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Caution! How do foreign trade enterprises deal with international sanctions? Three major risks must be paid attention
Apr 24,2022
For domestic enterprises, the most important focus in the face of external conflicts is how to deal with the risks brought by the economic sanctions imposed by the United States, Europe and other western countries on other countries. As these international sanctions will have a serious impact on the country and its trading partners, it may also affect part of the international trade business of Chinese enterprises. Enterprises must be cautious in engaging in international trade.
International sanctions usually include the inclusion of other countries' banks on asset freeze (SDN), Correspondent Bank account ban (CAPTA), financing ban (NS-MBS) and other lists. Chinese enterprises should pay attention to three major risks in response to such sanctions.
Financial risk
Domestic enterprises, especially foreign-invested enterprises investing in China, often have cross-border capital transactions with foreign parent companies or multinational clients, and once these cross-border funds involve sanctioned persons, they are likely to be frozen or returned as long as the funds pass through the sanction issuing country;
For export-oriented enterprises, it may lead to financial losses that are difficult to recover the purchase price;
For import-oriented enterprises, they will also face the risk of default due to the impassability of foreign exchange and the inability to pay for goods.
Compliance risk
If an enterprise has commercial dealings with the sanctioned person in the process of carrying out cross-border transactions and violates the sanctions laws and regulations, it may be subject to huge civil fines or even criminal liability.
In recent years, due to violations of U.S. sanctions, forced to sign a huge settlement agreement with the U.S. Treasury Department, and even led to the detention of company executives.
Risk of collateral sanctions
If an enterprise conducts major business dealings with certain specific countries or sanctioned persons, it may also be implicated in serious cases, be included in the sanctions list, and face the risk of being removed from the international economic and financial system.
To protect against the risk of sanctions, these key actions must be in place:
Know your enemy and yourself, do a good risk assessment
In fact, the prerequisite for managing sanctions risk is to first understand what the risk exposure is.
In the case of U.S. sanctions, for example, the key to judging exposure to U.S. sanctions is twofold:
First, the degree of connection between the enterprise and the United States, including whether the products are originated in the United States, whether the cross-border operating funds are mainly priced and settled in US dollars, and whether the enterprise employs senior executives in the United States, that is to say, the higher the degree of connection with the United States, the greater the responsibility that must comply with the sanctions requirements of the United States, and of course the more serious the consequences of violations;
The second is the extent to which the business has dealings with the sanctioned person, and the closer the dealings with the sanctioned person, the greater the exposure to the sanction risk.
Establishing a business-appropriate sanctions risk management framework
Sanction risk management requires cost. Therefore, enterprises should first understand their own risk exposure and use this as a basis to establish a sanctions risk management framework that matches risk exposure, business scale and cost, risk preference, etc., so as to avoid the mere formality of sanctions risk management due to "excessive compliance". For details, please refer to the OFAC Compliance Commitment Framework issued by the Office of Overseas Assets Control (OFAC) of the US Treasury Department.
Embed sanctions risk management measuresThe whole process of the company's business activities
Sanctions risk management can't just stay on paper and slogans, the key is implementation, so senior management must embed sanctions compliance requirements into the whole process of business activities.
For example, strict order management is the most fundamental means to reduce the risk of sanctions, from the pre-, mid-, and post-order signing links to the order counterparty, the country where the counterparty is located, the freight forwarding company, the transportation company, and even the carrier Ship, etc., must do a comprehensive screening of sanctions and sanctions lists to ensure that all parties to the transaction do not involve sanctioned countries, regions or personnel.
In addition, it is also important to do a good job in product evaluation. Enterprises should first identify the degree of connection between their products and the countries imposing sanctions, including origin, raw materials, key technologies, etc., so as to avoid exporting goods from the countries imposing sanctions to the countries under sanctions.
Finally, the design and arrangement of legal texts such as contracts are also the main work of controlling the risk of sanctions. Enterprises should find ways to implement the sanctions compliance clauses in the signed contracts and agreements, clarify the rights and obligations of both parties to the transaction and other details, especially to add the right to terminate the contract involving sanctions factors, in order to avoid their own legal risks.
In the complex international relations and geopolitics, sanctions have become an increasingly important tool for countries to resolve political, diplomatic, and economic disputes, and even become another invisible weapon. In this situation, foreign investment in China Enterprises must face up to the risks that economic sanctions may bring to their own operations and take effective measures to prevent them in advance.
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