International relations are in a state of flux and, consequently, so is the certainty of a stable climate for international business.
Consider the recent outbreak of hostilities between Russia and the Ukraine and the response of sanctions by Western powers. With little notice, US, European and UK businesses (among others) are finding themselves caught between, on the one hand, Western sanctions forcing them to divest from Russian or Ukrainian contracts and assets versus Russian financial countermeasures on the other.
Sanctions compliance is no longer simple.
From selling fintech solutions to Russian banks to importing clothing from western China, businesses can no longer rely on the fact that even their most mundane and benign activity will not suddenly become a problem.
This uncertainty creates risk for companies, especially those that do business in countries or industries that tend to be targeted by Western sanctions.
Your business can manage this risk and lack of certainty.
Managing sanctions risk requires understanding where you have exposure, and building a sanctions playbook to minimize that exposure and prepare your business to respond swiftly to different scenarios where risk might materialize.
Your sanctions playbook starts with mapping your exposure.
Managing risk starts with mapping out where your business has exposure.
When it comes to sanctions, legal exposure can be both regulatory in nature (are you subject to specific sanctions laws?) as well as contractual (have you voluntarily adopted any sanctions laws?).
Some countries are more likely to fall victim to sanctions regimes than others. In recent history, these have included countries that are suspect in the West for national security or foreign policy reasons, such as North Korea, Iran, Russia and China, as well as countries with sub-par human rights records or significant corruption problems.
Similarly, certain industries tend to be the focus of sanctions laws. Common targets of economic sanctions are the financial and banking sector and oil and natural resource extraction sector, and common targets of trade sanctions (export controls) include the defense and aerospace industry, chemical, biological and nuclear sectors, and, increasingly, industries engaging in emerging and foundational technologies, such as those contemplated by the US Department of Commerce.
You’ve mapped your exposure. What’s next?
With an understanding of where your risk lies, it becomes easier to target that risk – both to preempt it and put a business action plan in place for the day it materializes.
Key strategies and best practices begin at the business planning stage.
- Where do you plan on setting up shop?
- Who will your vendors be?
- What currency do you plan on using in your contracts?
- What types of investors are you looking for?
- Will your business engage in partnerships or cooperation agreements with other companies?
These are the kinds of questions that you need to ask about your business. This way, at an early stage, you can limit the sanctions risk factors that your business will face.
Use software solutions.
As your business develops, implement software solutions in your workflow, sales cycle and supply chain management processes.
A variety of solutions exist that allow for seamless screening and blocking of potentially problematic transactions and third parties, IP/geo-blocking user access from problematic countries and territories and flagging regulated products and components. Integrating these solutions effectively will ease internal communication regarding compliance across your critical business units, such as sales, product, legal and compliance, procurement, logistics and R&D.
Review your third-party contracts.
Another useful tool is the third-party contract. Third parties are all of the people and companies with whom your business engages, such as customers, vendors, business partners and investors. Your business can benefit greatly by having sanctions compliance provisions feature in its third party contracts. Consider some of the following benefits:
- Getting comfort that you aren’t contracting with problematic parties.
- Flowing down your own compliance obligations.
- Fleshing out “exit strategies” from the contract for when the worst happens.
Naturally, different types of contracts have different needs, which makes tailoring them to their unique circumstances paramount. This is why the sanctions provisions that you find in an office lease agreement will look different from those found in investor rights agreements, share purchase agreements, licensing agreements, software development agreements, and contracts for the sale of goods.
Do you have a business continuity plan?
Another strategy involves putting in place a business continuity plan, particularly when the business owns important assets, contracts, or business units that are at risk.
A flexible business continuity plan can help your company make targeted decisions when the time comes. Ideally, when risk materializes, your business will be in a position to make only the most limited changes necessary to avert damage caused by sanctions. Sometimes changes will be minor, like requiring the termination of a contract. At others, however, required change may be more significant, like overhauling or moving complete business units.
In this regard, sanctions often have wind-down periods in which businesses must shut down activity that has become illegal under newly minted sanctions. Business continuity plans should hope for long wind-down periods but plan for short ones.
At the same time, sanctions authorities often provide for licenses or permits, upon request, for continuing otherwise unlawful business activity. Take advantage of this. You can do so effectively by collecting information required for license or permit applications on an ongoing basis. Consider taking a risk-based approach and saving resources by limiting collection to third parties that are more prone to risk.
When sanctions hit, you’ll be prepared.
Taking adequate preemptive measures and populating your sanctions playbook will provide flexibility the day that sanctions impact your business.
When this happens, call your lawyer. Make sure legal counsel is ready to take calls and support your business at a moment’s notice as you execute on the risk management strategies laid out in your sanctions playbook.
Map out the event.
With legal counsel on standby, map out your exposure to the specific sanctions event and evaluate the risk to your business.
- How is your business impacted by the specific obligations and prohibitions implemented by these sanctions?
- Do these sanctions trigger reporting or disclosure obligations (either regulatory or contractual)?
- Will your business be caught in the crosshairs of Western sanctions and countermeasures or blocking statutes?
- What assets do you have on the ground that need to be moved, shut down, or otherwise attended to?
Don't forget to request a license or permit.
As noted, special licenses or permits often can be obtained from sanctions authorities. These may enable your business to evade or limit the impact of sanctions or, at the very least, extend the amount of time at your disposal to execute on a business continuity plan. Ideally your business will have collected the information required to submit license or permit requests expeditiously.
Execute your business continuity plan.
Finally, having mapped out where a sanctions event impacts your business, you can effectively execute your business continuity plan, limiting the changes to make to your business to the minimum necessary to mitigate the fallout from sanctions.
Some final thoughts.
Sanctions are becoming increasingly popular national security and foreign policy tools among countries around the world, and not in a unified way. This reality has complicated sanctions compliance for companies that do international business.
Unfortunately, there is no silver bullet or perfect solution for navigating the complexities of sanctions compliance.
However, thoughtful risk management can be a lifesaver in a time of need. So build your sanctions playbook: map out the inherent risk to your business, establish preemptive steps to mitigate that risk and implement strategies that address different residual risk scenarios when they come to bear.