and dimension of penalty that is selected, among others, depends on:

- The subjective side of the violators/company (criminal intent, recklessness, slight negligence etc.).

- The response of the violator/company.

- The level of due diligence applied (if at all); and related to that, the state and quality of any compliance program in place.

These variables can make the difference between receiving a mere warning letter on the one end of the spectrum, and a severe penalty with long term effects on the other end.

What is so challenging about US sanctions compliance?

As can be seen above; it is critical and often difficult to:

1. Develop the skills necessary to navigate the relevant sanctions landscape.

2. Develop and maintain a comprehensive sanctions compliance program.

The Office for Foreign Assets Control (OFAC), the most stringent US sanctions body, stresses out the following common root causes for violations that should be avoided:

- A lack of a formal compliance program.

- Misinterpreting, or failing to understand, the applicability of, sanctions.

- Facilitating transactions by non-U.S. persons (including through or by overseas subsidiaries or affiliates).

- Exporting or re-exporting US-origin goods, technology, or services to OFAC sanctioned persons or countries.

- Utilizing the US financial system, or processing payments to or through US.

- Faults with sanctions screening software or filters.

- Improper due diligence on customers/clients.

- De-centralized compliance functions and inconsistent application of compliance programs.

- Utilizing non-standard payment or commercial practices.

- Unchecked insider threats.

What is RSB´s approach and related products?

Depending on the client (industry, seize, transactions, environment, risk landscape) and mission (goals, preferences, scope, terms), RSB tailors its products by focusing on the compliance expectations of the responsible US bodies.

- For quick operational support, but also the informing of strategic decision processes, we deliver Sanctions Reports and Assessments. These map out relevant sanction landscapes, offer sanction scenario outlooks, and deliver answers and actionable guidance.

- Furthermore, we offer filter and due diligence services regarding the verifying of internal and external parties, such as customers or targets for Mergers & Acquisitions (FDI). From initial quick filtering to deep dives, as necessary.

- For sustainable solutions, we help clients to design or improve Sanctions Compliance Programs. These keep in consideration the following elements that OFAC see as necessary for a sanctions compliance program:

a. Having a risk-based approach in the center of the program.

b. Tailoring the program towards the company’s size, sophistication, products/services, customers, counterparties/partners, and geographic locations.

c. Covering at least the following five essential components, to be developed and constantly maintained:

- Top Management Commitment

- Risk Assessment

- Internal Controls

- Testing and Auditing

- Training

- In case of incidents or red flags, we support with reactive and investigative capacities. To mitigate risks, limit damages, and neutralize threats - in all dimensions, within the legal scope of the respective jurisdictions.

To achieve such quality solutions, RSB deploys its experienced teams and wide-reaching tools for its clients; from specialized legal experts to investigators, subject matter related IT operators, and geopolitical analysts.