Impacts of Sanctions and Export Controls on Supply Chains

This is an Insight article, written by a selected partner as part of GIR's co-published content. Read more on Insight

Overview

Today’s globalised, on-demand supply chains rely on increasingly seamless cross-border movement of raw materials and goods in order to be cost efficient and effective. Sanctions and export controls present potential impediments that, if not managed properly, can imperil a company’s performance, whether as an original or intermediate supplier, or as the final recipient of supplied goods or technology. In some cases, governments may impose new sanctions or export controls with little or no warning, with similarly swift knock-on effects cascading through impacted supply chains. However, this tends to be the exception rather than the rule; a business that is watching carefully will generally spot the storm clouds on the horizon. A well-designed, risk-based compliance programme tailored to a company’s specific circumstances, including the risk profiles of its suppliers, intermediaries and customers, will help with this forecasting, allowing a company to identify and address even the most challenging sanction and export control developments.

Effective development of compliance strategies starts with understanding the basis for sanctions and export controls, how they overlap and interact, and how to mitigate their related risks. It is also critical to understand how sanctions and export controls have evolved in recent years, and how still-developing trends could impact their trajectory in the near term and over the long term.

Rapidly evolving enforcement environment

By any measure, the use of sanctions and export controls reached critical mass following Russia’s 2022 invasion of Ukraine. In its wake, governments implemented sweeping multilateral policies designed to severely restrict Russia’s influence on the world stage and immobilise its war efforts. As an example of how this was achieved in a global economy, US regulators promoted policies aimed at achieving international implementation and enforcement. The result was a previously unthinkable united front in cross-agency, multinational collaboration, leading to the most robust sanctions and exports controls regime ever imposed on the modern supply chain. The depth of international cooperation achieved in responding to the invasion of Ukraine sets a strong precedent for nations increasingly turning to sanctions and export controls to address foreign conflicts and crises. For example, the recent efforts by like-minded countries to withhold advanced technology from China is emblematic of this new approach to trade policy, under which national security interests rather than traditional market forces appear to be the predominant guiding principles.

In the third edition of the Guide to Sanctions, this chapter outlined the distinctions and similarities between sanctions and exports controls, with an emphasis on the key strategies companies should consider when developing internal compliance protocols. Against the Russia–Ukraine backdrop, the distinctions between the two policy instruments are becoming less clear, as US regulators expand the scope of trade restrictions while broadening enforcement efforts within the sanctions and export control space. In this edition, the chapter includes analysis of the post-invasion regulatory landscape and its impact on supply chains, with a particular eye towards new rules governing trade with China and restricting transactions for advanced technologies.

Sanctions and export control overview

Perhaps the key economic takeaway from the global response to Russia’s invasion and recent actions towards China is that sanctions and export controls reflect foreign policy. For example, in the post-Cold War era, the trend towards a global free market economy was directly correlated with the relatively low level of disruptive conflict that reduced the barriers to international trading. This model, however, assumes that nations will contribute to the global economy by aspiring to be good-faith state actors. By contrast, Russia’s decision to invade Ukraine, coupled with China’s deteriorating trade relations with multiple jurisdictions, has forced an inverse trend. Now, businesses are looking to shore up local and regional trade relationships to prepare for future disruptions to the supply chain as the geopolitical landscape signals the potential for further deterioration. The upshot of this interplay with foreign policy is that companies can often prognosticate the consequences that new or upcoming sanctions and export controls may have on supply chains by paying careful attention to the trends within the targeted activities and types of product.

In the case of sanctions, they are imposed by one country or multilateral organisation against an individual, entity, sector, government or country to respond to, or deter, some course of conduct. Typically, they are designed to isolate and pressure their target via some combination of financial and trade restrictions (e.g., preventing the sanctions target from having access to certain financial markets, goods or technologies). In some cases, they are narrowly tailored, such as by targeting a single individual or entity, while in others they are widespread, up to and including imposition of country- or territory-wide embargoes. In many cases, including under US law, sanctions operate on strict liability principles (i.e., if you engage in a prohibited transaction with a sanctions target, you have violated the law regardless of your knowledge or intent). However, whether an enforcement action is pursued, and whether and what penalties may be imposed, will hinge heavily on intent. For example, the United States’ primary sanctions enforcer, the US Department of the Treasury’s Office of Foreign Assets Control (OFAC) has developed enforcement guidelines[2] that turn primarily on the question of whether a violation was ‘egregious’ or ‘non-egregious’. Key factors in that determination include whether the violation occurred due to wilful or reckless conduct, and whether supervisory or management-level personnel had actual knowledge of, reason to know of, or involvement in, the conduct at issue. Other factors include the size and sophistication of the implicated company, the existence, nature and adequacy of its compliance programme, and its remedial response to the apparent violation.

