International supply chains under sanctions regulation

Mainstream

Management of international supply chains under sanctions regulation is not a one-time check of the counterparty on the lists. It's the architecture of business sustainability.

The question is not whether you are complying with the current restrictions. The main question is whether the chain will remain operational if tomorrow one of the parties, jurisdictions or product categories falls under new sanctions.

Effective international supply management begins with three checks:

Do you know the real structure of the entire chain?Do you have links that are sensitive to sanctions risks?Do you have a pre-worked scenario in case of blocking any of the links?

If these three issues are not resolved, the company may one morning find that the goods are stopped at the border, the payment is frozen, and the counterparty is on the SDN-list – and there is no legal way to continue the transaction.

When Supply Chains Become Sanctions Sensitive

International supply chains require special supervision if:

• The product falls under the category of export control or dual-use
• The chain involves individuals from countries under comprehensive or sectoral sanctions.
• Contractors have beneficiaries in subsanctioned jurisdictions
• The logistics route passes through high-risk re-export zones (including the EAEU, the Near Abroad, the Middle East and Southeast Asia).
• payments are made through banks that are part of the subsanctioned banking groups
• non-standard financial instruments, settlements in national currencies or alternative payment channels are used
• the end-user or end-use is not fully transparent
• The chain involves traders, resellers, transit warehouses or companies with an unclear ownership structure.
• goods are manufactured with components originating from sanctioned or controlled jurisdictions (directly or indirectly)
• supply is provided by service contracts, insurance, transportation, subject to jurisdictions imposing sanctions

The mistake most companies make

Many companies start with the question:

How to get around sanctions faster?

That's the wrong first question.

The right question is:

How can we maintain the long-term legality and predictability of the chain?

Sanctions regulation is not static. Today’s workaround may become an independent object of restrictions tomorrow, and the use of “gray” schemes may lead to secondary sanctions, asset lockdowns, criminal liability of officials and the rupture of correspondent relations.

Supply chain management under sanctions does not require logistical improvisation, but a legally verified risk architecture.

Step 1. Build a complete map of the chain

The first thing to do is to take stock of all the elements of the supply. It is not “we buy from the distributor” but a traceable chain from the manufacturer to the final recipient.

Key elements:

• component manufacturers and finished products
• Countries of origin of raw materials and technologies
• Intermediate owners, traders, resellers
• route of movement
• customs-clearance
• Consignees, end users, beneficiaries
• Banks and financial flows along the route
• insurers, logistics, carriers, customs brokers
• availability of licensed or certified services in the chain

Without a complete map, any assessment of sanctions risks is fiction.

Step 2. Classification of goods, services and technologies

For the purposes of sanctions regulation and export control, it is necessary to clearly define:

• HS code and code for dual use
• whether the product is on the list of controlled products (EU, USA, UK and other jurisdictions)
• Whether it is subject to industry bans (e.g. oil and gas, luxury goods, marine exploration equipment)
• Does the U.S. components contain above de minimis thresholds and direct product criteria (FDPR)?
• whether the goods are military or have signs of dual use under Russian, Union or foreign legislation

In addition to the goods themselves, related services are subject to analysis: technical support, software, training, installation, service. Often the blockage is due to them.

Step 3. Conduct a comprehensive check of counterparties (screening and due diligence)

Standard checks on sanctions lists are insufficient. The full due diligence of the international chain includes:

• verification of the counterparty and its affiliates on all relevant sanctions lists (OFAC, EU, UK, UN and others)
• verification of beneficial owners to end individuals
• Analysis of ownership and control structure (50 percent rule and its modifications in different jurisdictions)
• Identification of signs of circumvention – nominee directors, offshore layers, rapid change of founders
• checking of business reputation and relations with state bodies of subsanctioned jurisdictions
• Screening of banks in which counterparties are served
• periodic monitoring (screening may not be a one-time)

Step 4. Conducting jurisdictional analysis

Not all jurisdictions are equally sanction-sensitive, and not all prohibitions are extraterritorial.

