As U.S. economic sanctions have tightened, sanctioned countries, entities and individuals are engaging in increasingly sophisticated practices to evade their impact. Recent reports in the media and by U.S. regulators have described complicated sanctions evasion schemes involving false documentation, front companies and other deceptive trade practices which appear to have succeeded in luring otherwise innocent U.S. parties into prohibited transactions.
Parties subject to U.S. sanctions restrictions should take note: while the reports emphasize the evolving nature of sanctions evasion tactics, the simultaneous guidance from U.S. regulators conveys the expectation that compliance programs must continue to evolve to address these new risks. As sanctions become "smarter" and sanctions evaders more crafty, regulators will expect companies transacting with foreign counterparties to adopt due diligence protocols with a progressively investigative tenor, and will demand procedures designed not only to collect key documents and compliance representations from counterparties but to meaningfully assess their credibility.
FRONT COMPANIES AND FALSE DOCUMENTS
On February 19, 2018, The Wall Street Journal reported that a sanctioned Iranian airline (Mahan Air) had engaged in an elaborate scheme to purchase U.S. aircraft parts and engines through Turkish front companies.1 A related filing by the U.S. Department of Commerce, Bureau of Industry and Security provided more details, describing a scheme involving transactions between September 2016 and December 2017 with several Turkish shell companies which apparently posed as legitimate purchasers with the intent to transship U.S. origin aircraft engines and parts from Turkey to lran.2 While U.S. authorities reportedly were able to thwart certain of the intended transactions prior to or mid-shipment, it appears that some of the transactions were completed before U.S. authorities were able to intervene.3
Sophisticated evasion schemes like this are particularly concerning in the context of U.S. sanctions laws, which generally set out a strict liability regime in which a party may be penalized irrespective of their knowledge of the prohibited nature of a transaction. The potential for a significant penalty becomes even more serious in industries and circumstances where sanctions risks are well known, in so far as regulators often take the position that parties were "on notice" of heightened risks and should have applied enhanced due diligence protocols designed to account for those risks. The challenge is determining how to enhance existing due diligence protocols to effectively identify sophisticated sanctions evaders.
On February 23, 2018, the U.S. Department of Treasury, Office of Foreign Asset Control ("OFAC") again raised the compliance bar, issuing new guidance targeting North Korean sanctions evasion efforts within the shipping sector.4 The guidance focuses on the use of falsified documentation and altered vehicle identification, and reiterates OFAC's expectation of enhanced due diligence protocols capable of targeting shipping practices which can be abused to evade sanctions, such as ship-to-ship transfers.
The message to all U.S. industries is crystal clear: diligence protocols must be capable of detecting deceptive practices that are tailored to specific industries. Regulators will look harshly upon any compliance program that does not appear to robustly address industry-specific risks raised and incorporate mitigation measures designed to address those evolving risks.
MORE THAN A PAPER PROGRAM
These recent developments spotlight the need for more robust protocols -- sanctions due diligence needs to go beyond boilerplate representations and checklists of corporate documentation. Rather, regulators expect sophisticated international market participants to use their sophistication to employ sanctions compliance practices that are designed to assess the underlying credibility of representations and documentation received.
In this environment, it is critical for businesses operating internationally to adopt thoughtful, forward-thinking, defensible and documented due diligence procedures along with a protocol to ensure that those procedures adapt to emerging trends and guidance. Going further, in today's environment, companies must ensure that their compliance procedures take a skeptical posture, adopting robust protocols designed to escalate red flags and effective enhanced due diligence procedures targeting high-risk transactions.