text: Why Sanctions and Trade Controls Are Not Working: Key Insights From Our Recent Webinar
  International sanctions, as well as trade and export controls, have ramped up since the onset of Russia’s invasion of Ukraine in February 2022. Yet, evidence suggests that despite these measures, restricted goods are still making their way into Russia through alternate channels.
  To explore this issue, Dow Jones Risk & Compliance hosted a webinar bringing together experts with backgrounds across government, research and the corporate world to share their diverse perspectives on what the international community can do to improve the ongoing sanction regime against Russia. Below are the key takeaways from the webinar, including an analysis of why sanctions may fail, strategies to enhance compliance and steps organizations can take to prepare for the evolving sanctions landscape.
  Gavin Proudley (GP) |
  Georgi Kantchev (GK) |
  Jack Crawford (JC) |
  Gail Lee (GL) |
  Core Takeaways: Why Sanctions May Fail and Best Practices for Corporations to Ensure Compliance
  During the webinar, experts discussed why sanctions on Russia and related entities and jurisdictions are not working as effectively as initially anticipated.
  Our participants highlighted three potential pitfalls that can create an avenue for sanctions evasion: global complexity, diplomatic issues and the need for enhanced compliance.
  GK: Russia was heavily impacted by imports and supply chain disruption immediately after the start of the war, especially regarding crucial items such as semiconductors and dual-use goods and items that can have both civilian and military applications, such as certain chemicals or electronics. However, both the Russian government and companies linked to or supplying the government war effort were able to adapt within months with the help of China and other countries that are not part of the sanction regime. As a result, Russia is now seeing increased trade with China and using neighboring countries in Central Asia and the Caucasus region as diversion nodes.
  Jurisdictional and Diplomatic Issues
  GK: The EU has passed 11 sanction packages, with a 12th package likely incoming soon. Tools such as diplomatic pressure in Central Asia and the UAE to stop trade have been ramped up. We haven't seen secondary sanctions yet, which are also an option. Resources are needed for sanction monitors in the local countries. Armenia, as a successful example, is tapering off as a diversion destination after being a key transit country.
  Increased Necessity for Enhanced Compliance
  When implementation and enforcement of sanctions are fragmented, as is currently the case with Russian sanctions and diversion routes, gaps can emerge for sanctioned entities to exploit.
  A discussion continued around best practices for sanction compliance and how they can be tightened by corporations beyond the bare minimum required by law. Gail Lee shared recommendations from her experience as the head of trade compliance at Atlas Copco:
  - Risk-based due diligence: Focus resources on high-risk transactions, geographies, products and business partners using a risk-based approach, consider the knowledge about well-known diversion routes and typical red flags and go beyond the minimum required screening
  - Creating a culture of compliance: Instill a high-level commitment to compliance from company leadership to set the tone for the entire organization to uphold sanctions
  - Increased cooperation between the private sector and public authorities: Proactive sharing of data and best practices with public bodies and authorities provides better insights to other companies and countries about red flags, circumvention routes and importing companies created for sanction evasion
  GL: Our Business Area operated a local distribution center in Russia, supporting customers in that region and surrounding areas, who all ordered our goods via this hub. After the closure of this hub last year, many of these customers outside of Russia (who are not sanctioned or linked to any sanctioned entity) continue to order our goods, but now have to order via our EMEA or UK locations instead. This means on first impression that our sales to certain regions surrounding Russia have increased (for example to Kazakhstan), which could indicate a red flag for diversion. However, for these existing customers, there are no red flags or increased risk, it is simply a new trade route which avoids Russia. Regardless, and to ensure we are still managing diversion risk here, all customers in those surrounding regions go through enhanced screening per transaction. This means they must certify that our goods are for their own use and will not be supplied to any other entity or to any other country. We haven't seen those end-users going somewhere else because of our enhanced compliance, and have had no issue in obtaining these certifications.
  JC: The goal of sanctions is not to create an absolute stop, which is difficult in the best circumstances, but to create a “quicksand” environment. With workarounds requiring more financial resources and effort, actors may cease attempting workarounds at all.
