Trade Sanctions and Risk Management

By Kathleen Ellis | November 5, 2012

Understanding Economic Sanctions and Regulation When Doing Business Abroad


The U.S. government has increasingly used laws and regulations that impose economic sanctions on others as an instrument to advance foreign policy and national security goals, with some recent efforts aimed at putting additional pressure on Iran over its nuclear program.

The U.S. government’s use of economic sanctions, however, opens up the potential for costly missteps by companies with overseas trading partners.

Even the most sophisticated multinationals can inadvertently violate U.S. economic sanctions. But the challenges are often greater for smaller companies that are just beginning to expand into overseas markets.

Large multinationals usually have experience in moving goods across borders and often have teams of lawyers at their disposal to help them sort through the requirements to stay in compliance. For smaller companies, however, economic sanctions often represent a new and complex field, rife with potential pitfalls.

Sanctions against countries and individuals can be in place for many years, but the programs can be expanded or relaxed.

In a recent case, a U.S. computer equipment company exported computer-related goods from the United States to Iran through another company located in Dubai, United Arab Emirates, in violation of U.S. economic sanctions. Civil penalties totaled more than $1 million along with the forfeiture of assets of nearly $2 million. (See: www.treasury.gov/resource-center/sanctions/CivPen/Documents/02242012_onlinemicro.pdf)

In addition to complying with economic sanctions laws and regulations, exporters must comply with export and re-export regulations, which are a separate set of rules administered by the Bureau of Industry and Security (BIS).

The BIS jurisdiction is over most exports from the United States, including dual-use commodities, technology and software. Dual-use commodities are commercial items that could also have military applications. Also, jurisdiction extends to the re-export of U.S. originating items from third countries, including foreign products that contain U.S. originating content or that are based on U.S. technology. The responsibility to comply with U.S. export control laws and regulations rests with the U.S. exporter.

U.S. Sanctions Programs

Some of the challenges related to economic sanctions come in part because of the number and scope of the sanctions and the fact that, over time, the government’s sanctions programs are dynamic and changing.

The U.S. government maintains sanctions not only on specific countries, but also on narcotics traffickers, terrorist organizations, and other non-state entities and individuals, known as Specially Designated Nationals (SDN).

Sanctions can be either comprehensive or selective, using the blocking of assets and trade restrictions.

Comprehensive sanctions programs include Cuba, Iran, Libya, North Korea, Sudan, Burma/Myanmar and Syria. Non-comprehensive programs include the Western Balkans, Belarus, Congo, Iraq, Ivory Coast, Lebanon, Somalia, Liberia, and Zimbabwe.

In non-comprehensive programs, there are no broad prohibitions on dealings with countries, but only against specifically named individuals and entities, according to the Office of Foreign Assets Control (OFAC).

OFAC is the arm of the U.S. Treasury in charge of administering the trade sanction programs.

The names of these individuals and entities are gathered by OFAC and added to the SDN list, which includes more than 6,000 names of entities, individuals and vessels that are connected with the sanctions targets. The assets of SDNs are blocked, and U.S. persons are prohibited from dealing with them.

One of the most notorious SDNs, before he was killed in 2011, was Osama bin Laden. Also on the list was international arms dealer Viktor Bout, who was recently sentenced to 25 years in prison by a U.S. court for his role in supplying weapons to a Colombia-based terror group that had been on the SDN list since 2004.

Recent Changes to Economic Sanctions

Sanctions against countries and individuals can be in place for many years, but over time, the programs can sometimes be expanded or relaxed. Sanctions against Iran, for instance, were imposed in 1979 following the Islamic revolution. In recent months, the United States and the European Union have moved to impose new, tougher sanctions as a means of pressuring Iran to abandon its nuclear program.

The U.S. government, for instance, is using economic sanctions as a means to reduce Iran’s ability to sell its oil in world markets, according to an Associated Press report.

