How to Navigate the Rising Geopolitical Market: Risks and Opportunities

Geopolitical Markets on the Rise

Operating within geopolitical markets is a new normal for the business world. In Europe, understandably most focus is now on Russia, however, there is another global issue that is likely to supersede this. The escalating and historically unique systemic rivalry between China and the West is one that for many years will stir up tensions, compliance issues, and global markets; way beyond what we see today. It is a conflict that will decide the future and success of many corporations, as they have to be both informed and prepared to make and implement timely decisions.

Geopolitical Risk Management: The Key to Survive and Strive

The days of global free trade without special concerns about the future and risks of sources and markets are over. The current geopolitical market reality is likely to worsen before there is any sign of improvement.  

For businesses, this brings Geopolitical Risk Management to the forefront. One key component of this is staying compliant with, and anticipating, strategic sanctions and exports controls. This is due to the fact that these strategic tools have become the tip of the spear of Western statecraft against its rivals.

Severe Risks vs. Unique Opportunities

Businesses need to prepare now and know how to deal with the risks. However, they can also seize the opportunities resulting from such geopolitical markets, by outsmarting paralyzed, insecure and mistake-driven competitors.

Corporate Sanctions Due Diligence

Sanctions are a particular tool of so-called “financial statecraft” that are increasingly applied for geopolitical purposes. The impact of which will be felt by those – especially in the West – who are not prepared.

To avoid severe punishments and exclusions from markets, businesses must adequately and proactively try to avoid any sanctions or export violations. For other than the smallest businesses, this due diligence obligation is expected to be conducted within an established Sanctions Compliance and Export Control Program.

For example, EU corporations must comply with both EU sanctions and export controls, and also the broader and riskier US sanctions programs. Before executing large transactions or onboarding critical customers or partners, businesses must conduct extensive research into the background of their targets, partners, customers.

• Who are the owners behind the partner?
• Who controls the business?
• With which regimes are businesses aligned?
• Is this target, source, client, or partner likely to become a target of sanctions?

This is especially pertinent when doing business in markets that carry compliance risks, where US authorities expect businesses to go dig deeper. In these scenarios, Enhanced Due Diligence is required. This goes beyond what most businesses or even attorneys can provide using standard procedures. Rather, special skills and access must be applied, whether developed inhouse or via external service providers.

Toughness of US Sanctions vs. European Businesses

US sanctions are tougher to understand and the resulting risks (legal, commercial, reputational, financial) much higher. There are several recent targets of these sanctions. These include:

• European banks paid up to 8.9 billion in fines (per bank) for various US sanctions violations, with customers and bank branches based outside the US.
• Two senior Austrian bankers face between 60 and 70 years prison time in the US. These relate to criminal charges in cases centered in SouthAmerica, for which one of them has already been arrested.
• A well-established Swiss B2B IT provider paid a multimillion dollar fine for IT services they sold to non-US customers. (because of external back-office services related to the US).
• An Australian logistics provider paid multimillion dollar fines for USD transactions in connection with business activities outside the US.

In all these cases the business was conducted outside the US but had a so called “US nexus”.

The Difference When Violations Occur: Having Adequate Compliance in Place or Not

When accidental US sanctions violations occur, having a solid sanctions and export program and conducing proper due diligence at the right time, makes a difference.

Case by case, the US authorities utilize a broad range or actions. These range from severe punishments to a mere warning letter or “No Action”. It all depends on the compliance and due diligence systems established and efforts conducted.

Better Sanctions Compliance as an Opportunity

Effective sanctions due diligence does, however, not only reduce severe risks but also offers real business opportunities. This is due to the fact that many competitors struggle and  “over-comply”  as they refuse business that would be legal and secure to pursue.

The Origin of the US Sanctions´ and Export Control Reach into Europe

The fact that US sanctions can force EU corporations to conduct relevant due diligence stems from:

• The dominant position of the US market, global banking, and the power of the dollar.

• The fact that the US corporate sector sets many of the compliance and due diligence standards globally, and many businesses expect its partners to follow these

• The long arm sanctions strategy that has been designed by the US Congress and President. This is enforced via OFAC (“Office of Foreign Assets Control”), and assisted by US intelligence services.

The US long arm design is based on what is by most lawyers considered as “extraterritoriality”. This is applied via the two following critical layers:

1. An extensive jurisdiction with regards to violations of “Primary Sanctions” (e.g. when paying in US Dollar outside the US, due to involved US clearing banks; or because of using US related software services – all considered cases of “causing” violations, and thus having a US nexus)

2. By becoming target of US sanctions (“Secondary Sanctions”). This can be applied anywhere against any business that is considered at as aiding enemies of the US in substantial ways. In this case, no US nexus needs to be identified.

A similar legal and factual reality exists with regards to export controls. The use and (re)selling US goods, components and technologies requires European businesses to understand and maintain US export compliance – with specialized due diligence which must be conducted prior to export transactions.

Issues to be Addressed for EU Businesses

In case of sanctions compliance, EU corporations are challenged by both EU and US sanctions. Overall, this sanctions compliance pressure results in special issues that need to be addressed and managed:

• Due diligence is not only expected by screening listed targets, but also to see if a counterparty is sanctioned, despite not listed on any screened list. This is increasingly the case, due tovarying ownership/control rules.
  • For example, a business might have to identify Austrian corporate clients as being sanctioned, without being on any list but merely because of ownership relations linked to certain individuals or entities in Russia or China.

• There is little protection in US courts. (Especially for corporations not residing in the US) Sanctions law, being considered US “National Security Law”, must be treated very differently by US courts, compared to most other legal matters. For example, US courts grant “extreme deference” to the way US authorities may interpret their legal authorities and rules.

• Some US and EU laws contradict each other with regards to obligations. For example, EU law prohibiting EU businesses to follow some Cuba and Iran US sanctions (EU Blocking Statutes).

• There are also issues that arise from combining related due diligence obligations of separate compliance fields. If due diligence to prevent money laundering and corruption is conducted within the same processes as sanctions due diligence, this carries the very practical risk of failure. Because some of their rules carry differences with regards to what look for and how to decide/act. These can make the difference between violation or not.

The Solution

The solution for businesses is to map out and adequately simplify the complexities of US and EU regulations relevant to their business and risk picture. Then, based on that establish a risk-based, tailored Sanctions and Export Compliance Program, that de-conflicts and balances between EU and US legal obligations. Whereas such a program should be designed to not only comply with the laws, but to improve one’s position vs. competitors. By better knowing how to navigate an increasingly sanctions affected world.

These are services that RSB International is providing to its corporate clients in Europe and the US.