Trends in Export Controls and Sanctions Compliance: A look at China and Latin America
3 October 2016
Looking globally, where are you seeing heightened levels of enforcement activity?
Peters: Two areas where enforcement is particularly active right now are China and Latin America. We’ve seen numerous recent sanctions designations in Latin America focusing on the intersection between international trade, anti-money laundering (AML), and corruption. This trend will continue because the U.S. government is focused on a more surgical enforcement of international trade commitments. The U.S. government isn’t typically looking to impose broad-based territorial sanctions against a complete country. Instead, they are targeting actors within a country to prohibit conduct that would be inconsistent with U.S. trade laws or with other U.S. obligations under international agreements — like laundering money through U.S. financial institutions.
For China and China-related activities, there are two key areas of risk for trade compliance where additional attention is warranted. The first is technology transfer and making sure companies understand that certain technologies — for example, production and development data related to sensitive materials and more sophisticated manufacturing equipment — may not be able to go to China without needed authorizations. The second is understanding whether there could be diversion of goods from China to another country like Iran or other sanctioned countries where U.S. law would prohibit the transfer.
With respect to Latin America, the United States has targeted a number of individuals and companies engaged in money laundering under U.S. sanctions laws. In addition, the U.S. government has used imposed targeted export bans or restrictions on certain companies in Asia, and most notably, Russia.
How has export control and sanctions compliance evolved and changed over the past 25 years?
Peters: Export control and sanctions compliance law has evolved in a wide variety of ways over the last 25 years. General counsels increasingly understand the importance of these laws to doing international business, and the degree to which this area of the law intersects with many companies business. These regulations are not just mandated by the United States — several other governments and jurisdictions increasingly are giving closer scrutiny to trade compliance. Frequently one transaction can trigger review under the laws of multiple countries.
In addition to compliance with trade regulations, which carry stiff criminal and civil penalties, other U.S. government agencies have supported the enforcement of trade compliance. For example, the U.S. Securities and Exchange Commission (SEC) has reporting requirements for doing business in certain sanctioned countries and with restricted parties. In addition, state and local governments have procurement rules and regulations that address trade compliance. State financial services agencies, such as the New York State Department of Financial Services (NYSDFS), also implement similar requirements.
What has been the impact on companies and general counsel?
Peters: It is typically no longer possible to have one person or one department handle a company’s compliance with international trade laws. Oversight by both federal and state agencies in the United States and in non-U.S. jurisdictions means that general counsels also need to support proactive risk-based compliance programs to address these expanding global risks.
What are the most important aspects of a well-crafted risk-based compliance program?
Peters: There are three key elements to a good program. The first is a focus on geography — knowing where you do business, in what countries, and with what kinds of companies. These factors dictate the nature and extent of the trade compliance risks and the scope of the program that the company requires.
The second key element of a good program is knowing the export classification of your technology, software, and products — and designing the compliance program accordingly. Is what you’re doing important for national security and the defense industrial base? The U.S. government has assigned controls based on the performance thresholds of various technologies. Elevated export controls apply to technologies in many industries — such as in the chemical, energy, and defense sectors.
The third core element is knowing how your customers and your go-to-market strategy affect your compliance program. Are you selling to trading companies or to the end users of your products? Do you understand where your products are going and to whom you are providing services and support? These factors will also affect how much compliance risk you are assuming in both sales and service transactions.
What are some of the biggest challenges facing multinational companies regarding international trade and compliance?
Peters: First, general counsels need to make sure their trade compliance program is the right size — not too large or too small and tailored to address the company’s greatest risks.
Second, one of the biggest challenges is training. Companies are inundated with regulatory and other areas where they need to train their employees. The challenge is how to effectively educate employees in multiple countries and in different languages. My recommendation is to understand the business well enough to filter and train employees on a functional basis; the training curriculum can focus on what they need to do rather than just on what they need to know about international trade compliance.
Where do you think companies should place their near-term focus?
Peters: The first area is technology transfer. If companies are not securing their technology because it’s controlled for national security reasons, they are actually leaving themselves vulnerable for either diversion of that technology, an export control violation, or a cybersecurity breach.
The second area is understanding how trade compliance risks intersect the business. Be thoughtful about the risks and how best to address them, given limited resources.
The third area is third-party diligence — whether and to what extent a company puts their distributors or other trusted suppliers through verification. You are only going to be as secure as either your supply chain or your reseller network. Eliminating the weak link is critical.
What makes Hogan Lovells the go-to firm for helping clients facing export controls and sanctions compliance legal challenges?
Peters: At Hogan Lovells, our international trade practice has broad subject matter knowledge in all areas of trade compliance and regulation, coupled with deep industry experience. This means we know exactly how international trade laws intersect a particular industry. We also have the ability to analyze risks and global transactions simultaneously under multiple laws and regulations — which are triggered whether part of the activity is in China, Belgium, the United States, or Mexico. In addition to mitigating risks for companies, we also help clients take advantage of emerging opportunities, like doing business in Cuba.