Import/export companies know firsthand that the world is a complicated place. Trade sanctions put in place by the U.S. government represent another layer of complexity—sometimes several layers—for any company trading with overseas partners or companies that serve the import-export business, such as shipping lines, freight forwarders, or insurance companies. Even the most sophisticated American corporations active in international trade can inadvertently violate U.S. trade sanctions, and the consequences of such missteps can be costly.

Recently, for example, a container shipping company operating in the U.S., but with a parent company based abroad, settled allegations that it had shipped cargo unlawfully to two Middle Eastern countries in violation of U.S. trade sanctions. Eventually, the company paid a little more than $3 million in penalties, dodging the bullet of much higher penalties (as much as $61 million), in part because the company cooperated fully with the government and because it agreed to change the way it conducts business to help prevent future violations.

Smaller companies need to be just as wary of running afoul of U.S. trade sanctions. Back when trade sanctions were in force against Iraq, a Florida citrus company ordered $1 million worth of Brazilian concentrate to be shipped to the U.S. to mix with its orange juice. That transaction sounds like a world away from the turmoil of the Middle East, but the company remitted its payment to Banco Brasileiro-Iraquiano, a Brazil-based entity that also happened to be controlled by Iraq. The company lost its payment and faced a $250,000 fine for violating the sanctions.

Over the years, trade sanctions have grown more numerous and, perhaps, are more likely to trip up the unwary. That’s especially true for U.S. companies used to importing or exporting from Western Europe or Japan, where historically the risk of violating sanctions has been low, though not unheard of. When such companies venture into the developing world, however, they need to be more circumspect.

U.S. sanctions and OFAC

Some U.S. trade sanctions are well-known and country-specific, enacted as long ago as the Cold War. More recent sanctions include those against terrorist groups and narcotics traffickers. Cuba and North Korea are subject to the broadest of the country-specific sanctions, which are sometimes termed embargoes to reflect their completeness. Simply put, no U.S. person (and that includes all corporations and partnerships) may export or import goods or services or technology to or from those nations; have any dealings with goods originated there; or use vessels owned by Cuban or North Korean entities. Banks may not finance ventures that involve trade with these countries, and insurance companies must scrutinize their policyholders’ business activities to ensure that the insurance they provide does not facilitate violation of these prohibitions.

Other country-specific sanctions are less comprehensive, though still fairly tight, such as prohibitions against most trade with countries such as Burma (Myanmar), Iran, Syria, Somalia, and Zimbabwe. In some cases, companies can trade with these nations if they obtain a license from the U.S. government, but in all cases the regulations are quite specific, often banning trade in specific goods and services. For instance, no goods of Burmese origin may be imported into the U.S., but there is no prohibition on the export of goods to Burma—except for any kind of money or financial service, such as bank drafts or letters of credit. Here too, insurers must scrutinize their policyholders’ business activities to ensure that the insurance they provide does not facilitate violation of these prohibitions.

Sanctions also have a tendency to change over time. Those against Iran, for example, have grown stricter since the Iranian hostage crisis more than 30 years ago, and may grow even tighter in wake of recent accusations that Iran planned to assassinate a Saudi diplomat in the U.S. By contrast, the sanctions imposed on Iraq beginning in 1990 have all been lifted, and long before the Libyans overthrew the Gaddafi regime, the U.S. ended sanctions against that country when (among other things) it discontinued its program to build nuclear weapons.

Besides entire countries, U.S. sanctions also prohibit dealing with organizations, groups, and individuals known in government parlance as Specially Designated Nationals (SDNs). Until his death in 2011, Osama bin Laden was probably the most notorious SDN, but he was only an infamous example among many. Currently there are more than 6,000 SDNs around the world. SDNs can be front companies, non-state entities, or individuals in the service of targeted countries or groups. They also can be terrorists or narcotics traffickers. U.S. persons are prohibited from any transactions with SDNs and must freeze any property under their control in which an SDN has an interest.