Export controls, on the other hand, generally reflect foreign policy not via an outward-facing targeting of specific individuals, entities or jurisdictions, but rather via an inward-facing defensive motive to identify and limit the export of particularly critical goods and technologies on an individual or multilateral basis. That being said, export controls can have many of the same characteristics as sanctions, have always had a level of interplay with sanctions, and have become increasingly intertwined with sanctions in recent years. Although the leading sanctions and export control regimes (i.e., those of the US, UK, EU and the United Nations) often differ in the specific targets of their restrictions, they all tend to have significant overlap in the types of conduct for which they impose sanctions and the types of technologies over which they impose export controls. From a sanctions perspective, terrorist activity, destabilising military or political activity, drug trafficking and human rights abuses predominate. Whether a particular individual, entity or regime will be targeted by a particular sanctions enforcer tends to turn on complicated questions of internal politics, geopolitics and geography.

From an export perspective, the rule is typically that military technology is subject to the most stringent restrictions (e.g., in the United States, most military technology must be licensed for export by the State Department’s Directorate of Defense Trade Controls under the International Traffic in Arms Regulations, with limited exceptions), and everything else is typically subject to few restrictions on export unless the item falls into a particularly sensitive category (e.g., nuclear, biological or chemical processing technology). Whether a particular technology will be subject to export controls turns on a balancing of the sensitivity of the technology (particularly if it can be used in problematic ways), a protectionist desire to limit distribution of the technology, and a counterbalancing desire to avoid limiting innovation by artificially restricting access to markets and talents by being overly protectionist.

Targeted supply chains

Sanctions and export controls impacting western supply chains are not a new development. As a prime example, for over 10 years world powers have imposed severe economic sanctions on North Korea. While the primary impetus behind these sanctions has been to pressure North Korea to denuclearise, some of the most robust sanctions regimes against the Kim regime also target its use of forced labour and have specifically sought to limit the flow of commercial goods to or from North Korea.[3] Among other things, OFAC regulations currently prohibit the importation into the United States of any goods made in North Korea or by its Worker’s Party or other state agencies. Separately, since the passage of the Countering America’s Adversaries Through Sanctions Act in 2017,[4] ‘any significant goods, wares, articles, and merchandise mined, produced, or manufactured wholly or in part by the labour of North Korean nationals or citizens’ have been prohibited from entry into the United States unless US Customs and Border Protection (CBP) ‘finds through clear and convincing evidence that the merchandise was not produced with a form of prohibited labour’. Because the North Korean government is known to send its citizens abroad to work under government contracts, including in China and Russia, the risk that North Korean forced labour has been exploited to produce raw materials or manufactured goods exists even when the materials or goods come from a country other than North Korea. As a result, businesses in the United States are obligated to assess the risk that their global supply chain may be tainted by North Korean labour.[5]

More recently, similar concerns regarding forced labour and other human rights violations by China’s government against the Uyghur populations in the Xinjiang region of north-western China have been at the forefront, as discussed further below.

Semiconductors and advanced technologies

We are now seeing export controls evolve to restrict the flow of sophisticated technologies deemed critical to the IT arms race in markets such as China, in a manner that swims against the current of recent cross-border supply chain evolution. For decades, the semiconductor and advanced computing industry built transnational supply lines predicated on unrestrained cross-border logistics. As modern export controls have evolved to become more restrictive, and, increasingly, the preferred policy instrument to further US national security interests, the technology sector faces unprecedented vulnerabilities. A prime example is the technological competitiveness legislation passed during the Trump administration with the Export Control Reform Act of 2018 (ECRA), and recently during the Biden administration with the CHIPS and Science Act of 2022. In particular, passage of ECRA represented a sea change in US free trade philosophy. ECRA delegated expansive authority to the Bureau of Industry and Security (BIS) to establish export controls on emerging and foundational technologies designed to prevent the modernisation of military adversaries and incentivise domestic manufacturing.

