5 Things Every CEO Should Know about Reopening and U.S. Sanctions

As economies in Asia, the Middle East and Europe reopen, companies are at increased risk of costly sanctions violations.  Here is what you need to know.

1. A Dangerous Mix of Supply and Demand

Economies around the world have been shut down for months due to COVID-19.  Closed economies have meant lost sales for companies, and lost sales have meant lost revenue.  Although there is still no vaccine for the novel coronavirus, countries and cities that have been able to gain control over the virus are beginning to reopen their economies. 

The desire to make up for lost sales puts pressure on companies to take risks they would not take under ordinary circumstances. 

Meanwhile, countries like North Korea, Iran, Syria, and Venezuela, which are subject to the toughest U.S. sanctions and which rely on an array of illegal methods to evade sanctions, have felt more cut off from the global economy than usual.  Purchasers in, from, and on behalf of those countries now have a lot of buying to do.

This combination of sellers eager to sell and buyers eager to buy is dangerous for companies. Violations of sanctions can lead to corporate criminal liability, individual criminal liability, enhanced penalties which could be twice the transaction value, forfeiture of funds, and blocking from the U.S. financial system.

2. You need a Compliance Program, Now

The U.S. Treasury’s Office of Foreign Assets Control (OFAC) is responsible for administering and enforcing the sanctions programs of the United States.  Separately, the U.S. Department of Justice, including the FBI, the United States Attorney’s Offices, and the National Security Division of Main Justice, investigates and prosecutes criminal and civil cases involving sanctions violations.

Investment in an effective corporate compliance program will help reduce the risk of costly sanctions violations and mitigate the consequences of any violations which do occur.  As previously described by OFAC, an effective sanctions compliance program includes management commitment, risk assessment, internal controls, testing and auditing, and training.

The cost of having a compliance program developed and implemented is minor compared to the costs and collateral consequences of a typical violation. 

3. Training and Testing

Although each characteristic of a sanctions compliance program is equally important, training and testing deserve special attention. 

For the program to work, everyone from the CEO to the newest entry-level employee must understand why sanctions compliance is important to the company, how the company ensures it is compliant, and what each person in the company is expected to do to ensure the company remains compliant. 

To make sure that training is effective, that employees know what they are supposed to be doing, and that the program is working, the program must be tested and audited.

Understandably, no company wants to spend money on training and testing after having been closed for several weeks or months due to a global pandemic, but it is for this very reason that training and testing are so important right now.

4. Know Your Customer…and Your Customer’s Customer

For companies that want to be good actors, that want to follow the law, the risk of sanctions violations comes from two main sources.  The first is not knowing the law, but that should be addressable through the implementation of a compliance program and its associated training.  The second is not knowing your customer.

Most companies are already familiar with the concept of Know Your Customer due diligence.   However, the use of sophisticated techniques to evade economic sanctions and trade sanctions makes it good practice for companies to know, reasonably, who the end user is.  Stated differently, it is good practice to know, reasonably, your customer’s customer.

5. Respond to Problems Immediately and Effectively

There are basically four main ways a company learns it might have violated U.S. sanctions.  The company discovers the violation on its own during the testing and auditing process; the company begins encountering banking problems and, though inquiry, learns it has a sanctions issue;  the company learns through news reports that a party with which it has been doing business is blocked; the company is contacted by Government agents.

When a company discovers a sanctions problem or possible violation, the company should begin working immediately to address the issue.  Particularly in the case of a possible violation, this should be done with the assistance of legal counsel who can help the company determine what happened and what disclosures might need to be made.  Among the courses of action which the company and counsel can discuss are an internal investigation, voluntary disclosure, a full accounting, and cooperation with the Government.  Conversely, the company might wish to contest any criminal, civil or forfeiture case brought by the Government against the company, individuals, or the funds.   

As economies begin to reopen after COVID-19, risks are high.  Companies that are proactive can better respond to, manage, and prevent costly violations.

This client advisory is intended to highlight certain issues and is not intended to be comprehensive or to provide legal or other professional advice. If you have questions, you should contact your counsel or other advisors and on matters related to our work we welcome you or them contacting us.