Since March 2022, U.S. companies doing business internationally have faced governmental sanctions imposed in response to Russia’s invasion of Ukraine. Controls affecting interactions with Russian, Belarussian and Ukrainian companies and individuals have created layers of challenges to be resolved.
As the war in Ukraine persists, many U.S. businesses are evaluating how best to proceed. A clear-eyed assessment of the scope of the new sanctions is essential to understanding how to navigate them in the months, and possibly years, ahead. Moreover, there are techniques available that companies may wish to consider as they evaluate opportunities in light of current and evolving restrictions.
The New Sanctions
The U.S. government has imposed a broad array of sanctions in response to Russia’s invasion of Ukraine. These measures fall into several general categories:
- Comprehensive sanctions on the two regions of Ukraine that Russia has recognized as independent states—the “Donetsk People’s Republic” (DNR) region and the “Luhansk People’s Republic” (LNR) region – prohibiting business with these regions
- Financial sanctions on designated businesses and individuals in Russia and Belarus
- Prohibitions on new investment in Russia by U.S. persons and companies
- Measures to cut off Russian financial institutions from the global economy
- Restrictions on exports to and imports from Russia and Belarus
A number of other governments, such as Canada, Japan, Australia, the EU, and the U.K., have imposed similar sanctions. The precise contours vary from jurisdiction to jurisdiction but there are more similarities than differences.
Impact on Manufacturers
It is essential to recognize that transactions and business relationships that used to be routine now must be reassessed in light of the new sanctions. The mere fact that a relationship existed or a transaction was executed regularly prior to March 2022 does not mean that it automatically falls outside of the sanctions.
Manufacturers with operations or personnel (including sales personnel) in or connected to Russia, Ukraine, and neighboring countries, or that source materials from those countries, could be affected. Manufacturers that sell to those countries, or whose products are resold into those countries, could similarly be affected.
In addition to the risk of prohibited transactions, manufacturers face practical hurdles to doing business. The measures designed to isolate the Russian financial system make it challenging to send payment to anyone in Russia—even individuals and businesses not subject to sanctions. Accordingly, payment logistics for suppliers, employees, and vendors located in Russia—for instance, a company that has employees or vendors in Russia that support their U.S. operations—may need to be revised even if the underlying transaction is not affected by the sanctions.
Considerations for Sanctions Compliance
Because these sanctions are so new, there have yet to be any criminal prosecutions or other publicized enforcement activity against U.S. companies for violations. It is clear, however, that they are a significant enforcement priority.
In March 2022, for example, the U.S. government launched “Task Force KleptoCapture,” an interagency task force designed to enforce the sanctions imposed in response to Russia’s invasion of Ukraine. The task force, which includes agencies within the Justice and Treasury departments, is charged with investigating and prosecuting sanctions violations and evasion.
The task force follows the creation of a trans-Atlantic task force (comprising the U.S., E.U. and other allied governments) in February 2022 dedicated to identifying and seizing the assets of sanctioned parties.
There are diligence steps that companies can implement to assess whether they are at risk of violating the new sanctions. Any risk assessment must begin with a review of the company’s business relationships abroad in order to determine which ones require enhanced screening or diligence. This would include relationships with customers, suppliers or vendors located in Russia, Ukraine, or Belarus. It would also include relationships in countries in which goods may be shipped to or sourced from Russia. (This is common in countries neighboring Russia and trans-shipment hubs, such as Dubai, Singapore or Hong Kong, where goods are commonly re-sold to Russia).
Once potentially affected transactions and relationships are identified, companies may wish to enhance their “know your customer” diligence for transactions connected in any way to the affected parts of the world. The Commerce Department’s BIS-711 form presents a concise method for obtaining this information from customers.
By obtaining business’s partners’ ownership and corporate structure information, companies can screen them against government sanctions lists. This inquiry will reveal whether a business partner (or its intermediate or ultimate owners) are subject to the Office of Foreign Assets Control sanctions against Russian and Belarussian companies and individuals.
Additionally, obtaining supplier information about the country of origin of components or raw materials sourced from abroad can reveal whether imports are affected by import restrictions imposed against Russia. Similarly, asking about the end use, end user, and ultimate destination of exported products will identify whether newly imposed export restrictions apply to the exports.
The U.S. government expects that companies will have relevant employees trained on the new sanctions and the company’s related diligence policies and procedures. In additional to written guidance, training enhancements may include practical compliance measures and a methodology for ensuring that the business stays up to date on sanctions developments. This would involve instruction on recognizing and responding to “red flags”—signs that goods might be going to or coming from a prohibited party or destination, or that a customer, vendor, or supplier is not honestly representing their activities.
Some common red flags:
1. Unusual information in the address a company provides. This could occur when a company’s mailing address, address in its email signature, or its web domain do not match the country where it says it is located. In some instances, companies may provide a made up address; plugging the address into public map websites can confirm whether an address exists.
2. Shipping instructions that do not fit a product order. If shipments are being routed in an unusual way (for example, a customer routing a shipment with a purported final destination in Australia but seeking a shipment route through Kazakhstan), it may be a sign that the customer is misrepresenting the true destination of the products.
3. Unusual payment terms. Payment being made to or from a country not involved in the transaction, or to or from a third party, could indicate that the true parties in interest are being disguised.
4. Payment of a significant sum in cash.
5. Failure to be forthcoming about any basic information. This may include hesitancy to disclose the origin, destination, uses or users of goods, or information about the company’s own ownership or location.
A red flag typically merits pausing the transaction and conducting further diligence to gather the relevant facts and engage in a thorough factual and legal analysis to determine whether to proceed with or stop the transaction. In other words, while not every red flag is a deal-killer, no one should simply turn a blind eye to the warning sign.
Finally, the analysis is not “one and done.” Sanctions evolve, and a company may find itself in a position where it can no longer do business with a foreign partner due to changing rules. In some instances, the foreign partner may owe money for business that took place prior to the change.
Winding down business in response to sanctions changes is dependent on the situation itself. Some sanctions programs provide a wind-down period, while others do not. How and whether to collect payment for past services also depends on the type of sanctions. Legal experts experienced in sanctions programs can promptly help companies identify their options.
Although compliance measures are not one-size-fits-all, companies can adopt comprehensive, yet nimble policies and procedures without crushing expense to identify and address possible issues.
Edward J. Heath is a partner at Robinson+Cole and chair of the firm's Business Litigation Group. Kevin P. Daly is counsel at Robinson+Cole and focuses his practice on complex commercial litigation and trade compliance issues.