After years of escalating trade rhetoric, pursuant to its new legislative grant, BIS promulgated a series of rules in 2022 aimed at limiting China’s ability to develop and produce advanced semiconductors, semiconductor production equipment and advanced supercomputers.[6] The rules set thresholds for high-end model software chips, requiring an export licence from BIS before transacting with Chinese entities. Notwithstanding the thresholds, BIS announced that all licence applications to export software chips to China face a presumption of denial, functioning as a de facto embargo on computing technology bound for China. To effectuate the rules, BIS expanded the scope of the Export Administration Regulations (EAR),[7] which is the control regulation for commercial and dual-use goods. Previously, the EAR applied to goods exported from the United States, goods produced in the United States and foreign-produced goods made with controlled US-manufactured components.

The new EAR China-related export controls also apply to goods produced wholly outside the United States that are the direct product of certain US technologies or that are produced from equipment that is the direct product of certain US technologies. This extraterritorial component functions by broadening the Foreign Direct Product Rule, which was previously used to prohibit products from being shipped directly or indirectly to affiliates of Huawei and ZTE, to include scores of Chinese technology and military conglomerates already designated on the BIS Entity List.[8] The revised controls further apply to restrict US persons from providing support for the development or production of covered technologies in applicable locations or in connection with covered end users or end uses, without a licence.

In hopes of minimising the impact on allies, the United States granted entities in Taiwan and South Korea, where some of the most advanced computer circuitry to date is manufactured, one-year waivers to continue production at China-based facilities. For example, Taiwanese semiconductor manufacturers were authorised to import restricted components into plants in Nanjing to continue production without subjecting exporters to the new restrictions. However, one year provides insufficient time to stave off the long-term challenges for exporters that may be unable to scale trading commensurate to pre-restriction demands, as Asian markets will inevitably turn to non-US trade partners to source component parts. This reflects the potential risk in imposing unilateral export control regimes. Without multilateral cooperation from other international markets, certain US industries could be rendered uncompetitive, specifically those that rely heavily on trade with Asian markets.

To be certain, a declining domestic semiconductor sector will have collateral consequences across US industry, manufacturing and production, at a time when inflation costs are already soaring due to supply chain disruptions. As a tacit acknowledgement of these risks, the Biden administration has engaged in ad hoc negotiations with foreign counterparts and heavily subsidised domestic technology markets, with some degree of success. In January 2023, two leading superconductor markets, Japan and the Netherlands, announced multilateral export control packages that operate in tandem with the US restrictions. Further, stateside investment has yet to slow as US companies and foreign-based interests race to build ultramodern, multibillion-dollar plants in Arizona, Texas and Ohio.

Meanwhile, the Chinese government has not stood idly by. Beijing announced plans for its own ‘Unreliable Entity List’ in response to the expanded US Entity List. In 2023, China’s Ministry of Commerce imposed export and investment controls on two major US defence contractors for supplying arms to Taiwan, barring Chinese entities from transacting with them and prohibiting their investments into China. For companies caught in this political crossfire, these retaliative escalations complicate their cross-border operations and could permanently disrupt their global supply chains.

While the net result remains to be seen, targeted technology sectors will suffer challenges from the volatility in the coming years as nationalistic attitudes prevail. To mitigate this, companies in this space must begin planning for worst-case scenarios and develop continuity plans that contemplate relocation of their supply ecosystem away from China.

Targeted conduct

Human rights abuses

As mentioned above, sanctions are regularly deployed against human rights violations and abuses. Outside the Russia–Ukraine context, recent sanctions have focused predominantly on human rights violations and forced labour campaigns by China’s government against the Uyghur Muslim populations in the Xinjiang region. In July 2020, the US departments of State, the Treasury, Commerce and Homeland Security issued an advisory alerting businesses to supply chain risks from links to entities exploiting forced labour and other human rights abuses in Xinjiang. Those government departments, joined by the US Trade Representative and the US Department of Labor, updated and reissued that guidance in July 2021. The US Department of Commerce also restricted exports to several Chinese companies and government ministries by placing them on its Entity List.

