In an era where regulatory compliance is under intense scrutiny, the importance of a well-orchestrated response to trade and sanctions investigations cannot be overstated. An investigation may involve transactions occurring in multiple jurisdictions, laws of separate jurisdictions, and inquiries from (or disclosures to) multiple governmental authorities.
Investigations may begin through an internal whistleblower or other internal discovery, which grants the company more discretion in directing the tempo and scope of the investigation. In other instances, investigations may be prompted by an inquiry or subpoena from a regulator, in which case the timing and scoping may be outside of the company’s control. We further discuss various sanctions investigation triggers here.
Regardless of the nature in which an investigation starts, what are certain critical first steps that need to be considered when approaching any investigation? In this blog post, we discuss three immediate priorities for most investigations: (i) containing the damage, (ii) determining scope of potential violations, and (iii) preserving documents and data.
Containing the Damage
The first step is to find ways to “stop the bleeding” while the relevant investigation is pending. This can be tricky, especially if the subject transactions are ongoing. A company could face a dilemma in pausing transactions so as to avoid additional violations or engaging in the same transactions due to commercial and other reasons but with heightened awareness as to the potential illegality of the conduct.
- This review often needs to be the highest priority because the risk of continuing the same transactions can result in significant and additional liability exposure.
- Further, sanctions, customs, and export controls enforcement guidelines of various jurisdictions often tend to look to the degree of knowledge as one of the key factors in determining the outcome of a government investigation (e.g., the amount of a monetary fine or the potential criminal liability).
- Companies should also be aware of whether any types of countersanctions could be at play.
- Various jurisdictions, including the UK, EU, China, Canada, Russia, and many others, increasingly have various countersanctions measures that could prohibit or restrict conduct under unilateral (often US) sanctions.
- China, often at the center of geopolitical tensions, has developed a full array of countermeasures over the past few years in response to foreign trade restrictions, primarily imposed by the United States and European Union on Chinese companies. These include unilateral sanctions, often termed “retaliatory” sanctions, a blocking regime akin to the EU’s blocking statute, and data protection and anti-espionage measures.
- Striking the balance between such local countersanctions while containing compliance damage is critical and trickier than ever.
Determining Scope
Sanctions investigations frequently involve matters in multiple geographic locations, which members of our Global Sanctions Investigations Group support locally and globally. Multijurisdictional violations are often systematic or share common root causes, especially for multinational companies with a centralized or global sanctions compliance program. Companies need to tackle the potential scope of the relevant issue at the outset of an investigation to minimize duplicated efforts and not miss key issues. Below are some common examples that highlight this point:
- If a company discovers shipments to Russia through Turkey in violation of US law, it may also have undetected shipments to Russia of the same nature through other countries at high-risk for Russia diversion (e.g., Kazakhstan).
- Certain errors tend to be systematic and repeated given the way companies often manage compliance around such issues. For example, errors related to import or export classification, country of origin, customs valuation (especially related party customs valuation), export licensing, etc. are types of errors that can repeat themselves throughout a company because they tend to be centrally managed.
- Transactions in one country can implicate sanctions of other jurisdictions. Most prominently, US law can grab transactions that do not appear to have obvious US touchpoints due to its extraterritorial nature and active docket of enforcement cases by the US Government. Transaction that involve parties in multiple jurisdictions mean all relevant jurisdictions should be reviewed.
Preserving Documents and Data
A company must also think through ways to preserve the relevant documents and data, to protect the integrity of the investigation and establish a defensible methodology. This analysis should include, for example,
- which company records are at issue,
- what specific information about the investigation should and
- should not be included in the relevant communication, who should receive the notice, etc.
Companies also need to have a thoughtful discussion as to which parties/teams should and should not be involved in the investigation.
Companies may also need to weigh relevant IT capabilities as to how to scope and manage the litigation holds process if they are used. If there is any indication that the relevant communications were transmitted through unconventional channels or outside of the company’s network, specific measures may need to be implemented to capture those communications.
It is equally important to ensure any type of data collection is done in compliance with applicable data privacy and employment laws, particularly if data needs to be transferred between multiple jurisdictions. Incorrect management of data could cause the company to not only violate sanctions but also one or several data privacy and employment laws.
Takeaways
In an era of heightened enforcement and increasing geopolitical tension, being aware of the first key steps of an investigation is important and can help companies with their investigation readiness. Although the above measures should be prioritized at the outset of the investigation, these measures are likely to be relevant throughout an investigation. Even once an investigation has begun, organizational blind spots, unanticipated government inquiries, and/or external whistleblowing are not atypical features of a “normal” investigation and may require revisiting these “first step” discussions.
This post is part of our blog series Navigating the Impending Global Sanctions Enforcement Storm. Stay tuned for upcoming posts on voluntary self-disclosures, cross-border interviews, data protection, and many more topics published through 2024.
View all posts in the “Navigating the Impending Global Sanctions Enforcement Storm” series.
Frank Pan is a partner of FenXun Partners who is a premier Chinese law firm. FenXun established a Joint Operation Office with Baker McKenzie in China as Baker McKenzie FenXun which was approved by the Shanghai Justice Bureau in 2015.
