A recent political development is the United States’ increased use of export sanctions. The use of sanctions has been on the rise since the Presidency of Barack Obama and continued throughout Donald Trump’s term, with current reports claiming that it will remain active during Joe Biden’s presidency as well. Even before then, the era of sanctions largely began with the 9/11 terrorist attacks when they were used for counterterrorism purposes.
Influencing Geopolitics Through Sanctions
Sanctions are an effective way to impact geopolitical order, and the United States is utilizing its influence in global trade to do so without resorting to armed force. For example, new regulations prevent certain goods that are intended for military end users (MEU) from being sent to areas like China and Russia. Additionally, the parameters for determining what constitutes “military use” have been expanded upon in the last year.
However, many politicians have put into question the effectiveness of these export controls, citing:
- Whether they result in diminishing returns
- Their potential impact on businesses and organizations
- Interference with humanitarian aid efforts
- The use of secondary sanctions
Secondary sanctions ban third parties from making deals with certain individuals and groups. Detractors of sanctions believe they alienate the allies of the United States and encourage the use of cryptocurrencies as opposed to the U.S. dollar.
The government is currently pursuing ways to enforce sanctions more comprehensively and attempt to gain more international support for certain sanctions. These developments are still ongoing as of this writing.
What It All Means for Businesses
This trend is of note to businesses, as it impacts how to deal with legal compliance risks. In response to concerns from politicians, many world governments are switching away from explicit instruction and towards directional guidance. Another consequence is that companies are expected to be accountable for their own export compliance and often turn to third-party risk management as a solution.
While the Biden administration has attempted more targeted sanctions to minimize collateral impact, companies will still have to deal with elevated compliance risks and work through export control compliance requirements.
What OFAC Recommends
The U.S. Department of Treasury’s Office of Foreign Assets Control (OFAC) oversees trade sanctions, particularly the ones that dictate which entities businesses are and are not allowed to connect with due to national security and foreign policy concerns.
OFAC has released a recent framework for organizations looking to build a sanctions compliance program, which consists of five major components:
- Commitment from management: Whether we’re talking about a board of directors or upper-level executives, getting the upper management to support the compliance program is key to its success. These individuals must delegate sufficient resources, authority, and policies to address potential risks when working with third parties.
- Staff training: Management aren’t the only ones responsible. Regular employees must be aware of their own compliance responsibilities and need regular training resources for that purpose.
- Internal controls: Staff responsible for legal compliance must have controls over internal processes and procedures in order to reduce OFAC compliance risk. Clear communication with all parts of the business is key here.
- Risk assessment: Management must be able to conduct a holistic review of the entire risk profile of the company, as all external touchpoints have the potential to be a sanction violation. Risks can come from almost anywhere: from clients, products, the supply chain, business partners, and certain geographic regions. As a result, keeping your due diligence is ultimately the challenge companies must face.
- Auditing: Businesses need to be aware of how effective their sanctions compliance programs are running. Individual departments must be held accountable for the business deals they create, and audits must be done regularly. Should any issues be brought up, they must be addressed promptly.
There are other regulations to follow as well, so it’s just as important for you to stay on top of new developments. For instance, the OFAC 50 Percent Rule is worth talking about: if sanctioned parties jointly own more than 50% of a company, then that business is considered to be sanctioned. Keep this fact in mind when working with organizations that approach that level.
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