On February 23, the U.S government announced sanctions and export controls on hundreds of Russian entities and persons believed to enable infractions against Ukraine. This move marked the second anniversary of Russia’s further invasion of Ukraine. The sanctions also acted as a protest against the death of imprisoned anti-corruption activist Alexei Navalny.
The newly enacted sanctions targeted more than 500 individuals and entities involved in Navalny’s imprisonment, Russia’s financial sector, defense industrial base, procurement networks, and sanction evaders spread across multiple continents. In addition, new export restrictions were placed on almost 100 entities accused of providing covert support for Russia’s war stratagems.
The demand now falls on all American companies engaged in international trade, directly or indirectly, to maintain robust compliance programs. Such systems should effectively screen and avoid transactions involving the targeted entities and individuals. In light of the new sanctions, these subjects should indeed be included in the ‘know-your-customer’ blacklists managed by companies and their screening vendors. However, a significant challenge arises as the “facilitators and enablers” who erect evasion networks may already be working on replacing the targeted parties with new straw individuals who may be willing to take the associated risks for financial rewards.
The Department of Justice has criticized the customary screening methods as underperforming. They have signaled their intention to enforce sanctions and export controls similarly to how the U.S Foreign Corrupt Practices Act is enforced. The liability standards here extend from “actual knowledge” to “high probability” for the actions of intermediaries.
This sanctions landscape is rapidly becoming complex and evolving, and companies need to find ways to navigate it effectively. They must learn from America’s struggle against resourceful adversaries, such as the terrorist networks in Iraq. As Retired General Stanley McChrystal described, the failure’s root cause was an organizational mindset that valued “efficiency over adaptability.” McChrystal highlighted how companies could adopt strategies that proved successful against rapidly evolving terrorist threats in Iraq, such as flattening hierarchies, facilitating cross-functional information sharing across various sectors, and identifying facilitators and enablers.
Companies should endeavor to improve communication and information sharing among different teams. For instance, sanctions and export control teams should communicate regularly about challenges, while anti-corruption teams familiar with the “high probability” standard should be included in these discussions. Ideally, colleagues from various domains like tax, finance, procurement, and sales should also contribute to the discussions, as they likely possess information crucial for a comprehensive assessment of evasion risks.
Carrying out a root cause analysis whenever a customer, a reseller, or distributor is designated or listed can also prove beneficial for companies. This would permit the identification of facilitators and enablers that previously fouled their compliance efforts and prevent future liability exposure. As companies, on the front lines of this economic war, try to protect themselves from the upcoming wave of front companies that the facilitators and enablers will deploy, U.S regulators look into these efforts as part of effective compliance programs.
Experts have opined that companies could derive lessons from successful wartime strategies to anticipate and block the next moves of highly sophisticated, complex evasion networks threatening businesses today. Using the lessons learned from successful war fighting strategies is necessary for dealing with the increased sophistication of state adversaries and the seemingly never-ending cycle of sanction designation and evasion.
Writing credit: Kevin Carroll, partner at Hughes Hubbard & Reed and former Department of Homeland Security worker, Michael Huneke, partner at Hughes Hubbard & Reed’ s sanctions and export practices, and Sean Reilly, counsel at Hughes Hubbard & Reed and former Department of Commerce worker.