In parallel, in July 2020, OFAC imposed sanctions on the Xinjiang Production and Construction Corps (XPCC), a paramilitary organisation that has been identified as building and running re-education camps holding Uyghur and other Muslim minorities in Xinjiang. According to news reports, the XPCC was responsible for up to one-third of China’s cotton production, which translates to up to 7 per cent of the world’s cotton. Under the sanctions, US companies may not buy from or sell to the XPCC or subsidiaries in which it has a majority stake. To complement OFAC’s actions, CBP issued a series of withhold release orders (WROs)[9] against cotton and other products from Xinjiang based on information that reasonably indicates the use of forced labour in their production. The first several WROs targeted products made by specific entities in Xinjiang, including the XPCC and several other entities involved in the operation of ‘re-education camps’, cotton processing and the production of electronics, textiles and hair products. The most recent WRO, dated 23 June 2021, cited information that reasonably indicated that a major Chinese manufacturer uses forced labour to manufacture silica-based products. China, and in particular the Xinjiang region, is the world’s largest producer of products containing silica, a critical raw material for the manufacture of cement, brick and glass. The WRO stood to have an immediate impact on the production of solar cells and to implicate the production of many downstream chemicals to which silica is a requisite component.

In June 2022, Congress enacted the Uyghur Forced Labor Prevention Act (UFLPA)[10] on a broadly bipartisan basis, which, among other things, created a rebuttable presumption that all goods manufactured in whole or in part in the Xinjiang Uyghur Autonomous Region are the product of forced labour and are not entitled to entry at US ports. The UFLPA significantly enhanced CBP’s authority in this space and largely superseded the Xinjiang-related WROs by requiring detention, exclusion or seizure of defined goods originating in China that are presumed to have involved forced labour in their production. For the commodities subject to the UFLPA or a WRO, CBP will prevent the admission into the United States of all merchandise within scope and can detain, exclude or seize merchandise that is present in the United States but has not yet cleared customs. The overlapping Xinjiang sanctions and export controls have forced companies and industries doing business in key sectors of the Chinese economy to revisit whether and how they screen their Chinese supply chains.

Leveraging a fuller spectrum of trade restrictions

As the foregoing illustrates, the United States and like-minded governments and their adversaries have all been deploying an increasingly wide array of trade restriction tools in furtherance of their diplomatic prerogatives – and with direct impacts on global supply chains. For example, WROs have been an increasingly popular tool since 2016, when the Tariff Act of 1930 was amended to eliminate a statutory exemption and to give CBP more enforcement power.[11] The Xinjiang region has not been the only target of WROs, and the use of WROs is expected to continue, if not expand, during the Biden administration.

Further, in 2019, the US Department of Commerce issued regulations enabling it to block any information communications technology and service (ICTS) transaction involving goods or services designed, developed, manufactured or supplied from foreign adversaries or companies organised in, or otherwise subject to the direction or control of, a foreign adversary. These regulations were issued under Executive Order 13873, signed by President Trump in May 2019, intended to protect sensitive information, critical infrastructure and vital emergency services in the United States. The Department of Commerce has identified China, Cuba, Iran, North Korea and Russia as foreign adversary countries, and Venezuelan president Nicolás Maduro individually as a foreign adversary. On 17 March 2021, and again on 13 April 2021, the Department of Commerce issued subpoenas to multiple Chinese companies that provide ICTS in the United States in a move that the Department described as an ‘important step in investigating whether the transactions involving these companies meet the criteria set forth in the Executive Order’. These actions indicate that the Biden administration intends to actively use this new power to evaluate transactions, although there has been little to no public enforcement activity to date.

As the geopolitical exchange plays out, the full spectrum of sanctions and export control strategies that have evolved over recent years are being promulgated across a rapidly developing legal and political landscape that is largely unrecognisable from the sanctions philosophies of just a decade ago. Sanctions and counter-sanctions are already proving disruptive to global supply chains, as companies facing import and export restrictions on one side of relevant borders or another are forced to find alternative sources of supply, to divert shipments to alternative markets or to otherwise revise or unwind sourcing and supply strategies. This includes disruptions due to direct prohibitions on particular imports or exports; indirect impacts due to finance and investment-related restrictions; and market-driven pressures to curtail or cease certain wholly allowable activities as a matter of moral or ethical compulsion, or political expediency.

