Conflicting EU, US Sanctions Regimes Causing Challenges for Global Companies

As the U.S. and the European Union continue to impose diverging sanctions measures, global businesses are being tasked with increasingly challenging compliance dilemmas, several trade experts said during a July 25 KPMG webinar. Companies are facing more strategic decisions about which countries they can and cannot afford to trade with and are reconsidering multiyear contracts because of the constantly changing sanctions landscape, the experts said.

“The divergence in these regimes has been extremely significant for businesses,” said Maya Lester, a U.K.-based trade lawyer who runs the EU Sanctions blog. She pointed to several reasons: the power of U.S. sanctions, the large volume and “high levels” of fines and enforcement actions by the Treasury's Office of Foreign Assets Control, the worldwide reliance on the U.S. dollar and the power of U.S. secondary sanctions. “Even when it comes to primary sanctions, which apply directly where there is a U.S. nexus, that nexus is very, very broadly defined,” Lester said.

While the U.S. and the EU have similar sanctions regimes, such as the regime against North Korea, companies are seeing “greater and greater” diverging sanctions between the two, said Arjun Ahluwalia, the head of sanctions advisory at HSBC U.K. “The challenge that we all face is trying to understand what the position will be across the different regulatory landscapes,” he said. In some cases, EU companies have struggled to comply with the ambiguity resulting from the 2018 reimposition of U.S. sanctions on Iran and conflicting EU laws (see 1906240014). In particular, large banks are increasingly “trying to create an environment that is almost artificially stable in an increasingly unstable world,” Ahluwalia said.

Neal Dawson, the head of anti-money laundering and sanctions at KPMG, said corporations are re-examining multiyear contracts, which may place companies at risk if they have a contract with a country or entity that may be sanctioned in the future. “Do you have the means for exiting those types of relationships?” he said.

Dawson also said trading with certain countries has now become a “big, strategic decision.” “As a corporate, you need to decide whether you want to deal with countries like Iran or whether you want to trade freely with the U.S.,” he said. Lester said the changing sanctions landscapes and the risks involved in long-term contracts require businesses to scrutinize each party in their supply chain and include detailed clauses in contracts to remain in compliance.

“It’s really important for almost every business to think through the risks of sanctions violations somewhere along the chain, or sanctions preventing contractual obligations from being able to be performed, Lester said. “This is where sanctions clauses are very complex and very important.”

Because of the risks, companies should be making more use of advanced technology in their compliance systems, Dawson said. For both large and small companies, that means ensuring sanctions lists are constantly updated and using technology to find every possible sanctions risk area. “It’s just increasing the need for really robust technology solutions to help manage the risks,” Dawson said.