The rise of sanctioned parties and sanction regimes, an ever-growing importance for trade compliance

Trade compliance is a topic that has been around for quite a while now and, while it has always been important for traders of specific goods or those serving certain industries, its impact became much more far reaching in the wake of Russia’s invasion of Ukraine. Since February 2022, 14 packages of sanctions against Russia have been adopted by the EU, adding hundreds of individuals and entities to the sanctioned party list as well as restricting the import or export of certain goods, directly or indirectly, to or from Russia and affiliated states.

This sharp rise in the number of sanction regimes and sanctioned parties over the past two years has made it difficult for EU traders to remain compliant. In this blog, we will dig deeper into the development of the sanctioned party list over the last couple of years and the steps traders can make to maintain compliance.

A brief background on sanctions

The idea of economic sanctions is to coerce individuals or entities to change their behaviour by disrupting their trade. Sanctions regimes against specific individuals and entities have been around for centuries, one of the first comprehensive ones being the Napoleonic Berlin Decree, forbidding trade with Britain. Sanctions have been on the rise globally since 2001, after the terrorist attacks of 9/11 when a variety of sanctions were imposed against parties affiliated with the terrorists, both by the European Union and the United States.

More recently, we have seen a sharp rise in sanctions after Russia waged war on Ukraine. Before February 2022, there were 1659 sanctions against individuals and 463 against entities. As of the publication of this article, the number stands at 3822 individuals and 1087 entities—a more than 100% increase on both fronts. A majority of the sanctions is against Russians or people linked to the Russian government and they consist of asset freezes, travel bans, and sectoral measures such as import and export restrictions and arms embargoes.

Current state of play on sanctions

Currently, there are more than 30 autonomous EU sanction regimes imposed by the EU towards governments, persons, and entities due to the actions of their country relating to security threats, foreign policy conflicts, and unhumanitarian behaviour. The main aim of these sanctions is to hit the economy, but also the people that benefit from the regime. Import bans on products that are commonly produced in these countries, such as crude oil, wood, iron, and steel have been put in place to disable the economy. In addition, export measures have been imposed, mainly on goods that can be used for military purposes, but also on luxury goods, in an attempt to affect the people that support and benefit from the regimes.

On June 24, 2024, the EU extended the scope of sanctions against Russia with a 14th sanctions package. The package prohibits, among other things, investments in and exports to projects supporting Russian liquefied natural gas (LNG), and in nine months' time, transshipment of Russian LNG via EU ports will no longer be allowed. The package also bans ships used in the war effort from accessing EU ports. On the financial front, EU banks outside Russia may no longer use SPFS, the Russian equivalent of SWIFT, and banks that are connected to SPFS will be banned from doing business with EU economic operators.

New rules around circumventing sanctions

Rather than creating the desired effect, there is evidence that blocking direct trade from the US and EU to sanctioned countries and parties may just be reshuffling the trade flows in the regions surrounding those countries. Based on UN Comtrade data, direct trade with Russia has declined 75%, while trade with countries such as Kyrgyzstan and Armenia has risen by roughly 100%. From that same data, we can see that the trade between Russia, Kyrgyzstan, and Armenia has risen by 400 to 500%.

This demonstrates that, regardless of the sanctions imposed, certain products will always find their way to the sanctioned party. To combat this, the newest sanction regulations include rules on how to deal with the evasion of sanctions. There is an added responsibility to the exporter to do a due diligence check on the buyer of the goods to show that these goods are not going to be resold to a sanctioned party. This means that a kind of end-user check has to take place. Only if the exporter shows that he has done everything to prove that the goods will be used by the buyer or will not be distributed to a sanctioned party will he not be held liable in case the goods are re-sold to a sanctioned party.

Furthermore, sanctions on luxury items are also not proving to be as effective as expected. Supporters of regimes are still getting their luxury products in a relatively easy way, either by the same circumvention measures or by simply buying the goods in friendly nations to both the sanctioned regime and the EU. It may have become more difficult to acquire these goods, but there is always a way to acquire them.

Creating a process for sanctioned party screening

Keeping up to date with sanction regulations is important, but how does an organisation ensure compliance? It would be a good start to:

  1. Make an overview of the potential sanctions on the goods that you export.
  2. Review your customer and supplier lists to determine whether any may be affected by sanctions regulations.
  3. Perform a risk analysis.
  4. Create a process flow that ensures sanctioned suppliers are on your “high-risk list”.
  5. Create a process flow that allows you to define whether your customer is allowed to receive these types of goods.
  6. Train all job roles that play a part in your supply chain on sanctioned party list screening to ensure they understand the processes.
  7. Define an escalation process in the event that a team member believes they have a hit.

When you see that a party is not directly sanctioned, that does not necessarily mean it is safe to trade with them. The next step is to establish a due diligence report to see whether there are any possible sanction evasion risks, meaning that your customer could potentially be an in-between broker to move the goods to a sanctioned party. If there is any doubt, either do not export to them or ensure that there are additional contractual liability clauses in place regarding sanction evasion.

Applying technology to ensure compliance

While managing sanctioned party list screening using spot checks may have sufficed a decade ago, the recent increase in sanctioned parties, which is likely to continue, has rendered this form of trade compliance management ineffective. International traders need to not only comply with EU sanctions packages, but those of the US, UK, Australia, and so forth. Ensuring that both suppliers and customers are fully screened is crucial to business continuity. Therefore, an automated and real-time solution that can transcend the limitations of manual screening is the cost of doing business in today’s international economy.

A robust trade compliance software solution will provide all available updates to sanctioned party lists along with concise information to help the user determine whether the party poses a risk. Basic functionality should include:

  • Name, address, DUNS, and VAT number checks
  • Settings for mandatory fields of compliance
  • List-agnostic API for global screening abilities
  • Bulk screening for enterprises
  • Detailed reasoning behind hits

Are you unsure whether your sanctioned party list screening process is reliable? Contact Portorium today for an assessment.



Leave a Comment