It is necessary to evaluate:

• What sanctions regimes affect the transaction (primary and secondary sanctions)
• Extraterritorial rules apply to the operation (US, EU, others)
• whether there are jurisdictions in the chain that are under comprehensive embargo (Crimea, DPR, LPR, Zaporizhzhzhia and Kherson regions, Iran, Syria, DPRK)
• whether there are sectoral restrictions related to a particular country (e.g. Russia, Belarus)
• Is it possible to apply the anti-circumvention rule to sanctioning jurisdictions?
• What are the risks of third countries participating in the chain?

Step 5. Structuring contractual protection mechanisms

The commercial contract is the main tool for the distribution of sanctions risks. Strong contract protection includes:

• Sanctions assurances and warranties about the absence of sanctioned persons and ultimate goals
• obligation to notify immediately of any sanctions changes
• right to suspend delivery or payment in the event of sanctions risks without breach of contract
• Termination clause in the event of sanctions making enforcement unlawful or commercially inappropriate
• sanctions force majeure balanced against specific sanctions regimes
• Prohibition of resale or re-export to certain jurisdictions
• the obligation of the counterparty to ensure compliance with export and sanctions rules by all subsequent links
• End-use and End-User undertakings (end-use/end-user undertakings)
• reservations on refund of payments or compensation of damages upon operation of sanctions prohibitions
• provisions on auditing compliance of the counterparty
• the right to unilateral withdrawal from the contract without penalty in the event of a sanction event

Without such reservations, any sanctions shock falls on the side that cannot fulfill the obligation, regardless of guilt.

Step 6. Assess logistics and transit risks

The physical path of the goods often overrules the impeccable compliance of counterparties.

Risks arise at the stage of:

• transshipment in ports with high risk of transshipment to conceal origin
• transit through countries from which re-export of sanctioned goods is documented
• use of vehicles or containers tracked by a ship tracking system (AIS) with abnormal behaviour (disabling trackers, transshipment at sea)
• customs clearance with distortion of the codes of the goods, country of origin or value
• participation of freight forwarders and carriers with a history of working with sanctioned cargoes

The route should be legally protected, not just logistically convenient.

Step 7. Building sustainable financial and payment corridors

Even if the product has passed all the checks, a failure in payment can paralyze the transaction.

It is necessary in advance:

• Analyze banks on all sides of the chain for sanctions risks
• Check correspondent chains, especially if the payment is in USD, EUR, GBP
• Determine acceptable settlement currencies, including currencies of countries that have not joined the sanctions
• to develop alternative settlement mechanisms within the applicable legal regimes
• Evaluate the risk of blocking payments at intermediary banks
• exclude the participation of persons from the SDN list and other blocking lists in the financial flow chain
• prepare the necessary foreign exchange and regulatory permits (e.g. OFAC licenses, national regulatory approvals)

Payment plan is the same part of the sanctions compliance as cargo inspection.

Step 8. Implementing an Internal Sanctions Compliance Program (ICP)

Without a systematic approach, one-time checks do not work. The ICP should include:

• Sanctions Compliance Policy and Procedures Approved by the Management
• Risk maps for different types of supplies, goods and routes
• Escalation procedures for detecting red flags
• regular training of employees of the departments of procurement, sales, logistics and finance
• IT tools for screening and monitoring
• Internal audit and compliance monitoring
• responsible person or unit (sanctions officer)
• Interaction with external consultants and regulators

Regulators in key jurisdictions consider the existence of a valid ICP as a mitigating factor for violations.

Step 9. Develop scenarios for anti-crisis response

The sanctions crisis is not the time to develop a plan.

Pre-worked scenarios should be in place for:

• inclusion of a key supplier in the sanctions list
• Prohibition of the supply of a specific product category
• blocking the route or transit country
• break-up
• Implementing new secondary sanctions affecting the chain
• adoption of new sanctions packages by the EU, the US or other countries
• Initiation of an investigation or request by the regulator

Each scenario should include a legal assessment, a list of immediate actions, notification templates, mechanisms for emergency chain termination or restructuring, procedures for interaction with government authorities and crisis communication.

