Treasurers' Approaches to Managing Sanctions
Treasurers have become adept at implementing and complying with sanctions. There may be questions about how effective they are, but every company understands the need to comply. The consequences of failure can be significant financially, but also a public relations disaster. For this reason, we have decided not to make them the subject of one of our usual calls with a detailed report. Instead, we have decided to summarise the comments peers have made over time: we hope this may be an aid to remaining compliant, while trying to manage the issues and obtain the best outcome for the business.
Compliance Programmes
It is essential to have a documented compliance programme, and ensure that all staff and business partners have been educated. Should a problem occur – and errors happen – this will at least help establish that the company has taken all reasonable steps to implement sanctions. This is especially important in countries which do not participate in sanctions: local staff there may think, erroneously, they do not apply to them.
The US’s Office for Foreign Assets Control (OFAC) publishes a list of individuals, companies and countries which are subject to sanctions: all sales and new customers should be checked against this list.
These programmes are essential – but being fully compliant remains a challenge.
Banks
Banks found to be in violation of sanctions face severe consequences: over ten years ago, one major European bank decided to settle $6 billion – not million – with US regulators to avoid being barred from all dealing in US dollars, over a US sanctions related issue. Settlements in the hundreds of millions of dollars are not unusual. Understandably, given this, banks regularly choose to be ultra cautious, and reject any transactions which may be challenged.
A common saying is that the first victim of any war is the truth. It could now be said that the second is the ability to apply logic and reason to financial transactions. Of course, companies should not be rewarded for doing business with unsavoury regimes, and a blanket ban is simpler. But reality is not always simple.
Humanitarian Exceptions
First, an area where the regulators, frankly, create a problem. For understandable reasons, sanctions regimes nearly always contain an exception for products which help with healthcare and agricultural products. These exceptions are formal and documented.
However, given their caution when dealing with sanctioned countries, banks often simply refuse to process any payment involving them – especially as they themselves are also usually in the process of winding down their own operations. The result is that, although these products are officially required for humanitarian purposes, the companies making them find it extremely difficult to get paid. Payments which do come through are often delayed pending lengthy checks – and banks are not allowed to inform their customers of what is happening.
A couple of peers recently shared with us that one of the few banks still able and willing to work with Russia is under strong pressure from the authorities to scale back their activities. Again, the reasoning is understandable – but, if we are serious about providing humanitarian goods, it should surely be possible to process payments for them?
In any case, a consequence of this situation is that the few banks who are prepared to offer this service are not subject to any form of competition, so fees are high, as are the requests for wallet share.
Inconsistent Rules
This is another regular complaint. This can take a simple form, which can still be problematic: the lists of prohibited products and counterparties vary from one authority to another, particularly between the EU and the US. All companies are anxious to comply – but it can be an issue when one product is exempted, but a second one, needed to make it work, is not. And, of course, checking multiple lists is never easy.
More serious are the regular divergences over the list of sanctioned countries. It will surprise no-one that, while the United States and Europe agree on countries such as North Korea, Iran and Russia, there are others which the US sanctions, but European countries do not. The most notorious example is Cuba: in the 1960s, this Caribbean island did indeed have a militant communist regime anxious to export revolution and agitation around the world. It is difficult to argue that it presents much of a threat today, and all European countries have long since ceased to apply any kind of sanction. The US, on the other hand, not only maintains its own sanctions, but has strengthened its enforcement actions against European banks doing business there.
The result is another example of the US’s view of the extraterritoriality of its laws: in fact, the $6bn fine referred to above related to a transaction which did not involve either the US or the US dollar, and was perfectly legal, if ethically questionable, in the countries between which it was executed. Treasurers beware: even if you have no dealings with the US, and – rightly – do not recognise any jurisdiction they may claim over your activities, US authorities do not share this view.
Workarounds via other Countries
Several significant countries have elected not to participate in all sanctions – China and India being the most obvious examples. In fact, the BRIC alliance, of which they are the two biggest components, has made a point of not joining in sanctions against Russia, and threatening retaliation if either Europe or the US apply secondary sanctions against them for their purchases of Russian oil.
The good news for American and European authorities is that, despite their refusal to join the current sanctions, banks in India and China refuse to provide a workaround for payments involving most sanctioned countries. When the current sanctions against Russia were implemented, several companies investigated the possibility of routing their permitted activities via these countries, to avoid the payment issues above. The uniform response was that this would not be possible.
There is, however, a potential cloud on the horizon: all the BRIC countries have loudly proclaimed that they reserve the right to decide their own foreign policy, and they do not want it to be dictated to them by Washington or Brussels. The US dollar remains essential for conducting international trade, so they are not willing to cut themselves off from the dollar based international payments system – yet. But China makes no secret of its determination to promote the use of the renminbi in cross border transactions. It has also significantly reduced its holdings of US Treasuries, and is adopting increasingly firm positions in negotiations with the US.
In other words, the use of the dollar as a tool to impose US policies on other countries may lead to the loss of its status as the indispensable global currency. US policy makers are aware of this risk, but view the dollar’s role as being irreplaceable. Time will tell…..
