Ongoing Sanctions Demand Supply Chain Vigilance

Ongoing Sanctions Demand Supply Chain Vigilance

In the 21^st century, some of the most powerful weapons employed against aggressive nations, rogue regimes, and criminal organizations are economic, diplomatic, and military sanctions. Modern sanctions date back to the First World War in the form of blockades and have significantly impacted the economies and governments of targets over the decades – along with notable failures and unintended consequences.

Although their effectiveness is controversial, many countries and international coalitions increasingly rely on sanctions to combat a range of political, humanitarian, and military threats.

Multilateral coalitions that include the US, UK, and EU have imposed sanctions on several countries that jeopardize their interests. Iran, Syria, and North Korea have all been subjected to substantial restrictive measures over the decades.

Sanctions are also imposed for wartime human rights abuses, such as the 2021 US sanctions levied against all warring factions in Ethiopia who have committed atrocities. In particular, the Biden Administration targeted the Federal government for blockading medical and humanitarian aid, which has caused widespread famine and disease. But it is the unprecedented range and ongoing intensification of Russian and Belarusian sanctions that have had the greatest impact on the global economy.

Russian Sanctions Effect Organizations and Individuals

Russia sanctions were imposed in 2014 with its annexation of Crimea, but the 2022 round levied in response to the invasion of Ukraine is formidable and sanctions escalate as the war continues. With the goal of limiting access to money, Russian banks have their assets frozen, are barred from making debt payments with foreign currency, and were removed from Swift, the international financial payments network. Russian oil and gas imports are banned by many countries or soon will be, and Germany halted the opening of the Nord Stream 2 gas pipeline.

Russian companies are also barred from borrowing funds and face export bans on electronics, encryption security, telecommunications, aerospace, and navigation technology. Recently, the US imposed penalties on individuals and organizations that support the Russian military supply chain and indicted more than ten people for sending military technology to Russia.

Thousands of Russian individuals are also subject to selective or a total block of assets including President Putin, Prime Minister Mikhail Mishustin, Foreign Minister Sergey Lavrov, and their families. Members of the Russian Duma and National Security Council, oligarchs, businesspeople, propagandists, and defense industry officials have all been sanctioned, with their real estate, yachts, and luxury goods seized.

Sanctions Impact Encourages Their Continuation

Analysts debate whether the sanctions are successful, but there is no question about the severe financial effects on Russia. The ruble collapsed and many Russian stocks may never recover from their free-fall and shut down of the Moscow Exchange. Interest rates rose to 20% before Russia’s Central Bank intervened, and the Russian economy is in a major recession, shrinking 4% this year.

Western countries frequently tally the impact of their sanction regimen:

• The UK’s Office of Financial Sanction Implementation recently stated that it imposed sanctions on 120 entities and froze the assets of 19 Russian banks, with global assets of more than £940 billion. The UK also froze £18.39 billion in financial assets held by designated persons, not including properties.
• The US State Department and Treasury Department report that the US and its allies immobilized $300 billion Russian Central Bank assets and restricted dealing with 80% of the banking sector, as well as crippled Russia’s military industry. The agencies continually update a large number of individuals, suppliers, and financial officials sanctioned.

Sanctions also have repercussions on the countries imposing them, most notably Russia’s retaliatory energy and export restrictions to “unfriendly countries” that inflicted €100 billion in economic damage to the European economy. However, the significant impact the sanctions have had on Russia, coupled with Ukraine’s recent advances in spite of Russian intransigence, indicate that the widening effort will continue or accelerate until the resolution of the war – if not indefinitely.

Sanctions Exact Compliance with Significant Penalties

Economic sanctions only work by restricting trade with designated entities, putting global companies and their supply chains at the nexus of the financial war. Businesses must not only contend with increased fuel prices, shortages, and lost sales created by the conflict, but they must also avoid the sanction landmines that can imperil any organization. Penalties can be imposed regardless of intent, knowledge, or attempt to comply with regulations, therefore companies bear the ultimate responsibility to verify any business associate’s representations. Inadvertent violations or indirect activities are not tolerated.

And penalties for noncompliance are severe. Violations can be criminally prosecuted and/or subject to substantial financial consequences, such as the UK-imposed monetary penalties of £90,000 on two Fintech companies that made funds available to the Russia National Commercial Bank. In the US, monetary penalties can be as high as $328,000 for each transaction while criminal penalties for willful violation can result in 20 years in prison and $1 million in fines. Details of financial sanctions breaches can also be publicized and governments can share information on suspected violators.

The Complex Sphere of Sanctions Requires Broad Oversight

Companies need to be aware of the scope of sanctions:

• Sanctions originate with numerous countries: Sanctions have been imposed by 45 countries including the UK, US, and EU. While multi-jurisdictional watch lists may help coordinate the identification of sanctioned entities, ongoing additions and revisions complicate the effort.
• Sanctions impact trade with countless other countries: Companies must thoroughly vet relationships in countries that do not impose sanctions like those of Western nations, and particularly with those that continue to trade with Russia and Belarus, such as China, India and Turkey.
• Sanctions target various industries: Stringent export controls rules apply to many products exported to Russia or Belarus related to transportation, energy, aviation, maritime navigation, communication, firearms and luxury goods. Particularly targeted are hardware, software and technology that may be exported to a military end-user.
• Sanctions apply to the complete extended supply chain: Upstream suppliers and vendors at all levels, partners and contractors, and downstream vendors, agents, buyers and customers are all subject to sanctions due diligence.
• Sanctions pertain to owners, related entities and facilitators: Fifty-percent rules dictate that sanctioned parties cannot own 50% or more of a company. However, ownership structures can be opaque, requiring rigorous Ultimate Beneficial Ownership (UBO) identification of business owners throughout a supply chain. Additionally, any person or organization that facilitates trade with a sanctioned entity or is related to it is sanctioned

Ethixbase360 Offers Comprehensive Sanctions Risk Management

To mitigate the risks produced by ongoing and dynamic sanctions, it is critical for companies to have visibility over their complete supply chain with transparent third-party networks. Using a sophisticated global database of high-risk entities, the Ethixbase360 Instant Sanctions Risk Questionnaire quickly ascertains UBO data and unwraps the organizational structure of supply chain companies. Ethixbase360 tools assess the risk level and evaluate any existing screening processes a company may have. Ongoing monitoring and risk status updates allow rapid response to sanctions changes or incidents.

Contact Ethixbase360 for a demonstration of our sanction risk management program.