For example, China has issued retaliatory sanctions against the United States for what it views to be unjustifiable extraterritorial measures. Pursuant to Beijing’s 2021 Anti Foreign Sanctions Law, Chinese entities are prohibited from either directly or indirectly implementing discriminatory measures taken by a foreign country, establishing a private cause of action for Chinese citizens to sue enabling entities. Importantly, the Law empowers Chinese authorities to issue countermeasures, including criminal prosecutions, against individuals who directly or indirectly participate in the formulation of foreign restrictive measures. Further, these lists may be extended to spouses, relatives and entities with which they are associated. Construed broadly, foreign nationals or entities with subsidiaries in China can be deemed as facilitating US sanctions by redirecting supply chains to competitors in western-allied jurisdictions.

These countervailing sanctions regimes will impose conflicting compliance and contract obligations on multinational businesses, all at a time when regulatory agencies are promising more civil and criminal enforcement action and greater penalties for sanctions and exports violations. Whereas in the past, many violations were deemed too trivial or attenuated to prosecute, recent enforcement actions underscore a new willingness from US regulators to incentivise corporate compliance through harsher punishment. On this last point, as part of a series of announcements, in March 2023 the US Department of Justice (DOJ) re-emphasised that it views sanctions and export control violations as not just a technical area of concern, but rather as a top prosecutorial priority, akin to the corporate prosecutions of prior decades under the US Foreign Corrupt Practices Act.

Compliance strategies

Sanctions and export controls can be highly dynamic in the speed with which they can be implemented and adjusted. Accordingly, businesses operating with international supply chains need to be prepared to be equally nimble. Fortunately, there are relatively straightforward and scalable strategies that companies can deploy to ensure they have a robust and effective compliance framework through which to operate, as detailed below.

US regulators now expect that sanctions and export compliance is a board room-level topic. Recent agency actions signal that enhanced control protocols are expected to be the rule for companies when dealing with higher-risk markets and trading in advanced technologies. For example, in a first-of-its-kind announcement in March 2023, BIS, the DOJ and OFAC issued a joint warning on compliance expectations, advising that companies must exercise heightened caution and conduct additional diligence upon indicia that a transaction will involve a party engaged in evasion efforts. The joint announcement is emblematic of the new unified regulatory front and reinforces that for companies engaged in cross-border activity, compliance requires a multifaceted approach to classification, training, risk-based due diligence, end-user certification and screening.

Classification and risk analysis

It is imperative that companies moving goods and technologies across borders fully understand the potential restrictions that may apply to those transactions. This starts with a clear understanding of which goods and technologies fall under which applicable export control regimes. Companies should understand which regimes apply (e.g., whether they are subject to control as military items, dual-use items or purely commercial items), where their products are classified within each applicable regime and what licensing, reporting and other requirements might apply to their export. As the BIS restrictions on advanced technologies illustrate, a frequent mistake is to focus too narrowly on the finished products that a company might ship to customers abroad.

Once applicable classifications are well understood, companies should conduct supply chain risk analysis to determine whether and where they might face challenges in securing licences or other export authorisations, and whether and where they might face heightened risk of sanctions impacting their supply chains. Among other things, companies must know the source of their raw materials and other goods and have some understanding of how their suppliers conduct business. As part of the risk analysis, contracts should be reviewed to ensure that appropriate contractual language is employed and that the company is properly exercising its rights under each contract. Not only will this risk analysis help identify and avoid potential pitfalls, but it can also serve as a baseline for demonstrating that a company’s compliance programme is being reasonably risk-calibrated.

Resource allocation

Companies operating across borders that leave sanctions and export control compliance as an afterthought do so at their own peril. Companies should allocate adequate resources to this compliance function, both internally and through the use of outside advisers. The larger and more sophisticated the company and its global activities, the more enforcement authorities will expect to be invested in related compliance efforts.

Training

It goes without saying that a company’s workforce can only address compliance risks if it is aware of and attuned to those risks. Training is therefore imperative, not only for those expected to serve as frontline compliance gatekeepers, but also for anyone in a function that touches on the supply chain. Personnel in finance and accounting, sales and marketing, logistics and fulfilment, and – critically – management should all have at least a baseline understanding of how sanctions and export controls work and impact the company and its supply chain, so that they can be positioned to identify, report and escalate red flags indicating potential violations as early as possible.

