Trade Adviser Says ‘Fear’ Is Spiking Over China’s Anti-Western Sanctions Enforcement

Multinational companies with operations in China are becoming increasingly concerned about facing retaliatory measures from Beijing for complying with Western sanctions, said Erika Trujillo, co-founder of SEIA, a compliance risk management firm. She noted that some businesses have begun to split their trade compliance efforts between a Western-focused team and a Chinese team to protect their Chinese employees and operations from potential penalties.

“The level of fear is very high,” Trujillo said during a summit of European government and industry officials in Washington last week hosted by NielsonSmith. This is “one of the key topics that I hear a lot of companies discussing,” she said, adding that “it's very difficult to serve two masters.”

To comply with both U.S. measures as well as various Chinese laws aimed at countering Western restrictions, such as China’s anti-foreign sanctions law (see 2309270039), Trujillo said, companies have begun to “really think about how they're going to kind of almost decouple their own operation.” From a trade compliance perspective, this may involve the Chinese teams being “really kind of carved out from the rest of the trade compliance organization.”

Although both teams still have to comply with general trade compliance guidelines, “a lot of that information is being sanitized so that it's also not putting the Chinese colleagues at risk in China if they are complying with very clearly stated” U.S. regulations, she said. That has led to a “decoupling not only of our economies, but also kind of how we approach trade compliance.”

Trujillo also said some companies are asking whether they could face retaliatory measures from Beijing if they start to pull back on certain business activities in the country. She said she was recently asked: “What happens if we are not bidding -- for example, on certain projects where we would be expected to put in a bid -- because of certain Western sanctions or export controls concerns? Could we be blacklisted?” Trujillo said that fear has been more pronounced because of the lack of “public enforcement” of retaliatory measures from China.

She said she thinks this issue is “significantly bigger” for European companies than for American firms, which mostly have “made their peace with” complying with U.S. rules. “There are very undefined boundaries of what kind of activities are going to” subject your company to retaliation, she said.

Trujillo also stressed the importance of conducting sanctions due diligence on third parties, but warned companies against focusing too much on compliance challenges that are out of their control. She said some businesses have become too focused on “the white whale of trade compliance” and miss the fact that “there's a lot of fish underneath us all the time.”

She pointed to the example of a company's product being sent “through 18 different parties” and somehow illegally ending up in Iran. “How can I possibly ever know that, right?” Trujillo said. "I think that's something that we all really obsess over, is how can we catch this white whale, one-in-a-million scenario.” She said “we're so focused on that one random scenario that we actually don't utilize a lot of the information that we already have.”

If compliance departments instead “put in the effort to do the basic approaches to due diligence and you actually look at how much information your company already has,” there is “a lot that you can do,” Trujillo said. “Maybe that's not going to be 100% perfect, but if you can really say 'I've done everything possible to take care of what I have in my house,' then you can go in search of additional white whales.”

She also said compliance professionals are being increasingly asked to act in a business advisory role, partly due to the constantly changing pace of export control and sanctions regulations. Years ago, many companies searched for ways they could “comply to a certain legal minimum,” but those minimums “are changing so quickly, that you have to be thinking" not only what the law says today, "but what is the law going to be literally next week?”

Because of those concerns, trade compliance officials have shifted into a much more "strategic advisory role” within their organizations, Trujillo said. They are being asked to plan for worst-case scenarios -- such as if a source of rare earth minerals from China is suddenly restricted -- and have a plan for how the business can pivot.

“What if something really goes horribly wrong tomorrow with China and Taiwan?" Trujillo said. "Do I have a packet in my desk that I can pull out and hand to the CEO" about how the company should react?

A potential Chinese invasion of Taiwan would likely spark a host of Western sanctions and export controls against Beijing (see 2305030052).

“I think this is where I really encourage all of you in trade compliance to start thinking very, very proactively about trade compliance risks from the perspective of business advisory,” she said.