Reshuffled Supply Chains Caused by Response to Coronavirus Pandemic May Lead to Trade Compliance Risks

Companies will likely be faced with a reshuffled supply chain after the novel coronavirus COVID-19 pandemic subsides, placing greater importance on maintaining sound trade compliance programs even as business uncertainty increases, said Kerry Contini, an export control and sanctions lawyer with Baker McKenzie. As supply chain actors struggle to stay in business and as new parties enter and leave the supply chain, companies may face a host of new suppliers or customers, Contini said, a transition that will likely affect global industries on a large scale.

“From a supply chain disruption standpoint, you couldn't really imagine a bigger disrupter,” Contini said during a March 24 webinar hosted by Baker McKenzie. “Even companies that had processes for early detection really could never have anticipated this.”

The impact of the pandemic on global supply chains has substantially increased from just a few weeks ago, when the effects of the coronavirus outbreak were largely felt among businesses in China but not by companies operating outside the Asian market, Contini said. “Now suppliers across a broad range of geographies and industries are directly affected, and not just suppliers, but pretty much everyone is affected in some way or another,” she said. “This is top of mind for everyone in pretty much every context.”

Some manufacturers and exporters may not be able to stay in business if they are based in a region that has ceased all non-essential business, Contini said. If those suppliers are forced to exit the supply chain, new ones will take their place, bringing a host of trade compliance risks, she said, including potentially unvetted banks and freight forwarders. In addition, companies may be under pressure to keep their supply chain moving and production flowing, making it tempting to skip screening steps to avoid business disruption.

“All of this has to be done with a very strong sense of urgency, and it can happen very quickly, so this is where the risk can lie,” Contini said. “You want to feel that you've got a solid trade compliance program that you can plug these new parties into.” As supply chains change, companies should “take a step back” to examine their compliance programs and make sure they’re operating correctly to avoid penalties. “Any chance you do get, it’s a good time to stop and look at your restricted party screening program or your [know your customer] process to make sure they're ready to deal with all of these changes,” Contini said.

U.S. government agencies, such as the Treasury's Office of Foreign Assets Control and the Commerce Department Bureau of Industry and Security, have not signaled any regulatory changes relating to enforcement of sanctions and export controls amid the spread of COVID-19 (see 2003200032). And although the European Union recently introduced new measures to restrict exports of certain medical goods and equipment (see 2003200029), the U.S. has not yet made drastic export restrictions. But companies should still prepare for new restrictions, Contini said. “We haven't heard anything specific indicating that it’s coming,” she said, “but that is something to watch if the outbreak does increase in the U.S. significantly.”