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International Supply Chain Risks: How U.S. Sanctions Can Kill Your Deal

U.S. sanctions are being applied more vigorously than ever to perceived foreign foes.  What risks do these sanctions pose to our supply chains and  what Mitigation Strategies Can be Used?

The United States (U.S.) had $2.21 trillion Dollars in exports in 2016 according to the U.S. Department of Commerce (D.O.C)i, and an estimated 10.7 million U.S. jobs supported by exports ii. Yet U.S. unilateral sanctions are being applied more vigorously than ever to perceived foreign foes, negatively affecting trade balances.

One of the most important and sensitive supply chain risks for private and public organisations is how to manage U.S. unilateral sanctions. The U.S. Treasury Department Office of Foreign Assets Control (OFAC) is responsible for administering U.S. sanctions. OFAC also distinguishes between primary and secondary sanctions, with the former prohibiting U.S. persons from engaging with sanctioned entities, and the latter targeting non-U.S. persons, outside U.S. jurisdiction, engaged in activities with the sanctioned entity either directly or in an ancillary fashion. Potentially affected businesses and individuals, therefore, must regularly consult the Department of Treasury’s online resources, or engage lawyers with OFAC compliance experience, to ensure they are not exposing themselves to significant penalties (or jail time) from U.S. authorities. For international or multi-lateral organisations, unilateral sanctions risks are particularly tricky because both the U.S. and the sanctioned country, or countries, may be among their members. This article will focus on U.S. unilateral sanctions risks affecting International Organisation deals.

Why Is This A Problem?

Nearly all international organisations have clauses prohibiting contracts, transfers of goods, or even technical cooperation engagements with vendors or countries subject to sanctions imposed by the United Nations Security Council. However, these organisations are not required by international law to adhere to unilateral sanctions of any one member country against another, due to the privileges and immunities conveyed upon them by international conventions.iii In theory this means that if the U.S. imposes sanctions on Iran for example (both member countries of the U.N. since 1945), but the United Nations itself does not impose sanctions on Iran, then U.N. agencies and similarly, non-U.N. multi-lateral organisations, could continue doing business with Iran and not have to abide by the U.S.’s unilateral action. In practice however, multi-lateral agencies may find it difficult to ignore the U.S.’s persuasive sanctions arguments, despite the detriment unilateral sanctions may cause another member. Why? The United States is a major actor on the world stage, and it has considerable influence. It can wield its tremendous political and economic clout as a powerful member of nearly every international organisation in the world, to ensure its objectives are met, and that any transgressions by suppliers or international agencies, are swiftly discouraged.

What Are The Supply Chain Risks?

Supply interruption – U.S. unilateral sanctions can be applied overnight because the surprise element is very powerful in coercing the sanctioned party to comply with U.S. demands iv. Because sanctions may be implemented quickly and unexpectedly, their enactment can trigger immediate supply interruption of goods and services. All members of the supply chain can become subject to rigorous product or service inquiry to determine continued eligibility, and re-negotiation of terms is a real possibility. Suppliers may find themselves scrambling to ensure their contract doesn’t involve activities or persons that expose them to secondary sanctions.

Payment restrictions – Cash flow can also become a problem, especially if suppliers negotiate special payment terms in certain currencies. If an international agency engages a supplier to provide goods or services, and that supplier is somehow involved with a sanctioned entity, directly or indirectly, payments or advance cash transfers may get tied up by banks who suspect the transfer may reach an entity subject to U.S. unilateral sanctions. This can lead suppliers to struggle to meet contract targets or cease delivery altogether. It can also make repatriation of payments back to a payer more difficult.

Reputational Impact – Although the U.N., other multi-laterals, and their staff enjoy immunity from legal processv, suppliers do not enjoy the same protections. Sanctions can bring additional costs they hadn’t expected and they may attempt to secure compensation when things go awry. Even when the relevant law and jurisdiction for disputes is determined by the international agency, suppliers may still aggressively pursue disputes and the reputational risk for the agency if it does not comply or compensate for a presumed breach, is high. Diplomatic and political resources often prevail in settling such disputes away from the prying eyes of the press and public, however, coming to a satisfactory resolution involves time, money, and uncertainty.

What Mitigation Strategies Can be Used?

The answer is…. “It depends.” First, it’s important to understand that navigating unilateral sanctions can be a political minefield for an international organisation! Unlike private entities, there is no clear system in place to manage unilateral foreign policy objectives of one sovereign member state against another. Second, although international agencies monitor political developments of member countries, and no doubt try to avoid dealings that would disturb the delicate balance within these structures, it is not within their purview to implement unilateral sanctions against a member, unless there is consensus among all members to do so. Third, supply chain risks are inherently unpredictable. Supplier audits and screenings only show a snapshot of current relationships, not entanglements with sub-contractors or third party beneficiaries. Although parties can attempt strong due diligence and even stronger government compliance, knowing the rules to follow when caught in the web of unilateral sanctions actions is challenging.

To read the full article by Magda Theodate, please click here. 

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i U.S. International Trade Administration, Department of Commerce 2016 Exports Fact Sheet, https://ibc- static.broad.msu.edu/sites/DEC/images/resources/1159b5b1-8a59-47a1-b988-4bb1836c9904us-exports- factsheet.pdf

ii U.S. Office of Trade and Economic Analysis, Department of Commerce Jobs Supported by Exports 2016 https://www.trade.gov/mas/ian/build/groups/public/@tg_ian/documents/webcontent/tg_ian_005543.pdf

iii Convention on the Privileges and Immunities of the United Nations (the “Convention”), adopted by the General Assembly of the United Nations February 13, 1946, and which set out specific privileges and immunities for the UN and its staff subject to waiver only by the Secretary General in certain situations.

iv U.S. implemented changes to Cuba sanctions rules announced officially November 8, 2017 and taking effect on November 9, 2017, see U.S. Treasury Press Release https://www.treasury.gov/press-center/press- releases/Pages/sm0209.aspx

v See Supra note 3