Rising Export Enforcement Coordination Will Create More Compliance Risks, Law Firms Say

Increasing export control coordination between the U.S. and its trading partners is likely to result in an uptick in enforcement actions and lead to a range of compliance risks for multinational companies, law firms said this month. While much of the coordination so far has centered around Russia-related restrictions, the firms said they expect the efforts to also result in more export penalties for controls imposed against other countries.

The firms pointed to an announcement last month by the U.S., Australia, Canada, New Zealand and the U.K. that launched a formal export enforcement coordination process among the Five Eyes countries (see 2306280025). Baker McKenzie said the announcement was “perhaps even more” significant than the Group of 7 Enforcement Coordination Mechanism unveiled in February (see 2302240054).

“We do not say this lightly,” the firm said in a client alert. “Given the very close security relationship between the Five Eyes countries, we expect this initiative to have a significant impact on the compliance and enforcement risks for companies with business in these countries.”

Baker McKenzie said companies with supply chains in the Five Eyes countries should be assessing whether their export compliance programs “adequately address the compliance and enforcement risks” in each jurisdiction. Hogan Lovells is expecting a rise in “joint investigations and coordinated enforcement actions” among the countries’ export control agencies, adding that the Five Eyes countries will likely share more information “with a view to reducing gaps in enforcement.”

“Companies with a presence in the Five Eyes countries can expect increased scrutiny as regulators expand and routinize intelligence sharing,” the firm said, “potentially increasing enforcement risks.”

Freshfields Bruckhaus said the coordination, particularly among the U.S., U.K. and the EU, is entering a “critical new phase.” The countries have traditionally focused on harmonizing their various regulations, but they’re now “shifting from sanctions and export controls implementation to coordinated efforts to investigate and prosecute those who violate or evade sanctions and export controls.”

“This new chapter in enforcement requires companies, particularly multinationals and those engaged in financial services or international trade, to redouble their efforts and reconsider sanctions risks and compliance through a multijurisdictional lens,” the firm said.

Baker McKenzie said companies should expect their “local regulators” to “step up their enforcement activities” and potentially increase penalties. The firm specifically said the U.K. may be “contemplating” a new civil penalty regime for export control violations similar to its sanctions regime.

Local governments could also step up customs screenings, which could lead to delays as officers check a particular shipment’s “control status,” Baker McKenzie said. “Goods may be detained while the local regulator seeks pertinent information to determine the control status of the exported goods and/or verifies the information included in any export declaration.” Incorrect export declarations or “inconsistencies within a group of declarations” also may trigger delays.

“Given enhanced coordination between the Five Eyes,” the firm said, companies should make sure they’re communicating to their affiliates in other countries if they’re facing scrutiny in one jurisdiction. In some cases, companies may need to make sure they can rely on “local expertise in each country,” the firm said, especially if they discover violations or other “compliance issues.”

Although the Five Eyes announcement centered around Russia and Belarus, the information sharing “will not be limited” to those countries, Hogan Lovells said. “Businesses should review their compliance policies and procedures to ensure they are proportionate to this increased regulatory focus.”

Baker McKenzie added that the Bureau of Industry and Security could “deploy” more officials to the Five Eyes countries to help with the enforcement efforts, using Canada as a “blueprint.” The agency recently announced it was looking to deploy a permanent, “dedicated” BIS official in Canada (see 2301310002).

“Given the particularly robust historic enforcement by US BIS,” Baker McKenzie said, it expects “this Five Eyes coordination to result in an increased enforcement environment throughout the rest of the Five Eyes countries.”