Sanctions and Export Controls are separate issues, but work hand in glove.
Export Controls and Sanctions: Two separate areas of significant risk and a history of heavy penalties
Sanctions focus on people, organizations and money. Export controls focus on goods, technology and services. Both can work together to isolate noncompliant governments, companies or persons and both can levy significant fines. The requirement to settle non-compliance issues can be daunting and represent further expense – more than the heavy fines generally levied, most often requiring the expert help of experienced export control consultants, even by the most sophisticated companies.
A brief summary of export controls, sanctions and their impact on businesses
Export control laws and regulations may generally be considered to govern every product, technology and service regardless of value or level of sophistication. While the most stringent controls are placed on the most strategic goods, export controls are used to isolate countries of concern from receiving even rudimentary items. In Europe, most nations are members of the European Union’s export control regime, but may also impose their own national controls if the country feels it warranted. The United States imposes extensive controls, generally in keeping with its allies, but with numerous additions. Further, U.S. controls often extend extraterritorily, creating additional compliance requirements for European companies.
When imposed upon a government, person, entity or country, economic sanctions can be surgical or broad brush, depending on the severity of the unacceptable conduct. Sanctions are generally issued by the United Nations, European national authorities and the United States. Sanctions are theoretically aligned, but there are numerous instances where one country is sanctioned by one regime and not by another, creating complexity in managing compliance. Additions and deletions happen frequently, making consistent monitoring important for compliance.
Comparison of Three Kinds of Sanctions
For many sanctions, the EU, individual country governments and the U.S. are fully aligned. However, there are a few countries where that is not the case. The EU and the United States do not share a viewpoint on sanctions involving Iran, for example. The United States imposes a total ban – an embargo – on any dealing with Iran whether in goods, services or money. In the U.S. parlance, not even a “no. 2 pencil” is eligible for export to Iran without a license – and a license would not be granted. The European Union imposed a policy of pressure and engagement, which includes some sanctions and some areas where engagement is allowable. The idea is that engagement will ensure that Iran lives up to its international obligations. These two approaches often come into conflict with one another when European and U.S. partners try to work together. U.S. individuals and companies have a strict requirement not to facilitate transactions with Iran in any way, leading to a difficulty in providing advice to non-U.S. subsidiaries.
Other sanctions target not whole countries, but specific entities. These can be found both in sanctions regimes and in export control regimes. The EU maintains a consolidated list of persons, groups and entities subject to sanctions. Likewise, the U.S. Office of Foreign Assets Control (OFAC) in the Treasury Department maintains a similar list. In addition, the Bureau of Industry and Security (BIS) in the U.S., primarily responsible for export controls, maintains an entity list, with whom it is impermissible to engage in export or import transactions. Finally, the U.S. Department of State maintains a list of debarred entities and persons.
Why Sanctions?
Sanctions have been used to advance a range of foreign policy goals, including counterterrorism, counter-narcotics, nonproliferation, democracy and human rights promotion, conflict resolution, and cybersecurity. They are used as a tool by governments and are intended to economically isolate the country of concern by making it as difficult as possible to complete monetary transactions and import or export goods and services. Sanctions can be used coercively to hasten a change in humanitarian violations. Sanctions also make it much more difficult for a country to purchase military goods legally, reducing their capabilities. Where organized crime has a strangle hold on banking systems in a country, sanctions make laundering funds through those means impossible. Since 9/11, there has been a tendency to use “smart” sanctions, which are more discrete actions that aim to minimize the suffering of innocent civilians.
Export Controls
Reasons for export controls differ from those of sanctions. Export controls are imposed to protect national security, foreign policy and domestic interests and can be levied in a very targeted manner. Export controls restrict the release of specific technologies, equipment, information and services to foreign persons. Some exports are simply “controlled,” meaning an authorization, generally in the form of a license is required before one can ship or transfer an item. For example, the UK government may be fine with Country A receiving their most advanced night vision scope, but not Country B. Export controls allow for this kind of surgical application. In Europe export control regimes are maintained by the European Union and national governments. In the United States, who can also have a role in some European transactions, export controls is managed by the U.S. Department of State (munitions items) and the Department of Commerce (dual use and commercial items.)
These agencies have created complicated lists of items that are and are not controlled, taking special knowledge in some cases to make sure that the control is properly applied. Some items require a license from the organization while others are granted a “general license” which means companies can ship without waiting for license approval. Getting it right is important to the speed of business and to compliance requirements.
A History of Penalties
Both sanctions and export control regimes have heightened their compliance enforcement over the years, clearly communicating that these are serious regulations and companies need to be proficient in compliance. On November 19, 2018, the Department of Justice announced that a French bank was to pay fines in excess of US$1.34B for violations of OFAC sanctions. In 2014 another bank was fined US$8.9 billion for sanctions issues. In 2019, the year to date total for penalties issued by OFAC tops is approximately $1.3 billion. On the export controls front, penalties are regularly in the tens of millions, with significant additional costs required as the company struggles to put in a suitable compliance program within a proscribed timeframe – one that meets with the Regulator’s approval. Many large companies have been heavily fined over the last decade in Europe, Asia and the United States. Export controls can be complex and spending the time to get it right before it goes out the door can save millions later on.
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