Avoiding the Avalanche: Evaluating Your Supply Chain for Export Control and Sanctions Risk 

Editor’s note: This is a sponsored article posted on behalf of Arnall Golden Gregory LLP as part of its annual partnership with Global Atlanta.

Two years today since the world began piling sanctions on Russia after its Ukraine invasion, an “avalanche” of export controls has been barreling down on companies doing business beyond U.S. borders. 

But getting crushed under the weight of these sometimes-opaque regulations is not inevitable, says Arnall Golden Gregory LLP attorney Michael E. Burke on navigating this evolving landscape. 

With a little investigation into one’s supply chain, Mr. Burke advises that the risk of being caught off guard can be dramatically reduced.

Export controls are designed to keep sensitive defense articles and dual-use items, from weapons to computer code to aircraft, from falling into the wrong hands, limiting adversaries’ ability to develop certain technological or military capabilities. 

The U.S. also uses economic sanctions, leveraging the weight of the world’s largest economy in an attempt to sway nations and groups to change their policies.

Sometimes sanctions target individuals; at other times they encompass entire nations. They’re promulgated by the U.S. Department of the Treasury’s Office of Foreign Asset Controls, or OFAC, while the U.S. Commerce Department’s Bureau of Industry and Security handles export controls applicable to dual-use items and the State Department’s Directorate of Defense Trade Controls regulates the export of defense articles. 

Since Russia’s invasion in February 2022, a raft of new controls has come into play to punish Russian leader Vladimir Putin, the patronage network of oligarchs thought to be enabling his aggression, and the Russian economy’s ability to sustain a war effort. 

“It’s an odd thing to see all of a sudden export controls in the news and people generally talking about it, but the Russian invasion of Ukraine has triggered an avalanche of not just U.S. economic sanctions or U.S. export controls but also sanctions from Canada, the EU and other countries,” Mr. Burke said in an AGG webinar. 

And that means American companies — as well as foreign companies whose products are present here — have to be particularly vigilant to ensure that their customers are above board, he added. 

Some firms may believe that export controls don’t apply to them because their customers are based in the United States, but it’s not that simple: movement down the value chain can also trigger compliance requirements. 

“When you start to explore a company’s operations in that way, you learn that they do have a lot of products, including parts and components, that cross borders,” Mr. Burke said.

Systematic supply chain audits can provide much-needed “risk mapping” to help firms evaluate their exposure, he said. 

Two Main Product Categories

Products can fall into two main categories when it comes to export controls, said Mr. Burke:

• Export Administration Regulations (EAR) — This regulates “dual-use” products that are not weapons or defense articles but might be used for defense purposes, as determined by the Department of Commerce. Items designated as EAR99/NLR under the EAR do not require a license to export (subject to OFAC and other regulatory compliance requirements).
   
• International Traffic in Arms Regulations (ITAR) — Weapons and other equipment used explicitly for military purposes and requiring a license to be sold to foreign customers. The ITAR can apply to products if companies have received research funding from the Department of Defense or DARPA for the development of such products.

Iffy about where your products stand? 

It’s worth checking the Commerce Control List and getting a verified five-digit Export Control Classification Number (ECCN) for your product, said Mr. Burke, if nothing else to avoid a costly probe into your business down the road. 

“It’s the investigation and then the remediation that takes up a lot of time,” he said. “It costs a lot of money, and perhaps most importantly, distracts the company from its operations.” 

On the sanctions front, many transactions are explicitly forbidden, like selling certain items to designated enemies like Iran, Cuba, North Korea, or Syria. Other transactions may be permitted under general licenses, categorical carveouts to existing sanctions for humanitarian and health products such as food aid. 

But at times, ensuring compliance can be challenging given the maze of contingencies and the fact that regulations can change based on the president’s broad powers outlined in the Trading With the Enemy Act and the International Emergency Economic Powers Act.  

Also, the “beneficial owner” of a company may not be based in the country where the good will be shipped initially, Mr. Burke said. Iranian companies have formed subsidiaries in France, and even a Burger King may be more than meets the eye if it is 50 percent owned by a sanctioned Russian bank. In such cases, the transaction involving the front company can be determined to violate U.S. sanctions.

Companies can ask OFAC to approve a transaction, but, in general, OFAC operates with a policy of denying applications for a specific license for a transaction. 

A Preemptive Policy 

Sanctions on Russia’s economy have been hugely disruptive to many companies, given how all-encompassing they have become as the war rages on.

Companies should use the 50 percent rule of beneficial ownership to ensure they’re not working with sanctioned individuals or banks in third countries. 

“If they don’t want to tell you (the ownership structure), that’s a red flag because it usually means somebody doesn’t want you to know,” Mr. Burke said. 

Despite the temptation to cut corners to do more business, companies should take the rules seriously, he added. 

“OFAC is now specifically looking at Russian sanctions evasion,” Mr. Burke said. “Even if you wanted to take the risk, don’t, because someone is going to find out.” 

Companies can preempt the problem by creating a written compliance plan outlining how and when they screen their customers. This should aim to minimize the tension between business development and compliance and should be woven into the contract and supplier review process. 

“There is no cookie-cutter approach to this because every company’s risk points are different,” Mr. Burke said. “Resist the temptation to go online and do the same thing that Microsoft is doing.” 

Companies should assign compliance functions to a specific person — perhaps an export compliance manager — rather than just assuming legal will take care of it. 

After all, it may not be just an accidental mishap that comes back to bite you — your competitors may be looking to take you down a peg and make a little change in the process: whistleblowers are entitled to recover part of financial penalties imposed by the U.S. government. 

To learn more, watch the full webinar here or reach out to Mr. Burke:

CONTACT 

Mike Burke

Partner

Arnall Golden Gregory LLP

mike.burke@agg.com

202.677.4046