Due diligence

As the Xinjiang discussion above illustrates, due diligence is an increasingly important consideration when dealing with higher-risk markets. It will only become increasingly so. Just as a company should understand its goods and technology through classification, so too should it understand its counterparties and third-party partners through some level of due diligence. While the level and type of due diligence can and should be calibrated to the relative risks presented by the market, transactions and type of parties involved, it should not be ignored altogether. Further, an effective third-party due diligence programme can protect a company not just against sanctions and export control risk, but also against bribery and corruption risks, money laundering risks and business risks, including potential exposure to undue financial or reputational risks associated with human rights abusers or unqualified (or underqualified) partners and counterparties.

Screening

Screening is an often overlooked but mission-critical compliance strategy in the context of sanctions and export control compliance. It is necessary to determine not only whether a company might be dealing with a designated sanctions target or export-restricted entity, but also whether it can be readily automated and built into existing business infrastructure such as enterprise resource planning platforms and payment systems.

As a good starting point, to facilitate screening the US government has compiled the Consolidated Screening List and an online search tool that purports to be an easily queried comprehensive database for foreign entities sanctioned or subject to trade restrictions across the US regulatory system.[12] That said, companies should have a more robust policy of checking new agency guidance and updates to restricted entities lists, along with requiring disclosure and beneficial ownership information before transacting with suppliers engaged in high-risk activities or based in targeted jurisdictions.

Practical considerations

Sanctions, export controls and import prohibitions can be deployed in a coordinated and complementary way. In considering them, companies should bear in mind that when they see an emergent use of one to target particular conduct or companies, there is a good chance the other will follow.

One key consideration is that sanctions, export controls and import prohibitions can be ‘sticky’, insofar as they can follow a person or an entity as they operate outside their home jurisdiction based on their nationality, and they can follow a product as it moves through commerce because of its origin. For example, a US national working for a European company outside the United States cannot be involved in that company’s dealings with Iran without violating US sanctions (without a particular licence or other authorisation). Similarly, a US-origin air traffic control system that has been exported to a customer in Europe will continue to be subject to US export controls if the customer wants to re-export it to a recipient in Asia. Accordingly, the selling company may need to obtain a licence to conduct the sale, even if none was required for the original export (as licensing requirements can vary depending on the country to which an item is being exported or re-exported). Export controls are also sticky insofar as they can attach to an item once it is imported into a jurisdiction, unless it is simply moving in transit through the jurisdiction or is being held in a free trade zone or other special-status area. As a result, it is important to have a thorough, holistic and comprehensive view of where and how sanctions and export controls can impact an organisation.

For example, it is not unusual for the documentation for an item originally exported from the United States to include EAR or OFAC declarations notifying any intermediate consignees or end users of the US origin of the shipment and asserted extraterritorial application of US laws and regulations. It is also the case that some US exporters request information and certifications to assess their potential export obligations[13] and satisfy best practice guidance promulgated by BIS in support of efforts to ensure re-export controls are operating effectively and preventing improper diversion to prohibited end uses, end users and locations.[14] Although these inquiries are not necessarily required, particularly in the case of exports of products subject to limited export classifications (e.g., the EAR99 catch-all classification under the EAR), BIS considers it a ‘red flag’ (that should be resolved before completion of a transaction) if a company refuses to cooperate with reasonable requests for information.[15] Accordingly, unless there is a reasonable, good faith and readily articulable reason not to comply, counterparties making reasonable requests should be given adequate information and assurances to satisfy their inquiries.

Finally, companies should be aware that while sanctions and export restrictions can be imposed quickly in the face of a developing foreign policy issue, the run up to the imposition often develops quite slowly and with a good deal of purposeful foreshadowing. In the example of more restrictive export controls with China, this was a years’ long evolution across multiple administrations, legislative acts, agency announcements and notices of proposed rule-making. Whether examined individually or read together, the United States announced these moves to industry well in advance of the eventual punch. Companies with cautious advisers were well apprised and benefited from a period to recalibrate before new restrictions took effect. Where prevailing political and economic policy views put specific regions, entities or commodities in an entity’s cross hairs, there is a significant risk that sanctions of some form will follow. Businesses should not wait for a designation or WRO to be issued before addressing potential issues and considering options for supply chain redundancy or other changes.

