Greater Sanctions Compliance, Due Diligence Expectations Causing Challenges, Panelists Say

A shift toward list-based sanctions and a rise in federal government compliance expectations are causing increasing challenges for the compliance community, compliance professionals said. At the center of those challenges are the designations imposed by the Treasury Department’s Office of Foreign Assets Control, which is setting a high bar for due diligence by more clearly describing its compliance expectations in settlement agreements.

“Gone are the days when we were dealing with sanctions programs that were limited to a few persons within the Zimbabwe government,” said Frank Swerda, an export compliance manager with IBM, speaking during the Association of Exporters and Importers annual conference June 30.

Swerda, a former OFAC enforcement officer, said companies are seeing an “evolving picture” from OFAC about the agency’s compliance expectations, which can be found by reading “between the lines” in recent settlement agreements. He specifically pointed to the agency’s $130,000 fine issued to Amazon last year for violations stemming from the company’s faulty screening system (see 2007080024).

OFAC clearly outlined the high expectations it has for large, sophisticated companies, Swerda said, which usually have broader due diligence responsibilities than small businesses do. “The expectation from OFAC appears to be that we expect the sophistication of your screening program to be commensurate with your size and sophistication, especially in the tech sector,” he said. OFAC has “been putting a very fine point on some of what its expectations are.”

While these settlement agreements help industry understand OFAC’s expectations, Swerda also said they have created more work for compliance departments. OFAC “has been giving us a lot more information than maybe it had several years ago, because it really does help the exporting community,” he said. “But it’s also created this picture that we need to piece together.”

Another compliance challenge is a recent shift toward federal governments targeting entities and individuals rather than country-wide embargoes, said Michael Burton, a trade lawyer with Jacobson Burton Kelley. In addition to OFAC, which has actively updated its Non-Specially Designated National Chinese Military-Industrial Complex Companies List (see 2106160014) this year, exporters must also keep up with the constantly changing Entity List maintained by the Commerce Department.

“I think the trend over time has been to be increasingly list-driven and targeted, which is great from a policy perspective,” Burton said. “But from a compliance perspective, it can actually be a bit challenging because the changes are occurring on a daily basis.”

Burton said his clients are most concerned with making sure they’re conducting the right levels of due diligence with transactions related to China, Russia and Venezuela, which have been made subject to new military end-use and end-user rules (see 2007090075).

“What’s keeping them up at night is performing due diligence,” Burton said. “How much due diligence is enough? And if we conduct sufficient due diligence, will that shield us from potential liability? It really depends on the transaction.”

Although many list-based designations are constantly changing, Burton said companies shouldn't expect many changes to the types of business activities that are permitted in Iran even though the Biden administration is hoping to rejoin the Joint Comprehensive Plan of Action (see 2106240044). Even though a U.S. return to the JCPOA would lift some U.S. sanctions, they likely won’t make a significant difference on trade. “Unless one falls within some of the narrow general licenses that OFAC has already issued,” Burton said, “it's pretty much the status quo that the country is off limits.”