Foreign markets, navigating the sanctions

There are approximately 600 active sanctions measures worldwide, half of which have been put in place after 2020. To reduce business risk, companies need to have a comprehensive overview of potential sanctions measures in their target markets

The report published last July by Chatham House – The Royal Institute of International Affairs, the leading British think tank – provides a very comprehensive snapshot of the issue. Of the approximately 600 sanctions detected and active, almost half were issued in the 2020-23 period, and at least ten of them have been in force since the last century. Furthermore, as specified in the report, there is a distinction between UN sanctions and those imposed by individual countries or institutions (such as the European Union), since these are measures adopted unilaterally, operating "outside the international procedures and norms established under the UN”. It is precisely these latter, unilateral sanctions that constitute the focus of the research in the study conducted by Chatham House. By the end of 2023, according to the report, 94% of all sanctions had been imposed unilaterally, while only 6% had been imposed under the UN framework. The vast majority of active sanctions measures (67%), had been imposed by the US, EU and Great Britain.

For Italian companies that have decided to identify new non-EU markets, there is therefore a need to delve deeper into – in addition to the issues of tariff and non-tariff barriers, and questions concerning product competitiveness and the impact of transportation costs – also those aspects relating to the international sanctions system in order to identify, anticipate and manage the resulting business risks. A quick overview of the sanctioned and so-called “at risk” countries can be found in the following links having as our main point of reference the EU sanctions: (https://www.consilium.europa.eu/it/topics/sanctions/ or https://mysace.it/private/servizi/lite/mappa-sanzioni). It is the EU sanctions that directly impact the activities of Italian companies. It should be remembered that the restrictive measures apply to EU territory, to natural and legal persons with EU nationality, including ships and aircraft, and to economic activities conducted within the EU. However, they also impact the non-EU subsidiaries of EU companies. Browsing the European Union or SACE (Italian export credit agency) websites offers an overview of the market areas least impacted by the sanctions: North America and Latin America (with some exceptions), Australia, China, Southeast Asia, the Western Balkans, and several African countries. But this vantage point alone is not enough. Indeed, EU sanctions aim to combat international terrorism and human rights violations, and thus the targets of restrictive measures may be specific natural or legal persons. In this case therefore, regardless of the foreign country, the subject (designated person) is affected by asset freeze measures, such as the freezing of his assets and prohibiting third parties from providing him with financial assistance. To avoid such cases, which also compromise the credit risk for Italian exporters, it is advisable to acquire, right from the outset, the essential basic data for the verification (identity document, residence, date and place of birth) for the relevant natural persons (legal representative, beneficial owner, contract signatory), also to avoid false positives (e.g., two persons with the same name). For legal entities, due diligence must include obtaining information on the company's control structure and its relationships with any parent company, subsidiary, or end user in a sanctioned country.

On the subject of human rights, there are specific sanctions, such as those affecting the textile sector in the Chinese province of Liaoning, due to labor exploitation.  This type of sanction requires the company to conduct due diligence on the origin of the imported goods, also given a possible request for certification.

Trade restrictions (export and import) are those that have the most direct impact on company decisions, as they impose constraints on the export of goods to the target market (or entire sectors: such as the arms sector). This is perhaps the least problematic matter to verify. Once the customs code has been defined, the company or its forwarder will be able to determine whether the product is freely exportable or whether ministerial authorization is required (for example, for dual-use components or products) in the destination country. It is important to note that the sanctions also affect the providers of services associated with the transaction (transport, consultancy, legal services). Services affected by the sanctions also include those provided by banks and the financial system. This last point deserves the utmost attention as it directly impacts the economic and financial aspects of foreign transactions: the certainty of being able to collect payments and the ability to access banking services and financial assistance for internationalization activities. It should be remembered that banks are required to directly assess compliance (for example in the area of money laundering and terrorist financing) with monitoring and reporting obligations, which result in administrative and criminal sanctions also against individual operators. Here we can point out the role of the Banks envisaged by Law 185/90 on transactions concerning armament materials, or those on dual use goods and technologies. The banking system is also directly affected by the fund-freezing obligations and the ban on providing financial assistance set out in EU regulations and transposed into Italian law. All this makes the bank an essential partner for companies that must explore these issues in depth in relation to their development projects in non-EU markets.

Finally, other sanctioning measures such as the travel ban, which can create obstacles to normal commercial activities (business travel, participation in events), and bans on using ports and airports in certain countries for the transport of goods, with repercussions on the times and costs of freight and logistics, should not be underestimated, nor should the disconnection of a country's banks from the SWIFT system, which in effect prevents completion of transactions regardless of the good/service being traded.

Exposure to Third Countries Sanctions. Italian companies may have to deal with sanctions imposed by third countries (e.g., US sanctions), especially if they have subsidiaries and personnel outside the EU. And this is true even though, as stated in the EU sanctions helpdesk, the Union “does not recognize the extraterritorial application of laws adopted by third countries and considers such effects to be contrary to international law”. Indeed, notwithstanding the existence of this principle, US sanctions may have effects on the Italian company's US subsidiaries, its local employees, or on US nationals in Italy. It should be added that such sanctions may prohibit the use of the dollar in transactions with certain countries and, since the dollar coverage is managed by US banks, this also becomes a critical element in the management of operations. More generally, the greatest risks concern Italy-based companies with significant interests in the US market. This could lead – and not only for reasons related to sanctions – the Italian company to prioritize in its strategy a greater presence in the Mercosur markets, which are more closely tied to the US economy.

Sanctions evasion: triangulation and circumvention. The sanctions system also targets tax evasion activities. In this regard, the definition used in the EU is: “EU sanctions prohibit the act of knowingly and intentionally participating in activities that have the object or effect of circumventing the sanctions, including in activities without deliberately seeking that object or effect, but being aware that the participation may have that object or effect and accepting that possibility”. The cases referred to are mainly triangulations on third countries (defined as circumvention hubs due to geographical proximity or close relations with the sanctioned country) and through intermediaries. These are cases in which the company is required to take a proactive approach towards the counterparty, aimed at identifying the end-user and preventing sanctions evasion, for which the company remains responsible.