By Benjamin Knuth, Subject Matter Advisor, Securities and M&A at LexisNexis
In light of the ongoing invasion of Ukraine, the White House continues to issue executive orders and sanctions that expand on previous executive orders against Russian entities and individuals and presents the most extensive sanctions issued to date. Specifically, the Department of the Treasury is targeting Russian government officials and business leaders, luxury properties of Russian elites, and asset management and service companies that are facilitating Russian attempts to evade sanctions.
The Department of Commerce is further restricting the Russian military’s ability to obtain technologies and other resources it needs to sustain its aggressive stance and projection of power. As part of the updated sanctions, the U.S. and its allies have added an extensive number of parties in Russia and Belarus to the Entity List, which prevents them from sourcing products that derive from U.S. software and other technologies.
To date, the U.S. has added over 1,000 parties to the Treasury’s Specially Designated Nationals and Blocked Persons List and over 300 parties to the Commerce’s Entity List.
Contending with the impact of intensified sanctions
The new wave of sanctions levied against Russia for its invasion of Ukraine created an urgent mandate for compliance departments. As the war persists, compliance professionals are tasked with keeping track of fast-changing requirements and implementing the necessary controls to ensure that their organizations are abiding by the sanctions issued across multiple jurisdictions around the world.
With heightened interest and regulatory activity in play, organizations are well-advised to proactively update their sanction compliance response plans. Revisiting new sanction measures and refreshing sanction screening filters to account for changes to the Bureau of Industry and Security (BIS) Entity List are important first steps.
Assessing products and services in sanctioned countries and reporting blocked and unblocked assets to the Office of Foreign Assets Control (OFAC) keeps organizations on track with regulatory compliance. Running queries that analyze the customer base and counterparties using an updated filter reveals risk exposure.
Cautionary guidance offered by compliance experts and governments indicates that paying careful attention to these compliance concerns will be critically important in 2023. Notably, organizations should be prepared for upleveled enforcement of these sanctions by U.S. lawmakers, and related investigations, document requests, and information sought by large global banking institutions.
Fortifying compliance protocols for expanded requirements
Refreshing an organization’s compliance plan starts with staying up-to-date on the latest developments in the evolving sanctions landscape, which requires management commitment to actively monitoring official government announcements, and performing the due diligence needed to keep track of all sources of compliance risk.
- Assess compliance risk – Organizations should start with a comprehensive review of an organization’s products, services, customers, and partners. Reviewing all existing contracts with customers and partners empowers the organization to address problematic clauses and provisions related to sanctions requirements.
- Build internal controls – Cataloging compliance requirements helps capture the context needed to update policies, procedures, and controls within the organization, all of which inform measures needed to stay on track. Communicating the potential impact of sanctions and the detail of the updated compliance response plan to internal and external stakeholders — including employees, customers, and partners — keeps all parties on the same page.
- Conduct ongoing testing and auditing – Testing and auditing for sanction compliance must be an ongoing exercise. Continuously monitoring the situation and adjusting the compliance response plan helps organizations stay ahead of compliance risk.
- Implement training programs – Employees are an organization’s first line of defense as it relates to complying with sanctions requirements. Ensuring that they understand their responsibilities readies them for identifying and reporting potential violations.
- Avoid the consequences of noncompliance – Non-compliance related to negligence, ignorance, or deliberate illegal behavior can lead to fines that range from moderate to severe, based on the extent of the violation. Moderate fines are levied for violations related to insufficient compliance controls and administrative errors, whereas severe fines are imposed on organizations that show a cavalier attitude or flagrant disregard for sanctions with past occurrences.
Tailoring compliance protocols for corporate compliance professionals
In addition to baseline compliance measures, corporate entities should be building and executing a broader organizational sanctions response plan.
Extra measures should include reviewing products and services in sanctioned countries. Further, investments and transactions involving sanctioned parties and entities should be voided or wrapped up within the applicable timelines in accordance with sanction directives, unless allowed under a specific or general license.
Revisiting and amending sanction screening filters — especially as it relates to the Specifically Designated Nationals (SDN) list — helps capture geo-location information and account for common misspellings. Corporate entities should also be amending screening filters for other lists as applicable.
Blocking the assets and accounts of sanctioned Russian entities
U.S. institutions are required to block the assets of sanctioned Russian entities or individuals if the property is in the United States and is held by U.S. individuals or entities. Prohibited transactions must be blocked or rejected if they are made on behalf of a blocked entity — reports of blocked transactions must occur within 10 business days.
Blocking reports must include a description of the owner and the blocked property, the estimated value of the property in U.S. dollars, the date the property was blocked, and the contact information for the holder of the blocked property.
Staying ahead of evolving sanction mandates
Chief compliance officers must stay abreast of the evolving Russian sanctions mandates. To help with this mission, corporate compliance officials should ensure that they’re current on these regulatory responsibilities by leveraging corporate compliance solutions.
Using a purpose-built platform in conjunction with due diligence and monitoring for government announcements, compliance teams can detect potential issues in advance, loop in in-house counsel, and provide comprehensive briefings of the scope of regulatory changes. With this information in hand, corporate compliance officials can assist the executive team in drafting compliance policies that mitigate financial and reputational risk.
About the Author:
Benjamin C. Knuth is the LexisNexis Subject Matter Advisor for the Corporate, Securities and M&A practice areas that provides solutions for corporate compliance. He is a licensed attorney and former commercial litigator. In his 15 years at LexisNexis he has conducted hundreds of Continuing Legal Education seminars and moderated myriad panel presentations with leading attorneys and former government officials. He is a graduate of Villanova University School of Law and Gettysburg College.