U.S. Regulators Focus on Compliance Efforts in Enforcement Decisions Involving International Companies

Over the past few years, U.S. regulators have made it clear that having comprehensive and effective compliance policies covering trade is a must, regardless of the company size, location or industry. The government’s move to formalize the importance of compliance programs is a clear signal of what it expects and a harbinger of what is to come.

Why Is Trade Compliance Important Regardless of the Company’s Location?

Trade compliance should be the goal of every global company, in particular as a risk mitigation measure and a positive value proposition. A compliance program serves as a security blanket for large financial institutions accustomed to dealing with regulations, small startups with a cloud-based platform, and even companies with no physical presence in the United States. A trade compliance program lays the groundwork for international companies on how to conduct business in or with the United States.

With changing industry regulations, it is critical to keep up to date and have a compliance program that is effective. Failure to have a strong compliance program could result in increased legal exposure, potentially leading to fines and penalties as well as negative publicity associated with an enforcement action. Maintaining an effective trade compliance program could help companies mitigate penalties for potential violations, and is ultimately cost-effective. For example, last year, the U.S. government imposed $1.3 billion in penalties on cargo firms, penalties that could have been mitigated with robust compliance programs.

Avoiding U.S. Sanctions

Engaging in the complex global supply chain may be a financial win, but it requires formalized diligence procedures to ensure your company does not run afoul of the law. The Department of Treasury’s Office of Foreign Assets Control (OFAC) has released guidance encouraging organizations to employ a risk-based approach to sanctions compliance and focus on five essential components: senior management commitment, risk assessments, internal controls, testing and auditing, and training. To incentivize companies to engage in international transactions, OFAC also provides that in the case of a violation, it will give favorable consideration to companies with effective sanctions compliance programs and that the existence of such a program may mitigate a civil monetary penalty.

OFAC is not just issuing guidance, it is increasing its enforcement efforts involving both U.S. and foreign entities. It continues to designate more non-U.S. entities that have helped evade U.S. sanctions. For example, several Chinese shipping companies were found to have violated North Korean sanctions, and as a result, were blocked from doing business in the U.S. or with U.S. parties. In January 2020, Eagle Shipping, a Marshall Islands ship management company with headquarters in Stamford, Connecticut, agreed to pay $1,125,000 to settle its potential civil liability for 36 apparent violations of the Burmese Sanctions Regulations. The violations involved Eagle Shipping’s affiliate in Singapore entering into a chartering agreement with Myawaddy—an entity identified on OFAC’s List of Specially Designated Nationals and Blocked Persons. Eagle filed an application with OFAC requesting a license authorizing it to carry sand cargoes purchased from Myawaddy but continued its dealings while the OFAC application was pending. OFAC ultimately denied the license, but Eagle resumed its dealings with Myawaddy, carrying cargo from Burma to Singapore.

Among the aggravating factors, OFAC considered Eagle’s status as a sophisticated shipping company, which should have had expertise in international trade and global shipping transactions. Among the mitigating factors, OFAC considered Eagle’s efforts to develop and implement a formal sanctions compliance program with specific policies and procedures for compliance screening, transaction checklists, and red-flag identification tools.

Compliance Under Commercial Export Laws

The U.S. Department of Commerce’s Bureau of Industry and Security (BIS), which administers U.S. commercial export control regulations, also has published comprehensive guidance for companies working to develop or shore up compliance materials. In its guidance, BIS identified the following elements as foundational in creating an effective Export Compliance Program (ECP): management commitment, completing regular risk assessments, obtaining proper export authorization, record-keeping, training, compliance audits, addressing export violations and taking corrective actions, and maintaining your ECP. Like OFAC, BIS emphasizes the importance of tailoring your ECP to your organization and business based on size, volume of exports, geographic location, and other relevant factors. Companies that fail to comply with regulations that govern export controls have experienced significant penalties.

The U.S. export control laws govern not only U.S. companies, but also certain export activities of foreign companies dealing with the export of certain products, technology, or services from the United States to a foreign country. For example, most recently, BIS imposed substantial export and reexport restrictions on Huawei, a Chinese company, and its 68 non-U.S. affiliates in connection with Huawei’s violations of U.S. export laws specific to the Iranian Transactions and Sanctions Regulations. As part of that action, BIS restricted any export, re-export, or transfer of U.S.-origin technology, commodity, or software to Huawei and its entities without an export license.

This enforcement action ultimately impacted both the U.S. and non-U.S. businesses, including big and small tech companies, suppliers, importers, shippers, and financial institutions. Separately, in 2017, the U.S. government imposed a $1.2 billion criminal fine against ZTE, a Chinese telecom equipment company, for shipping U.S.-origin telecommunications equipment to Iran and North Korea. These two cases have affected how U.S. and foreign companies view their compliance programs; they also have incentivized the development and implementation of more robust compliance programs, including vetting procedures and sanctions checks that ensure adherence to the U.S. export control regulations.

Recommended Steps for Ensuring Compliance and Mitigating Risk

• The benefits of having a compliance program in place when a mistake happens are significant. When creating your tailored trade compliance policies and procedures, remember the following:
• Compliance programs should include a comprehensive, independent, and objective testing or audit function to ensure that your business is aware of how its programs are performing.
• Programs should be updated regularly in light of constantly changing regulatory and business environments.
• Ensure that your compliance program has comprehensive coverage to track all parties involved in import and export transactions.
• Even products that seem harmless can be used in ways that companies do not intend. As an organization, you are responsible for knowing how your products will be used and for avoiding government-prohibited end uses.
• Watch for red flags on BIS’s published list.
• Watch for “deemed” exports, which are released in the United States of technology or source code to a foreign person. Such a release is deemed to be an export to the foreign person’s most recent country of citizenship or permanent residency, which may require a license or even be prohibited.

Now more than ever, government offices and agencies are providing the industry with guidance on how best to comply with trade regulations. However, this also means that companies can no longer claim ignorance of trade regulations. Today, companies participating in the global marketplace must take proactive preventive measures to ensure compliance, mitigate risk, and minimize potential penalties.

Reprinted with permission from the March 24, 2020, issue of Global Trade. © 2020 Global Trade. All Rights Reserved. Further duplication without permission is prohibited.