Crypto
Most forms of crypto currencies provide anonymity, and therefore the potential to escape regulations, such as exchange controls, and, potentially, sanctions regimes. Again, only for transactions which are perfectly legal, but difficult to execute for the reasons above, several treasurers in our network have looked at payments in bitcoin or various stablecoins, on the grounds that the entities providing these services are not subject to the same invasive supervision as traditional banks.
To date, while there is limited evidence of some success in facilitating retail transactions into some countries with exchange controls, this approach does not seem to be working for sanctions. At some point, all treasurers want to convert the crypto into a fiat currency account with a bank – and the same issues resurface.
Closing down your Business
For the many businesses which are not covered by exemptions, a different headache arises: how do you close down your existing business? Of course, you can simply lock the doors and leave local staff to manage as best they can.
Whatever the politics behind sanctions, most companies are anxious to look after their staff, and, at the very least, make sure they are paid any salaries or bonuses which may be outstanding. Also, and for different reasons, they usually prefer to settle any outstanding taxes. Finally, when all is done, companies are anxious to receive any cash which may be owed them, whether it be outstanding intercompany receivables, or dividends. A common action is to sell the business, often to local management: this raises the question of how to receive the funds.
These problems receive, and deserve, less understanding: most companies accept that, if you had a valuable business with assets in Russia or Iran, these are now lost. But, at least in the early stages of implementation, treasurers have a duty to minimise the loss, and make sure local staff receive payments they have earned. Often, it is better to accept the situation and materialise the losses sooner, rather than wait and lose a larger amount later.
There are situations where companies prefer not to shutter the local business completely. We have seen several situations where the newly independent local subsidiaries continue to provide similar products and services, often using names and logos which are disturbingly close to the original. There are limits to what can be done in Russia or Iran to combat this – but a small local presence can be helpful in monitoring the activity.
Where this is the case, several companies have not closed down their local subsidiaries. Instead, there are legal firms which provide management services: the subsidiary is completely cut off from internal IT systems, management processes and products, and “ring fenced”. The legal firm manages the remaining activity, has full decision making authority, and provides periodic reports.
Preparing Re-entry
No political situation is permanent. Most of us are old enough to have seen the collapse of regimes which seemed immovable: ironically, the current situation with Russia, in many ways, owes its origin to the collapse of the Soviet Union. Many of us never thought that day would come.
As they exit sanctioned countries, many companies start to think about the day they will be able to return. This is not undermining sanctions or their objectives: on the contrary, the hope is that a day will come when these measures are no longer necessary. The form of the plan will vary: some companies who have lost money with the closure will look to using distributors, with a much lighter onshore presence. Sanctions may lead to the development of a local production capability which may be a competitor in the future. Yet another solution is to sell the local business to buyers with an understanding that they will sell it back when the time is right. Naturally, care needs to be taken that these agreements do not themselves violate sanctions.
In all cases, people in the country will remember how your company behaved. Whatever the local circumstances, and these can be very difficult, companies who behaved well with staff and creditors will be viewed more favourably on their return.
Illegal Imports
All the treasurers we speak to do everything they can to comply with laws and regulations. But, inevitably, goods continue to be available via grey channels. For example, it appears that most modern electrical appliances, PCs and smartphones can be obtained in Iran.
For consumer products, it is virtually impossible to prevent people from buying these goods in retail channels, and then arranging for them to be smuggled into sanctioned countries. Any company using distribution channels is well advised to include clauses in its distribution agreements requiring the channel partners to certify that they will apply denied parties checking to their own customers. In practice, audit and enforcement become increasingly difficult, as you go down to second, third and lower tiers.
It is becoming increasingly common for treasurers to be challenged during AML checking by banks or the due diligence process in other financial transactions. A quick internet search by a junior staffer will often reveal branded products being offered for sale in Iran or Russia. These may be fakes (that happens!), but they may also come via parallel channels. Currently, it is generally accepted that, as long as it remains a small percentage of sales, it cannot be prevented.
But it is important for treasurers to be aware, and be prepared – a well documented programme to ensure compliance and staff education is essential.
Conclusion
Companies need to not only comply with sanctions, but they also need to be able to demonstrate that they have a well documented and effective programme to ensure they do so. If distribution channels are used, partners must be required to certify their own compliance. When a new country is subjected to sanctions, every treasurer will do what they can to reduce the cost – but it is important to recognise that there will be a cost, and accept the situation where withdrawal becomes inevitable.
This is true. But authorities do not help the situation by making it difficult to implement the exceptions they themselves provide. You either think medicine should be exempted, or you don’t.
Many people have felt uncomfortable for a long time about the US’s tendency to expect its laws and rules to be implemented even in places where it has no jurisdiction, and to use the international financial system to make this happen. With the increasingly unpredictable and unreliable nature of US foreign policy, it is becoming more important to make sure there are alternatives: apart from anything else, China, India and an increasing number of countries are working actively to create alternatives.
Fortunately, for most international companies, business in sanctioned countries has historically not been unduly significant. These issues involve cost and inconvenience – but usually not much more.
Given the challenges and the logical inconsistencies, this is just as well.