The U.S. government agency tasked with enforcing sanctions is the Office of Foreign Assets Control (OFAC), a part of the Treasury Dept. The agency investigates sanctions violations, provides information about how to avoid violating sanctions, and maintains the complete list of SDNs. American citizens and permanent resident aliens must comply with OFAC regulations, but so must branches, agencies, and offices of foreign companies in the U.S., regardless of where they are headquartered. Entities owned or controlled by any of the above—most importantly foreign subsidiaries of U.S. corporations—also fall under the jurisdiction of OFAC.

OFAC enforcement is generally through civil penalties, often negotiated before the case can go to court. Egregious violations, such as shipping rocket launchers to Somalia or supercomputers to North Korea, can be the bases of criminal cases against violators. Recent settlements show that OFAC is enforcing sanctions more vigorously than ever before. About $3.5 million worth of fines were collected by the agency in 2008, but during 2009, collections spiked to $772.4 million, based on some large cases. In 2010, collections were about $200 million, and 2011’s total is on track to top $100 million.

Complying with sanctions

U.S. companies doing business with foreign nationals and corporations aren’t expected to become authorities on the OFAC SDN list but must practice due diligence when it comes to their foreign customers. Sometimes this is no more than common sense. For instance, a request by a previously unknown individual to ship a quantity of dual-use product—items with peaceful uses, as well as more violent applications, such as ammonium nitrate fertilizer—to a post office box in the London Borough of Newham ought to prompt the company to further investigate who the individual is and what he/she wants with the goods.

Commercially available software exists to scan import/export documentation against OFAC’s SDN list, flagging matches or close matches or even suspicious patterns that might require further investigation. OFAC itself is a wealth of information when it comes to sanctions. A summary description of each particular sanctions program may be found on OFAC’s Web site, along with the text of the relevant regulations in the Federal Register. A regularly updated SDN list is also on OFAC’s Web site, including a country-by-country list of SDNs. The agency also maintains a hotline for companies to report cases in which they believe they’ve found a valid match in their documents to a name on the SDN list. It should be noted, however, that OFAC typically doesn’t give an “all clear” in a borderline case, but will say that a transaction is forbidden if that is the agency’s determination.

Complicating matters for importers and exporters is the fact that the Bureau of Industry and Security (BIS) of the U.S. Dept. of Commerce maintains separate lists for the programs it administers, including the Denied Persons List and the Entity List. The Denied Persons List consists of individuals and companies that have been denied export and re-export privileges by BIS. The Entity List consists of foreign end users who might divert U.S. exports to the development of weapons of mass destruction.

Unfortunately, the goals of the BIS lists and the SDN list are too much at odds for them to be combined into one list, so companies need to have some familiarity with all of them.

Companies with high volumes of business elsewhere in the world need a well-developed internal program to comply with sanctions—one that’s taken seriously by both executives and employees. The program need not be onerous in its complexity, but it does need to provide documentation of a company’s due diligence efforts. Such programs have two distinct benefits. The obvious one is preventing violations, but it’s also true that OFAC considers the implementation of a program as a mitigating factor when violations do occur. Companies with serious compliance programs tend to receive lower penalties in the event of a violation.

Another important strategy in dealing with sanctions violations is cooperation with OFAC, whose guidelines specifically state that self-disclosure of violations, along with cooperation during an investigation, can mean significant reductions in penalties. Such cooperation is especially important in cases in which it’s difficult to tell whether violations are intentional or not. It’s a bad situation for any company if OFAC decides that the company is willfully violating sanctions or has devised elaborate ruses to hide violations. In a worst-case scenario, not only will OFAC be involved, but possibly BIS or the Dept. of Justice’s Counterespionage Section or the U.S. Attorney’s National Security Section—a potentially crushing welter of legal woes for even the largest company.

As the developing world becomes more prosperous, the opportunities for American companies to make money in international trade improve. Sanctions can be nettlesome, especially for those companies who refuse to educate themselves about them. For more astute international traders, large or small, complying with sanctions may be a cost of business, but they know that ignoring sanctions can be much more costly. wt