  The Impact of Technology on Sanction Effectiveness
  Technology offers new avenues for sanction compliance, including advanced data analytics. These tools help analyze complex trade data, revealing potential evasion networks.
  However, their effectiveness hinges on the sharing of information and data. This can be challenging due to commercial sensitivities. Moreover, the adoption of these technologies requires significant investment in skills and tools. Companies must carefully consider these costs against the benefits of implementation.
  JC: Governments are already enhancing cooperation, as seen in the European Commission guidance to help operators assess at-risk supporting circumvention networks. Opportunities exist for investment in data analysis tools and visualization tools to facilitate cooperation between public and private sector research organizations. Intergovernmental cooperation is already increasing, in terms of data and forums and institutions sharing information, as seen in an approach the Dutch government is taking.
  Contemporary Challenges in Sanctions and Trade Control
  GL: If our organization does not supply goods because our enhanced screening raised red flags, the customer will likely try to obtain them from somewhere else. Hence, it is unlikely that the circumvention gap can be completely closed. As JC noted, the “quicksand effect” is making it more difficult, and that is what the goal of sanctions ultimately is.
  While there are several challenges associated with sanctions, the participants' discussion focused around three areas.
  - Diplomatic relations: Russia's invasion of Ukraine led to unprecedented sanctions packages, severing existing supply chains and creating commercial challenges, particularly for European companies used to dealing with Russia for imports and exports. Diplomatic relations with countries enabling diversion are now severely tested.
  - Re-routing of goods: Russia adapted quickly, increasing trade with China and using third countries to reroute goods, challenging enforcement.
  Financial and Compliance Issues
  - Weighing costs vs. compliance: Corporations not only face commercial decisions such as investing in trade compliance, but also reputational risks and practical challenges in closing operations in Russia.
  - Financial flows: Complex, shifting sanctions environments create compliance hurdles such as changing supply chains and inquiries or freezing of payments by banks.
  - Public-private knowledge sharing: Governments could enhance cooperation and explore public-private partnerships to improve enforcement.
  - Improved compliance frameworks: Companies can conduct enhanced due diligence, requiring end-use certificates for high-risk jurisdictions.
  Preparing for the Evolving Nature of Sanctions and Compliance
  JC: Our organization traces the flow of Western microelectronics and related components into Russia’s defense industry. However, this is just one category of goods being illicitly procured by Russia to sustain its invasion of Ukraine. For example, automated machine tools, construction materials, polymers and fiber materials are all required for the production of military equipment. Polymers are especially difficult to sanction because they are widely used for legitimate reasons.
  Panel speakers also shared ideas and best practices from their research or organization’s internal measures in two key areas.
  Adapting Compliance Infrastructure
  - Risk-based due diligence: Companies should evolve toward risk-based due diligence processes that can flexibly adapt to new sanctioned parties.
  - Proactive monitoring by financial institutions: Financial institutions are already very cautious and should keep up proactive monitoring of customer’s financial flows, sometimes going beyond legal requirements.
  Building Compliance Cultures
  - Regular training: Frequent instruction ensures personnel across functions understand the latest sanctions risks.
  - Messaging from leadership: Constant communication sets the tone for the entire organization to diligently uphold sanctions.
  - Information sharing with business development functions: Sales teams should be informed whenever sanctions guidance is updated.
  - Going above and beyond: Companies can implement policies that exceed legal minimums to reduce risks.
  Implementing Webinar Insights
  Effective sanctions implementation is challenging, particularly when dealing with entities whose hallmark is diversion risk. To strengthen compliance defenses against diversion risks, companies and compliance officers must integrate strategies into their strategic planning such as risk-based due diligence approaches when dealing with exports. Moreover, continuous learning and rapid adaptation on both corporate and government levels are essential, as sanctions regimes and circumvention tactics continue to evolve swiftly.
  This discussion has been edited and condensed for clarity.