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With national security central to Trump’s policy agenda, sanction compliance will be a critical topic for all management teams to reassess. Especially so, as nearly one third of all countries are impacted. As stewards of the company, business leaders must ensure responsible and ethical operations, which include strict adherence to sanctions. Failing to comply can expose the company to significant legal and reputational risks, which will ultimately harm shareholders' and company interests.
Key takeaways:
- Trump used sanctions as a key tool in his first administration’s foreign policy strategy, corporate leaders should expect him to do so again in his second term
- As part of good governance practice in ESG (Environmental, Social, and Governance), executive teams must fully understand sanction compliance requirements and the associated legal and reputational risks, which include financial penalties, criminal charges, shareholder lawsuits, and significant reputational damage from associations with sanctioned entities or countries
- Litigation risks arise for companies due to sanction violations, which can result in significant penalties and reputational damages
- With the broad geographical spread of corporate supply chains and target markets, they face challenges with counterparty sanction defaults
Although not always top-of-mind in the C-Suite, sanction frequency has surged dramatically over the past several years. U.S. sanctions now impact nearly one-third of all countries. This increase, driven by greater global interconnectedness and the risks posed by authoritarian regimes, highlights the growing significance of sanctions in international relations and the escalating complexity of the global economic landscape. Sanction compliance, the adherence to laws and regulations that prohibit transactions or relationships with sanctioned entities or countries, has become a critical responsibility for executive teams navigating these increasingly stringent enforcement measures.
How will Trump use sanctions?
Sanctions are currently being imposed in various regions around the world and in 28 countries, with a significant focus on countries involved in geopolitical conflicts or authoritarian regimes. Trump leveraged sanctions as a key tool in his first administration’s foreign policy strategy. However, in an extraordinary bi-partisan effort, in 2017 Congress passed the Countering America’s Adversaries Through Sanctions Act (CAATSA), which was enacted in part to limit the president’s ability to unilaterally lift sanctions on countries such as Russia.
Major areas of current sanction activity include:
- Russia, due to its ongoing war in Ukraine and related human rights violations. Trump has recently threatened Russia to add new tariffs if a deal to end the war isn’t made
- Attempting to isolate U.S. companies from cartel activities in Mexico may be impossible and leave American businesses vulnerable to sanctions
- Iran in response to its nuclear program and regional destabilization efforts
- North Korea faces sanctions over its nuclear ambitions and human rights abuses
- Venezuela is under U.S. and EU sanctions linked to corruption and democratic erosion under Nicolás Maduro’s government
- Syria has been designated a State Sponsor of Terrorism since 1929, additional sanctions and restrictions were added in May 2004. With the Assad regime now toppled, many are pressing for sanction relief to help stabilize and rebuild Syria
- Sanctions are being enforced against individuals, entities, and regimes in countries like Myanmar, Belarus, and Sudan, primarily for their roles in human rights violations and authoritarian practices
Sanctions and executive management responsibility
Executive teams typically focus on key areas such as sanctioned countries, entities or individuals, goods or services, and specific industries and activities. Their boards will also monitor how frequently management provides sanctions-related training to employees and the regularity of compliance reporting. The risks associated with sanction compliance failures are significant, both in monetary terms and in potential reputational damage.
Business leaders must stay vigilant in this evolving environment and focus on:
- Sanctions oversight and monitoring: Ensure the company has a robust monitoring system, with information effectively disseminated across all relevant teams
- Sanctions policies: Regularly review and approve sanctions-related policies and procedures, ensuring they are up-to-date and comprehensive
- Regular reporting: Management should provide frequent reports on sanctions compliance, potential risks, and mitigation strategies
- Third-party and related party risks: Boards should evaluate and understand the legal and reputational risks associated with third-party non-compliance
- Awareness and education: Directors, like employees and management, must stay informed and trained on the latest developments in sanctions
Boards of directors and executive teams can be held liable for sanction violations by their companies. Enforcement agencies are willing to take legal actions against companies and individuals for violation of sanctions, as we have seen in recent years.
Litigation risks for sanction violations
Industries with global operations, particularly in high-risk emerging markets, face substantial exposure to sanctions. Industrials, CPG, Travel, Hospitality, and Leisure, as well as Minerals and Mining, are prime examples of highly exposed and impacted industries. Violations can lead to severe consequences for companies found out of compliance, which include material fines, criminal charges, and significant reputational damage.
Recent examples:
- Unilever and P&G (2019): The SEC (Securities and Exchange Commission) charged Unilever’s Board for violating U.S. sanctions against Russia, resulting in a $1.5M settlement. This followed a similar case where the DOJ (Department of Justice) fined P&G $1.1M for violating sanctions against Iran
- Reckitt Benckiser (2020): The UK’s Financial Conduct Authority fined the company £10.4 million for breaching EU sanctions against Iran. The U.S. DOJ also charged Nestlé for violating sanctions against Sudan, leading to a $1.5M fine
In these cases, boards were held accountable for knowingly violating sanctions. Shareholders have even pursued derivative lawsuits against board members for failing to fulfill their duties.
The role of human rights groups
Human rights organizations, such as Amnesty International and Human Rights Watch, have increasingly influenced legal actions against companies and their boards. For example, Swedish prosecutors, supported by human rights groups, charged Lundin Energy executives for operations in conflict zones. Similar cases have been brought against Trafigura Group and for sanctions and environmental regulation violations.
Companies under related party sanction default
Sanction regulations and enforcement are constantly evolving. Related party risks are rising for many companies, emphasizing the importance of executive oversight. In today’s social media-driven world, the risk of reputational damage is growing exponentially.
Notable examples:
- P&G faced significant reputational harm and financial losses due to its association with a sanctioned Iranian company, resulting in a $2.5M fine from the U.S. Treasury Department’s OFAC (Office of Foreign Assets Control)
- Nestlé faced criticism for its ties to a sanctioned Russian company and subsequently announced its divestment from the entity in 2018
- Unilever faced backlash from human rights groups when it was revealed that its palm oil supplier was linked to a sanctioned Indonesian company in 2017
- ZTE Corporation came under scrutiny for using multiple affiliated entities to conduct business with Iran and North Korea, followed by the high-profile Huawei Technology case in 2018
- California-based Murad cosmetics was faced with penalties of ~$3.3M in 2023 for violating OFAC sanctions in Iran
- MetLife agreed to settle its potential civil liability for over 2,300 apparent violations of sanctions against Iran
Assessing the risks associated with third-party sanctioned counterparties and taking appropriate mitigation steps is crucial for any company, particularly consumer-facing ones. The compliance, operational, financial, and reputational risks are substantial and can significantly impact executive teams.
Actions executives can take:
To mitigate risks associated with sanctions, business leaders should:
- Establish a sanctions compliance committee with representatives from legal, compliance, operations, commercial, and finance, reporting to the Audit or ESG Committee
- Leverage technology to enhance Know Your Customer (KYC) and Know Your Supplier (KYS) systems
- Ensure periodic training for the board and executives on the evolving sanctions landscape
- Roll-out company-wide training on company’s sanction policies
Additional Telesto resources:
- Takeaways for management teams – Apple’s playbook on how to beat China tariffs and export restrictions
- China’s intensifying response to Trump 2.0 tariffs and what it means for U.S. companies
- Trump 2.0 tariffs and preparedness for Industrial companies
- Navigating corporate climate action under a second Trump administration – 7 focal points for business leaders
- Atlas, equips your organization’s corporate directors and leaders with the insights and knowledge necessary to stay up to date, mitigate risks, and seize business opportunities associated with sustainability, climate, and ESG.