These sanctions, if successful, will make it more difficult for Iran to continue its nuclear program. For example, The National Defense Authorization Act for Fiscal Year 2012 imposes sanctions on foreign financial institutions that do business with Iran’s central bank, barring them from operating in the United States to buy or sell Iranian oil. The objective is to discourage these institutions from facilitating Iran’s export activities. These sanctions took effect at the end of June at around the same time a European embargo on Iranian oil began.

The sanctions against Myanmar (Burma), on the other hand, are starting to relax. Sanctions were first imposed in 1997 in response to concerns about repression of democratic opposition. The U.S. government in April said it was ready to lift some of the sanctions to recognize Myanmar’s fledgling democratic transition. This would include lifting a ban on U.S. companies investing in or offering financial services to the county, according to a Reuters report.

On April 17, 2012, OFAC announced the first of these measures (General License 14-C), which authorizes the provision of financial services (including the provision of insurance coverage) in support of the following not-for-profit activities in Burma: humanitarian, democracy building, educational, sporting, non-commercial development and religious activities, provided that no SDN was involved.

The U.S. government has imposed sanctions through the years, but to be effective, they have to be enforced. In addition to administering the sanctions programs, OFAC also is in charge of enforcing them.

Recent settlements show that OFAC has been enforcing sanctions more vigorously than ever before. About $3.5 million in fines were collected in 2008, but that rose to $772.4 million in 2009, based on some large cases. In 2010, collections were about $200 million, and 2011 was on track to top $100 million, according to OFAC.

The fines for violations can be substantial. Depending on the program, criminal penalties can include fines ranging from $50,000 to $10 million, and imprisonment ranging from 10 years to 30 years for willful violations. Civil penalties range from $250,000 or twice the amount of each underlying transaction to $1.08 million for each violation.

Compliance is expected from all U.S. persons, including all U.S. citizens and permanent resident aliens. In addition, all persons and entities within the United States, all U.S.-incorporated entities and their foreign branches also must comply. In the case of certain programs, such as those regarding Cuba and some aspects to the sanctions against Iran, all foreign subsidiaries owned or controlled by U.S. companies also must comply.

Trade Sanction Risk Management

U.S. companies doing business with foreign nationals and corporations must understand their obligations under the economic sanctions laws and regulations, and practice due diligence with foreign customers.

A request by a previously unknown individual to ship dual-use products – items with peaceful uses as well as more violent applications such ammonium nitrate fertilizer – ought to prompt the company to investigate who the individual is and what he or she wants with the goods.

OFAC provides information on how to avoid violating sanctions, and maintains a list of SDNs. Companies also can use software to scan documentation against OFAC’s SDN list. OFAC also has information on its website and offers an agency hotline.

For larger companies that do a high volume of business with foreign customers, it makes sense to develop an internal compliance program. A smaller company may need to rely on outside experts.

If there is a violation, companies should cooperate with OFAC to resolve the problem. Companies that discover a violation(s) are encouraged to voluntarily disclose them to OFAC. Self-disclosure is considered a mitigating factor by OFAC in determining the appropriate penalty for a settlement.

A U.S. company’s domestic and foreign affiliates, for instance, recently exported goods to Iran and Sudan and conducted transactions involving property with Cuba. OFAC determined that the company voluntarily self-disclosed the apparent violations, and that the apparent violations constituted a non-egregious case. The base penalty amount totaled $661,053 and the company agreed to pay more than $502,408 to settle apparent violations, according to OFAC.

As U.S. companies expand and the developing world becomes more prosperous, opportunities for international trade improve. The United States has numerous sanctions programs in place and is constantly expanding them and revising them. Enforcement also has been increasing in recent years. Small companies that are starting to work with overseas partners may not have the expertise or resources to navigate this complex field and avoid potential fines.

About Kathleen Ellis

Ellis is a senior vice president of Chubb & Son and manager of Multinational Risk Group - Global Accounts More from Kathleen Ellis

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Insurance Journal West November 5, 2012
November 5, 2012
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