By the same token, sanctions and export controls can be nimble and quickly deployed, as we have seen in the case of the response to Russia’s invasion of Ukraine. Taking largely unforeseeable circumstances such as Russia’s aggression into account, having a well-trained compliance function in place, supported by trusted outside advisers, is the key to having the system resiliency needed to rapidly pivot in the wake of precipitous sanction and export control developments.

Conclusion

The sanction and export control regimes described above are complex, with a variety of overlapping considerations and jurisdictional vagaries that can vary from country to country and transaction to transaction, and that are subject to periodic amendment. Companies seeking to navigate them successfully need to thoroughly understand the goods and technology with which they deal and the supply chains through which they operate.


Footnotes

[1] Alex J Brackett, J Patrick Rowan, Jason H Cowley, Laura C Marshall and Edwin O Childs, Jr are partners, and Elissa N Baur is an associate, at McGuireWoods LLP. The authors wish to thank associates Abigail G Urquhart and Alex J Scandroli for their contributions to this chapter.

[2] These guidelines are located at 31 Code of Federal Regulations (C.F.R.) Part 501, Appendix A.

[3] This concern was highlighted in some detail in a 23 July 2018 Advisory by the US Departments of the Treasury, State and Homeland Security entitled ‘Risks for Businesses with Supply Chain Links to North Korea’.

[4] Countering America’s Adversaries Through Sanctions Act, 22 U.S. Code § 9241a.

[5] See, e.g., US Customs Ruling HQ H317249 (5 March 2021) (finding that the company did not have the clear and convincing evidence needed to overcome a presumption that imported goods were made using North Korean forced labour when manufactured at a specific Chinese company).

[6] 87 Federal Register 62186; 15 C.F.R. Part 734 et seq.

[7] 15 C.F.R. Part 730 et seq.

[8] The Entity List, which is maintained by the Bureau of Industry and Security (BIS) within the US Department of Commerce, is a list of individuals and entities (including businesses, research institutions, government and private organisations, individuals and other types of legal persons) whose privilege to receive US exports has been limited or prohibited due to some form of misconduct or national security concern. Those placed on the Entity List, found in Supplement No. 4 to Part 744 of the Export Administration Regulations (EAR), are subject to specific licence requirements for the export, re-export or transfer (in-country) of specified items, supplemental to those found elsewhere in the EAR. The BIS Entity List imposes licence requirements before an individual or entity may transact with a restricted party.

[9] These withhold release orders were authorised under Section 307 of the Tariff Act of 1930, which prohibits the importation of merchandise mined, produced or manufactured in any foreign country by convict labour or forced or indentured labour, including forced child labour.

[10] Pub L 117-78 (2021).

[11] This amendment was part of the Trade Facilitation and Trade Enforcement Act of 2015, signed on 24 February 2016.

[12] The Consolidated Screening List can be found at www.trade.gov/data-visualization/csl-search.

[13] Although a destination control statement is not required for most EAR99 exports or most re-exports (see 15 C.F.R. 732.5(b)), it is not unreasonable for a company to inquire as to end-user and end-use information to fully assess whether an export is allowable under General Prohibition Five (see 15 C.F.R. §§ 732.3(m) (encouraging performance of ‘Know Your Customer’ due diligence) and 744.1 (regarding prohibited end uses and end users)).

[14] See 15 C.F.R. Part 732, Supplement 3 (outlining guidance for ‘Know Your Customer’ due diligence); ‘BIS “Best Practices” for Industry to Guard Against Unlawful Diversion through Transshipment Trade’, available at www.bis.doc.gov/index.php/documents/pdfs/625-best-practices/file.

[15] See 15 C.F.R. Part 732, Supplement 3 (identifying ‘red flags’: when ‘[t]he customer or purchasing agent is reluctant to offer information about the end-use of a product’; and ‘[w]hen questioned, the buyer is evasive or unclear about whether the purchased product is for domestic use, export or reexport’).

Unlock unlimited access to all Global Investigations Review content