Step 10. Ensure continuous monitoring

Sanctions lists and regimes are updated almost weekly. Continuous monitoring includes:

• automatic screening of counterparties and beneficiaries with a given frequency
• Monitoring of changes in legislation in all affected jurisdictions
• Analysis of law enforcement practices and new risk cases
• monitoring of cargo movements and vessels
• End-user and end-use verification (especially in high-risk supply chains)
• Updating internal policies and contractual forms

The international supply chain is a living organism, and its sanctioned “immune system” must operate continuously.

Avoidance strategy vs risk management strategy

In practice, companies often face a choice: eliminate risk markets and counterparties or continue to work, building a risk management system.

The choice of strategy depends on the volume of business, applicable sanctions jurisdictions, product nomenclature and risk appetite of owners and management. However, a complete departure does not always mean no risk – historical transactions, warranties and subsidiaries can maintain a legal link with the risk jurisdiction for a long time.

How to strengthen your position before problems arise

The best protection against sanctions risks is built at the design stage of the chain.

When building international supplies, it is necessary from the very beginning:

• Include sanctions due diligence in the business processes of M&A transactions, entering new markets and signing major contracts
• Diversify suppliers and routes, avoiding critical reliance on a single source
• Legally separate the flows of sanction sensitive and non-sanctioned goods
• Create “clean” and “conditionally clean” chain segments with different levels of compliance control
• budget the cost of sanctions compliance and legal support
• Create a “plan B” for each key element of the chain

The contract and the chain should not be written for a quiet market, but for a period of maximum turbulence.

Common mistakes in chain management under sanctions

1. Sanctions can come through a third or fourth link, and liability for indirect re-export is just as serious.
2. Considering that the goods were not sanctioned because they were not listed on the “yesterday” list requires legal analysis of the codes, components and applicable export control rules.
3. Regulators are actively investigating such cases, and the consequences of secondary sanctions can destroy business.
4. Only contractual guarantees and assurances with property liability can give real protection.
5. Ignore the sanctions risks in insurance, transport and financial contracts Even a flawless commodity contract will crumble if the insurer or bank refuses to service due to sanctions.
6. Do not test the chain for U.S. jurisdictions of the Direct Product Regulations (FDPR), de minimis and involvement of U.S. People make a huge amount of international supplies controlled by the United States even without explicit American counterparties.
7. The absence of an ICP not only increases the risk of a breach, but also deprives the company of protection of “good faith behavior” before the regulator.
8. In a crisis, time is the main enemy. The paralysis of management in the first days after the sanction event increases the damage at times.

Checklist for Supply Chain Management under Sanctions

Before you start or continue the chain, answer 20 questions:

1. Are all the individuals and entities in the chain identified?
2. Have all parties and their beneficiaries been screened against the current sanctions lists?
3. What is the product classification for all applicable export control regimes?
4. Are there American components or technologies in the product, and what is the percentage of them?
5. Is the product subject to industry bans (oil, equipment, technology)?
6. Do transportation routes pass through areas at risk of overload and bypass?
7. What is the end user and end use and is it documented?
8. Are full sanctions clauses, guarantees and obligations included in the treaty?
9. Is there a right to suspend or terminate the contract in the event of a sanctioned event?
10. What banks and currencies are involved, are there any correspondent chains with sanctions-sensitive elements?
11. Are licenses or permits required (OFAC, BIS, national regulators)?
12. Is there a risk of extraterritorial application of US or EU sanctions?
13. Has the internal compliance system of the contractors been audited?
14. Is there a monitoring of changes in the sanctions regimes?
15. Have sanctions risk scenarios and emergency response plans been developed?
16. Is there a legal separation between sanction-sensitive and non-sensitive flows?
17. Are there alternative suppliers and routes?
18. Does insurance cover meet the sanctions risks?
19. Are the staff trained to recognize red flags?
20. Is the legal adviser ready to cooperate with regulators in the event of an incident?

