The Economist - UK (2022-03-19)

The Economist March 19th 2022 Business 57

Navigatingsanctions

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W

ith unprecedented sanctions
come unprecedented compliance
challenges.Westernbanksandcompanies
hopingtonavigatethemorassare,atleast,
gettingsomehelpfromtheOfficeofFinan­
cialAssetsControl(ofac), whichoversees
mostAmericanmeasures.Ithaspublished
answersto 62 “frequentlyaskedquestions”
aboutthose againstRussia. Butcompli­
anceofficerscravingclaritycanhardlyre­
lax.Thelegaleserunsto13,800words—and
leaves many queries unanswered since
guidanceisstillbeingfleshedout.More­
over,newsanctions arebeingaddedal­
mostdaily.AndtheonesimposedbyBrit­
ain,theeuandothersoverlaponlypartial­
lywithAmerica’s.
TheWesternresponsetoRussia’sinva­
sionofUkraineiswithoutparallelinterms
ofboththenumberofcountriesparticipat­
ing,andthesizeandinterconnectedness
ofthetarget’seconomy.Theyhavecreated
whatStephen Platt,authorof“Criminal
Capital”,a bookaboutfinancialcrime,calls
“asanctions­complianceemergency”.
Thisisfurtherfuellinga sanctions­in­
dustrialcomplexthathasburgeonedover
thepastdecade.International lawfirms
saytheyhaveneverhadsomanyinquiries;
somehavesetupround­the­clockhotlines
forworriedclients.Compliance­techfirms
are busierthan ever, too: softwarethat
helpsusersweedoutentitiesandindivid­
ualshitbysanctionsisflyingoffshelves.
Globalspendingonsanctionscompliance
bybanksalone(noreliablefiguresexistfor
non­banks)reacheda record$50bnorsoin
2020,thelatestyearforwhichestimates
areavailable.Theoutlaythisyearislikely
tobewellabovethat.
Keepingontopofthenewsanctionsis
noeasytask.InAmericaalonetheyarebe­
ingissuedbyfourseparateagencies:ofac
(financialsanctions),theCommerceDe­
partment(exportcontrols),theStateDe­
partment(visabans)andtheJusticeDe­
partment(anti­kleptocracymeasures).To­
gether,theseare“amasterclassofallprior
sanctionsprogrammesbeingimposedall
atthe same time, utilising elementsof
thoseimposedonChina,Cuba,Iran,Vene­
zuela and even narco­traffickers,” says
AdamM.SmithofGibsonDunn,a lawfirm.
Banks, whichhave long beenonthe
financial­crimefighting front line, will
findcomplyingtrickybutmanageable.The
challengeismoredauntingfornon­finan­
cialcompanies,afargreater numberof

which  do  business  that  is  covered  by  the

sanctions  than  was  the  case  with  Iran  or

other  past  programmes.  The  Russia  sanc­

tions “reach across the corporate spectrum

like never before”, says Michael Dawson of

WilmerHale, another law firm. Lawyers say

callsforhelparecoming  from  software­

makers, manufacturers,consumer­goods

sellersandeven,inonecase, a sports team

thatrecruitsplayersfrom Russia.

Onereasonfortheanxiety is the sweep­

ingexportcontrolsimplemented by Amer­

icaand 33 “partnercountries”  which  re­

strictthesaleoftechnology (for things like

semiconductors and telecoms),  compo­

nentsandwholegoodsto  Russia.  These

cover notonly stuff shipped  directly  to

Russiabutpartsforproducts assembled in

othercountries,suchasChina,  and  later

exportedto Russia.Insome  cases  sanc­

tionskickinif the“controlled content” ex­

ceeds25%ofthevalueofthe finished pro­

duct.Theymayalsoapply if the product is

manufacturedinthirdcountries where the

machineryusedisitself  “the  direct  pro­

ductofus­originsoftware or technology”. 

This covers technology  and  widgets

madebythousandsofWestern firms, large

andsmall.Manyhavehomework  to  do  to

determine if their products  might  be

caughtinthenet.Another lawyer says he is

gettingfretfulcallsfromstartups that have

outsourcedsoftwaredevelopment to Rus­

siancontractors.It mayor may not be legal

tocontinuedoingso,depending on the cir­

cumstances; either way,  payments  have

got more complicated because  of  sanc­

tionsonRussianbanks.Many  small  and

middlingWesternfirmsare “spectacularly

illequipped”toconductthe  required  due

diligenceonbusinesspartners,  counter­

partiesorsupplychains,says Mr Platt.

Thistaskismadeharder still by Russia’s

expertiseinobfuscation.  Russian  money­

menhavedevelopedworld­beating  skills

increatingopaqueoffshore  structures  to

conceal  ownership.  Their  creativity  has

prompted ofacto tighten its rules on what

constitutes control of a corporate entity. 

Adding  to  the  anxiety,  fines  for  viola­

tions  have  got  bigger,  and  not  only  for

banks. Firms hit with hefty American pen­

alties  in  the  past  decade  include  Schlum­

berger,  an  oil­services  group  ($259m)  and

Fokker, an aircraft­parts maker ($51m). The

Justice  Department’s  recent  creation  of  a

“KleptoCapture”  task  force  adds  to  the

risks of trading with oligarch­linked firms.

Enforcement  in  Europe  has  been  less  vig­

orous, but that may change. Even Western

lawyers,  with  all  the  extra  billable  hours,

need to stay on their toes: Britain’s Solici­

tors  Regulation  AuthoritysaidonMarch

15th that it will police law firms’sanctions

compliance with spot checks.n

Companies will need to up their game
to comply with Russia sanctions

The pro-lawyer lobby

BusinessinRussia

Should I stay or

should I go?

“O

ne should not condemn  compa­

nies that decide to stay in Russia as

financiers  of  Putin’s  war,”  says  Michael

Harms,  head  of  Germany’s  Eastern  Busi­

ness Association, a lobby group. As long as

they  don’t  violate  Western  sanctions  it

should be up to them whether they stay in

Russia or leave. Metro and Globus, two big

German supermarkets, have so far opted to

stick around. They say they do not want to

let  down  their  staff  or  innocent  Russian

shoppers,  who  need  their  groceries.  Hen­

kel  has  frozen  new  investments  in  Russia

but  not  its  sales  of  laundry  detergent  and

other  essentials.  Bayer,  another  German

giant, will keep selling both its medicines

and, for now, its seeds. Procter & Gamble,

an  American  consumer­goods  behemoth,

has  stopped  advertising  in  Russia but

many of its brands remain available there.

Western companies in Russia can be di­

vided  into  four  categories.  First  are  firms

whose business is subject to Western mea­

sures. These comprise the makers of some

microchips  or  any  type  of  dual­use  tech­

nology  (including  things  like  artificial  in­

telligence  or  cryptography).  They  have  no

choice  but  to  pull  out.  The  second  group

encompasses  companies  such  as  Volks­

wagen,  Europe’s  biggest  carmaker,  which

stopped production in Russia because the

war, and the West’s response to it, disrupt­

ed its supply chains. Next are firms such as

Coca­Cola  and  Pepsi,  two  makers  of  soft

drinks, and McDonald’s, a fast­food chain,

which have suspended operations in Rus­

sia  to  signal  their  horror  at  the  invasion.

B ERLIN

Some Western firms’ Russian

dilemmas are getting thornier