Banks and firms face a mammoth sanctions-compliance challenge

WITH UNPRECEDENTED sanctions come unprecedented compliance challenges. Western banks and companies hoping to navigate the morass are, at least, getting some help from the Office of Financial Assets Control (OFAC), which oversees most American measures. It has published answers to 62 “frequently asked questions” about those against Russia. But compliance officers craving clarity can hardly relax. The legalese runs to 13,800 words—and leaves many queries unanswered since guidance is still being fleshed out. Moreover, new sanctions are being added almost daily. And the ones imposed by Britain, the EU and others overlap only partially with America’s.

The Western response to Russia’s invasion of Ukraine is without parallel in terms of both the number of countries participating, and the size and interconnectedness of the target’s economy. They have created what Stephen Platt, author of “Criminal Capital”, a book about financial crime, calls “a sanctions-compliance emergency”.

This is further fuelling a sanctions-industrial complex that has burgeoned over the past decade. International law firms say they have never had so many inquiries; some have set up round-the-clock hotlines for worried clients. Compliance-tech firms are busier than ever, too: software that helps users weed out entities and individuals hit by sanctions is flying off shelves. Global spending on sanctions compliance by banks alone (no reliable figures exist for non-banks) reached a record $50bn or so in 2020, the latest year for which estimates are available. The outlay this year is likely to be well above that.

Keeping on top of the new sanctions is no easy task. In America alone they are being issued by four separate agencies: OFAC (financial sanctions), the Commerce Department (export controls), the State Department (visa bans) and the Justice Department (anti-kleptocracy measures). Together, these are “a masterclass of all prior sanctions programmes being imposed all at the same time, utilising elements of those imposed on China, Cuba, Iran, Venezuela and even narco-traffickers,” says Adam M. Smith of Gibson Dunn, a law firm.

Banks, which have long been on the financial-crimefighting front line, will find complying tricky but manageable. The challenge is more daunting for non-financial companies, a far greater number of which do business that is covered by the sanctions than was the case with Iran or other past programmes. The Russia sanctions “reach across the corporate spectrum like never before”, says Michael Dawson of WilmerHale, another law firm. Lawyers say calls for help are coming from software-makers, manufacturers, consumer-goods sellers and even, in one case, a sports team that recruits players from Russia.

One reason for the anxiety is the sweeping export controls implemented by America and 33 “partner countries” which restrict the sale of technology (for things like semiconductors and telecoms), components and whole goods to Russia. These cover not only stuff shipped directly to Russia but parts for products assembled in other countries, such as China, and later exported to Russia. In some cases sanctions kick in if the “controlled content” exceeds 25% of the value of the finished product. They may also apply if the product is manufactured in third countries where the machinery used is itself “the direct product of US-origin software or technology”.

This covers technology and widgets made by thousands of Western firms, large and small. Many have homework to do to determine if their products might be caught in the net. Another lawyer says he is getting fretful calls from startups that have outsourced software development to Russian contractors. It may or may not be legal to continue doing so, depending on the circumstances; either way, payments have got more complicated because of sanctions on Russian banks. Many small and middling Western firms are “spectacularly ill equipped” to conduct the required due diligence on business partners, counterparties or supply chains, says Mr Platt.

This task is made harder still by Russia’s expertise in obfuscation. Russian moneymen have developed world-beating skills in creating opaque offshore structures to conceal ownership. Their creativity has prompted OFAC to tighten its rules on what constitutes control of a corporate entity.

Adding to the anxiety, fines for violations have got bigger, and not only for banks. Firms hit with hefty American penalties in the past decade include Schlumberger, an oil-services group ($259m) and Fokker, an aircraft-parts maker ($51m). The Justice Department’s recent creation of a “KleptoCapture” task force adds to the risks of trading with oligarch-linked firms. Enforcement in Europe has been less vigorous, but that may change. Even Western lawyers, with all the extra billable hours, need to stay on their toes: Britain’s Solicitors Regulation Authority said on March 15th that it will police law firms’ sanctions compliance with spot checks. ■

Our recent coverage of the Ukraine crisis can be found here

This article appeared in the Business section of the print edition under the headline “Read and follow”