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Preventing sanctions from slowing global trade

Blockage of the Suez Canal in 2021 by the merchant vessel Ever Given was a physical reminder of the vulnerability of global trade and how easily it can be disrupted. Beyond failures of physical infrastructure sit largely invisible threats to the administration of global supply chains. 

The movement of goods and commodities in cargo and freight around the world creates an invisible web of connectivity that facilitates trade and makes the world a smaller place. This web can also pose traps and the increased complexity of trade routes has made getting caught up in illicit financial activity a very real risk for those working in the transportation industry. That’s why there are a host of sanctions and export compliance controls that must be adhered to by firms working across the global supply chain.  

When it comes to sanctions and export compliance, two things are happening in tandem. First, numerous regulators oversee the cargo industry and have been toughening their stance over a number of years. Regulators have begun to recognize the vulnerabilities present in the facilitation of trade, having previously focused on the gatekeepers of financial crime (namely the financial services industry). Second, these regulators have issued rules and regulations that overlap with each other in some cases and change regularly.

Aneta Klosek, Director, Trade Compliance, LexisNexis Risk Solutions
Aneta Klosek, Director, Trade Compliance, LexisNexis Risk Solutions

Navigating the Web of Regulation 

In the U.S., the Department of Commerce, Bureau of Industry and Security (BIS) manages laws relating to the control of certain exports, reexports, transshipments and other activities. The regulations, including Export Administration Regulations (EAR), stem the proliferation of weapons of mass destruction and limit the military and terrorism support capability of certain countries.

Tangential to EARs are Directorate of Defense Trade Controls (DTC) International Traffic in Arms Regulations (ITAR). The DTC enforces the Arms Export Control Act and the ITAR through licensing, assurance of proper end-use of licensed exports and implementation of regulatory policies.

In addition, the U.S. Treasury’s Office of Foreign Asset Controls (OFAC) acts under Presidential wartime and national emergency powers and has authority granted by specific legislation to impose controls on transactions and freeze foreign assets under U.S. jurisdiction. 

The list could go on, but what is important is that nearly every cargo shipment will be subject to export controls and sanctions rules under at least one of these agencies. Each of these agencies have increased threats of enforcement and enforcement actions over the last few years. Today it’s not just those directly involved in transactions and the physical movement of goods that violate regulations who attract regulatory attention, but also those who indirectly facilitate these. 

This should concern all legitimate firms involved in global trade especially because regulators, such as OFAC, enjoy expanded jurisdictional reach. For example, in 2020 OFAC fined a Europe-based specialist in air transport communications and information technology company US$7.8 million for 9,256 violations of the Global Terrorism Sanctions Regulations. The firm provided commercial telecommunications network and information technology services to airlines on OFAC’s Specially Designated Nationals and Blocked Persons (SDN) list. 

Fines are the least of OFAC’s enforcement tools; it also has the power to withdraw licenses, which can damage profitable lines of business, as well as administer criminal penalties including jail time. 

As sanctions and export controls have increased exponentially over the years – often driven by politically charged sanctions and tariffs such as those arising from the U.S.-China trade conflict – so too has the reach of sanctions and export controls. 

Understanding Supply Chain Complexity

A high-profile example of U.S. sanctions and export controls in action involved a Chinese technology firm. Since 2019 the U.S. has effectively blocked the company’s access to U.S. exports of goods, technology and software – even extending as far as banning its latest apps on American app stores. 

As a result of the firm’s designation on the U.S. Department of Commerce’s “Entity List” in May 2019, it became prohibited under U.S. law from exporting, re-exporting or transferring items that are subject to EARs relating to 152 non-U.S. affiliates. However, the definition of what is “subject to the EAR” has expanded for this company specifically to include offshore semiconductor production based on U.S. technology. This means that even the silicon wafers that would form part of the semiconductors that would eventually be used by the firm are restricted.

The challenge with cargo is that the risk of inadvertently breaching a sanction is very high due to the complexity of entity names and technological components that can be difficult to identify. Manifests are often vague and when even something like a silicon wafer itself is difficult to identify as a potentially controlled item, a manifest labeling them as ‘computer parts’ isn’t going to aid the situation.  

These pressures have been exacerbated by new ones, as the pandemic has seen the air cargo industry expand and adapt to ensure the flow of global trade in the face of rolling lockdowns across the globe. None of this means the cargo industry is doomed - far from it - as it seems cargo is needed now more than ever before. It does mean, however, that parties involved in the handling and movement of air cargo need to become much savvier when it comes to risk management and due diligence. 

Taking a Risk Based Approach

How should cargo operators handle these challenges? They must study commercial bills carefully to ensure completeness and accuracy. Companies must make their own risk-based decisions using up-to-date insights for each shipment based on the goods or their destination. Some items might need additional licenses from a regulator. Some destinations such as France and other EU member states are very low risk, but Turkey, for example, may be more complex due to its proximity to sanctioned countries. 

Completing these risk-based assessments takes time. Checks should start from the point of booking a shipment rather than the point of embarkation when the shipment is already loaded. This has an additional logistical benefit – by commencing checks at this stage operators can prioritize less risky shipments to consignees that have been cleared and hold back high-risk ones to send them later after they complete manifest checks. This avoids delays or missing out on other cargo that could have gone in its place. 

Honoré de Balzac once famously mused that “laws are spider webs through which the big flies pass, and the little ones get caught.” As long as regulatory reach continues to extend and enforcement actions stiffen, this is a reminder that those most at risk are small and medium-sized enterprises for whom violation of sanctions and export controls pose a proportionally greater threat to their future as a growing concern.  

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