Russia Sanctions Surge Causing Resource Strains, Compliance Challenges, Lawyers Say

The recent surge in U.S. sanctions and export controls on Russia is causing resource strains for compliance teams, KPMG lawyers said during a webinar last week. Constantly expanding restricted party lists, as well as due diligence requirements under the Commerce Department’s military end-user rules, have become increasingly time-consuming and expensive to comply with, the lawyers said.

“One of the things that we've all seen over the past few years, and even more so over the past year, is more complex export control and sanctions issues,” said Steven Brotherton, a KPMG trade lawyer. “More things are requiring analysis, that analysis is taking longer, and oftentimes we're having to do so with the same staff and same budget.”

Compliance with Commerce’s MEU rule can be particularly challenging (see 2105050048, 2004270027, 2007090075 and 2102190042), KPMG trade lawyer Brandon Barela said. Companies are having to take several additional compliance steps that they may not have had to consider in the past to determine if a transaction “potentially could involve military end users down the line.” He said more companies are focusing on scrutinizing their distribution network’s supply chain.

“This takes time -- researching your partners’ lines of businesses, working with your affiliates, potentially obtaining end-user statements from partners,” Barela said. “These are all tasks that may not have been required for certain transactions historically.”

He said a “full-diligence” MEU review sometimes takes more than an hour per transaction. “This obviously poses a significant resource [strain] that did not exist a few years ago,” Barela said.

Barela also said he’s seeing companies devote more resources and attention to restricted party screening, especially “given the frequency of additions.” Firms are looking to make sure each of their transactions are “corroborated by a well-calibrated screening tool or thorough manual screening efforts to ensure no business is conducted with restricted parties in real time,” he said.

Commodity jurisdictions are also growing more complex, Barela said, specifically pointing to Commerce’s effort to control emerging and foundational technologies. “Changes to export controls related to emerging technologies requires continual assessment of products and services, even for those companies with historically validated classifications,” he said. “These lists are growing so we have to grow these programs with them.”

This can be challenging particularly because trade compliance departments are usually “very lean,” KPMG trade lawyer Kim Canales said. “A small department may look big on a headcount, but that's relative to the overall size of the organization,” she said. “And the larger or more complex the organization, or the more complex the activities are, the more difficult it is to manage each and every risk that can be involved with every transaction.”

Even though compliance requirements can be overwhelming, Canales said businesses shouldn't reach a place where their “decision-making is bottlenecked” by trade control procedures. “I think all of us who've worked in this industry all feel that sense of stress or that urgency when the transaction is being held and needs to be reviewed or released or declined even,” she said. “So there's this balance between managing risks and then managing every transaction, which is, you know, pretty much impossible.”