In the world of sanctions compliance, the main focus of 2022 was the Russia-Ukraine war. G7 policy makers continue demonstrating a strong commitment to cooperation. The set-up of the Russian Elites, Proxies, and Oligarchs ("REPO") Task Force and the OFSI-OFAC enhanced partnership last year are good examples of this multilateral cooperation. Since the war outbreak, new sanctions measures have been introduced at an unprecedentedly rapid pace. Businesses and governments are still adapting to the changes resulting from the sanctions measures – including energy shortages, and rising commodity prices, to name just two.
Turning our eyes to China, the sanctions and export control activities in 2022 continued the regulatory trends we had seen in the previous year.
The following are some key takeaways:
- U.S. regulators continued restricting the export of critical technologies to China. The U.S. has especially tightened the export control of certain technologies, e.g., electronic design automation ("EDA") and advanced chips. Restrictions on end users were extended. Almost 70 entities were added to the BIS Entity List last year. While the U.S. Department of Defense extended the Chinese Military Companies list by 13 entities in October, no new entity was added to the OFAC Non-SDN Chinese Military-Industrial Complex Companies List ("NS-CMIC") in 2022.
- Human rights accusations remain a key reason for China-related designations. Uyghur Forced Labor Prevention Act ("UFLPA") came into effect in June 2022. A new UFLPA Entity List was introduced at the same time. In 2022, over 50 Chinese individuals and entities, as well as 157 Chinese vessels were added to SDN lists. Most designations were made under the Global Magnitsky, Iranian and North Korean programs. Furthermore, several BIS Entity List additions were due to the alleged use of forced labor. No new listing was made under the Hong Kong program.
- China is further strengthening its legal framework of export control. In June, China Ministry of Commerce issued the Export Control Regulations for Dual-Use Items (Draft for Public Comment) in order to streamline the export regulation of dual-use goods as defined in China's Export Control Law. The Unreliable Entity List remains empty. In September, the Measures for the Security Assessment of Data Exports took effect, setting requirements for exporting important data and personal information.
- Taiwan gained attention as a source of sanctions risk. In 2022, the Chinese government announced only a handful of sanctions on foreign officials and entities – the majority of those were related to activities allegedly supporting Taiwan's independence. The cross-strait relationship between China and Taiwan will likely remain a key risk area to monitor in the coming years.
U.S. regulatory measures against China accelerated in the second half of 2022. This trend is expected to continue into 2023. U.S. Deputy Attorney General Lisa Monaco publicly called sanctions "the new FCPA". There seems little doubt that U.S. regulators and enforcement agencies will step up their regulatory supervision and enforcement actions in the future. We recommend that multinational companies consider the following measures to stay prepared for the increasing regulatory challenges:
- Actively monitor sanctions policy updates, enforcement trends, and assess the risk exposure based on their business and operational footprint.
- Establish a sanctions compliance program if they have not done so and regularly revisit its effectiveness, including testing of relevant internal controls.
- Enhance the business continuity plan to incorporate measures in response to sudden escalations of sanctions and export control measures in sensitive industries and regions. This is especially relevant to corporates producing or trading dual-use goods or technologies on the Critical and Emerging Technologies List, such as advanced computing and aero engines. This also applies to financial institutions as they must take swift actions to implement new regulations.
- Diversify supply chains to reduce the business impact of unexpected disruption caused by potential sanctions in high-risk regions and industries.
AlixPartners has deep expertise in assisting financial institutions and corporates to develop sanctions compliance programs, manage supply chain disruption and overcome operational challenges. Please reach out if you have any inquiries relating to this article or our services.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.