Supply Chain Risks Related to US Sanctions and Export Control Issues
When companies and compliance departments think about US sanctions and export control risks, they often focus on sales to customers and exports/reexports from one country to another. In that context, the compliance focus is typically on confirming that a customer and other parties involved in a sale and shipment are not restricted parties and that the transfer of a product is authorized under applicable export-control regulations. This is only half the story. Companies can have similar risks in their supply chain, which can be disruptive to a company’s operations beyond one transaction or customer relationship if not property managed.
Suppliers and vendors present many of the same risks as customers under US sanctions. Failure to properly screen suppliers and vendors used by a company could lead to repeated dealings with a Specially Designated National (“SDN”), for example. Given the comprehensive prohibitions targeting SDNs, a US company would likely have significant liability if it had obtained goods or services over a long period from an SDN. When an SDN customer is identified and business terminated, a company may suffer financial losses in the immediate and medium term but new, non-SDN customers can be found to keep up sales. By contrast, identifying a supplier that is an SDN can be disruptive to a company’s supply chain over a long period, particularly if that supplier was a crucial or only source in the manufacturing process and is no longer available. This risk underscores the need for companies and their compliance teams to consider frequent screening of suppliers and vendors to mitigate such risks.
As part of a screening risk assessment, compliance functions should, at a minimum, focus their efforts on regions that include US comprehensively sanctioned territories (i.e., Crimea, Cuba, Iran, North Korea, Syria) because of the higher prevalence of restricted parties in those areas. US comprehensive sanctions prohibit imports into the United States, and/or US Persons dealing in products, from such territories. US companies that directly or indirectly procure parts, components, or other items from comprehensively sanctioned territories can face liability under US sanctions. A January 2019 enforcement case from the US Treasury Department’s Office of Foreign Assets Control exemplifies this risk. In that case, a US-based company settled an enforcement case with this agency and paid almost $1 million in civil penalties for having materials of North Korea origin in goods from Chinese suppliers.
US export controls can also pose risks in the supply chain, particularly for non-US companies. The US Government applies its export controls on an extraterritorial basis in which US and non-US persons may have liability if they violate US export controls in their dealings with items (i.e., goods, software, technology) subject to US jurisdiction, wherever such items are located. To the extent a non-US company procures items from a US supplier (whether for re-sale or to incorporate into a product manufactured outside the United States), failure to appreciate applicable US export-control restrictions can lead to liability for that company and potentially being cut off from such suppliers if they do not have faith in the non-US company’s US export-control compliance program. This risk is acute where non-US companies procure controlled items under the International Traffic in Arms Regulations and/or Export Administration Regulations. Companies with supply chains that incorporate this risk should have adequate compliance controls to ensure that the use of items subject to US jurisdiction complies with US export controls.
Beyond the practical consequences that can arise from not properly addressing US sanctions and export-control risks in their supply chain, companies should keep in mind that potential penalties are significant and can add up quickly. The maximum civil penalties for US sanctions violations are generally the greater of $295,141 or twice the value of the transaction, while the maximum civil penalties for US export-control violations are the greater of $300,000 or twice the value of the transaction. These civil penalties can be imposed for each violation on a strict liability basis, and the maximum amounts are adjusted each year to account for inflation. Beyond civil penalties, the US Government has also increasingly designated companies on one of its restricted parties lists (e.g., Entity List, Denied Parties List, Foreign Sanctions Evaders List, etc.) to penalize parties that do not comply with US sanctions or export controls and may not cooperate with US Government investigations. Designation on one of these US restricted-parties list can be devastating to a company’s operations, if they are later lifted by the US Government.
Alex advises clients on compliance with US export controls, trade and economic sanctions, and antiboycott controls. He counsels on and prepares filings to submit to the US Government’s Committee on Foreign Investment in the United States (CFIUS) with respect to the acquisition of US enterprises by non-US interests. Moreover, he advises US and non-US companies in the context of licensing, enforcement actions, internal investigations, compliance audits, mergers and acquisitions and other cross-border transactions, and the design, implementation, and administration of compliance programs.