A company’s Russia-bound shipment gets stopped by customs authorities in the UK, which claim the products are prohibited for export to Russia. After confirming that the products are indeed restricted, the company initiates an internal investigation to get to the root cause of the problem and remediate.
A whistleblower uses its employer’s compliance hotline to report concerns about possible US, EU, and UK sanctions or export controls violations. The company initiates an internal investigation to figure out whether there is a basis for the claim and, if so, what happened, what to do next, and whether to self-disclose.
Media reports based on publicly available trade data allege diversion in a company’s downstream supply chain to military end-uses in Russia. You guessed it…the company initiates an internal investigation to look into it and decide how best to address any gaps in their compliance program.
As one of the leading and largest trade and investigations teams globally, it is no surprise that our Global Sanctions Investigations Group has been assisting numerous companies on sanctions investigations. So, how do sanctions investigations start in this hot enforcement environment? These days, what causes a company to initiate an internal investigation? The answers to these questions can help with your company’s investigation readiness, so that you are not caught (at least not entirely) by surprise.
Sanctions Investigation Triggers
Some of the triggers we have come across in the past year or two include:
- Detentions of shipments by, or questions about shipments from, customs authorities
- Internal whistleblowers using the company’s compliance hotline or alerting legal or compliance personnel
- Media reports or media inquiries
- Publicly available trade information
- Subpoenas or requests for information from regulators
- Visits by regulators
- Discovery of a sanctions issue during the course of M&A due diligence
- Complaints by former customers or competitors
- Calls to service centers requesting servicing from somewhere the product shouldn’t be
- Letters alleging sanctions issues (from NGOs, government agencies, etc.)
- Bank reporting to regulators (which may feed back into #5)
Many of these investigation triggers will look familiar to those of you with sanctions investigations experience. But the globalization of sanctions and sanctions enforcement has created some new flavors of these common investigation triggers. We are noticing some of these coming up more frequently than in the past, or in different ways. To give a sense, we will dive into two of the investigation triggers we have seen come up a lot lately.
Example #1: Detentions or Questions from Customs Authorities
Generally speaking, customs authorities around the world are responsible for enforcing their jurisdictions’ laws at the border, including sanctions and export controls. Customs authorities typically have broad authority to stop any shipment for almost any reason.
With the proliferation of export controls and product controls being used as a form of sanctions, customs authorities have more reasons than ever to stop and question shipments. We have been noticing a few trends and patterns that we find to be particularly interesting:
- We are seeing customs authorities in the UK, EU and US using their authority to stop shipments more than they have in the past. Perhaps unsurprisingly, we are seeing Russia-bound shipments encounter issues at the border. We are also starting to see more questions and issues with shipments to China.
- Customs authorities are collaborating much more closely with other domestic regulators and with each other in other jurisdictions. For example, UK and Dutch customs authorities have coordinated to prevent supply of biotech goods to Russia and carry out inspections of the same at their borders.
- Sometimes an initial question is not sanctions-focused, but reveals potential non-compliance relating to sanctions, shipment detentions and further investigations by regulators. For example, following an inspection, a customs authority may ask questions about a particular product and discover that it has been misclassified and that the correct classification suggests that the product is prohibited from being exported to a country. The shipment is not destined for that country, but a neighboring country, leading to an investigation of circumvention.
Example #2: Financial Institution Reporting
Another key source of sanctions investigations may be reports made by third parties, most notably banks. The financial services sector is increasingly seen as one of the key forces in driving sanctions compliance from within the market itself, particularly given that banks and other regulated firms are required to report breaches or other suspicious activities to regulators. There are many real-life examples of this which have led to investigations and fines being imposed on the banks’ customers and other third parties involved. Common fact patterns include:
- The bank is asked to process a payment under license but identifies inconsistencies in the license coverage: the bank will likely report this to regulators and who may then issue a request for information to the underlying licensee.
- The bank has issued a performance bond in favor of a supply of goods which subsequently becomes subject to sanctions product controls prior to export: the bank is likely to report the matter to regulators who may then issue a request for information to the underlying exporters.
- The bank is asked to process a payment but identifies that one of the beneficiaries is owned / controlled by a designated party: the bank is likely to freeze the payment and report the matter to regulators who may then issue a request for information to the payer.
- The bank is asked to process a coupon payment on a bond but identifies that the issuer is owned or controlled by designated parties: the bank will likely freeze the coupon payment and report the matter to regulators who may then look to investigate other coupon payments made on the same bond.
Takeaways
In an era of heightened enforcement and increasing geopolitical tension, triggers for sanctions investigations abound. Being aware of how sanctions investigations may arise can help companies with their investigation readiness.
View all posts in the “Navigating the Impending Global Sanctions Enforcement Storm” series.