What a strong international chain management strategy looks like under sanctions

A strong strategy is built on five levels:

1. Legal Architecture: Classification of goods, jurisdictional analysis, contract structuring and building a legally clean supply chain.

2. Compliance Infrastructure Screening, due diligence, internal policies, training, auditing and IT systems.

3. Financial and Logistics Resilience Diversified payment channels, logistics routes and trusted financial partners.

4. Crisis Response Blueprint Pre-prepared scenarios, document templates, crisis management team and channels of communication with regulators.

5. Strategic Flexibility: The ability to quickly refocus the chain, take assets out of risk, and re-sign contracts without losing business.

Without a fifth level, the first four may not be sufficient if the regulatory environment changes dramatically.

Yes, in many cases – subject to comprehensive legal compliance, the correct structure of the transaction and constant monitoring. A complete ban usually applies to strictly defined goods, persons and activities.

The biggest risk is blocking sanctions (SDNs), comprehensive embargoes on the territory, and extraterritorial secondary US sanctions that can cut the company off from the dollar system and the market.

Immediately freeze operations, assess the legal grounds for terminating the contract, invoke sanctions clauses, transfer purchases to alternative suppliers, and notify regulators if necessary.

Any scheme whose purpose or effect is to circumvent sanctions is illegal in leading jurisdictions and entails serious risks of secondary sanctions and criminal liability.

There is no direct universal legal requirement, but from a practical point of view, it is impossible to manage sanctions risks without ICP, and in the course of proceedings, the presence of ICP is a key factor of protection.

No, but a correctly drafted clause gives the right to suspend, withdraw from the contract, recover damages and withdraw from the transaction without violation, which critically reduces losses.

Direct insurance of damages from violation of sanctions, as a rule, is impossible due to public policy, but insurance policies cover a number of related risks (arrest of cargo, delay, loss of goods) taking into account sanctions exceptions.

How quickly should we respond to the new sanctions?A legally meaningful response should follow immediately: blocking operations, activation of the crisis management team, first notifications to counterparties and assessment of the impact within 24-48 hours.

Liability can be imposed on any person who participated in, facilitated or failed to take appropriate measures to prevent the prohibited transaction, including top management.

What comes first: Jurisdictional Analysis or Due Diligence of the Contractor. It is impossible to evaluate a counterparty without understanding the sanctions regimes under which it falls, and vice versa.

Related services

• Sanctions, export controls and international compliance
• International trade, distribution and cross-border transactions
• Due Diligence of Supply Chain and Risk Management
• International regulatory risks and strategic advice
• Corporate investigations and business integrity
• Commercial contracts and sanctions clauses
• Crisis management and interaction with regulators

Related material

• How to check foreign counterparty for sanctions risks
• Sanctions clauses in international contracts: How to Protect Businesses Extraterritorial Sanctions from the United States: How to Avoid Secondary Risks
• Dual-use goods and export controls: practical guide
• How to withdraw from the contract in the event of a sanctions event
• Sanctions Compliance for Medium-Sized Businesses: where to start
• Logistics and sanctions: How to eliminate the risks of transit and congestion
• Payments under sanctions: Alternative currencies and banking mechanisms to investigate sanctions circumvention: EU and US practice
• Building an Internal Sanctions Program (ICP) in 90 Days

Conclusion

Managing international supply chains under sanctions does not require a set of technical actions, but a strategic rethinking of how, with whom, and under what conditions a company conducts global business.

A strong position is based on a full chain map, legal analysis of goods and jurisdictions, deep due diligence of counterparties, sanction-resistant contracts, payment corridors without compromise, internal compliance and pre-prepared crisis response scenarios.

In a world of extraterritorial restrictions, the winner is not the one who finds the way around the world faster, but the one who builds a legal architecture in which any new sanctions strike does not destroy business, but launches a managed plan of action.