Mr. Scherlofsky is Partner at RSB International (USA) and external Senior Advisor with Grant Thornton (Austria). He is furthermore a member of the leading sanctions specialised body ACSS (the Association of Certified Sanctions Specialists) that is headquartered in the U.S. but has also branches in Europe. Mr. Scherlofsky operates out of Vienna and focuses on corporate clients in CEE.
As an expert in the field, can you please shed light on the actual or soon-to-be effective measures and regulations that the logistics industry might face when it comes to sanctions compliance?
Sanctions is about “national security and foreign policy”. It is about geopolitics – and again a top priority for policy makers, law enforcement, and intelligence services. The days of global free trade without special concerns about the future and risks of sources and markets are over. The current geopolitical market reality is likely to worsen before there is any sign of improvement. In Europe, understandably most focus is now on Russia. However, there is another global issue that is likely to supersede this. The escalating and historically unique systemic rivalry between China and the West is one that for many years will stir up tensions, compliance issues, and global markets; way beyond what we see today. The US National Security Strategy – the highest document of relevance in that matter – calls the 2020s as being “the decisive decade” in the competition between the blocs.
For businesses, this brings Geopolitical Risk Management to the forefront. One key component of this is staying compliant with, and anticipating, sanctions. Nowadays, not only in the U.S., but in Europe too, authorities get tough on sanctions enforcement. A German businessman just got sentenced to six years in prison for sanctions violations, trying to sell civilian equipment to the wrong parties. If a logistical service provider is involved in such a transaction – even without intent – it nowadays faces severe consequences.
But there are unique opportunities in such an environment too. The businesses that are professionally prepared can outsmart paralyzed, insecure, and mistake-driven competitors. EU corporations must comply with both EU sanctions and export controls, and also the broader and riskier US sanctions programs. This U.S. jurisdiction over European companies is based on cases with a so called “US Nexus”. Such as in most cases with international payments, or when using US IT services or technology. It is almost impossible to not consider both EU and US sanctions when operating cross border anywhere in Europe.
Can you share examples or case studies that shows how the management of compliance issues make a real difference within the logistics sector?
A very telling case that has been made public by the U.S. authorities is that of Australian Toll company. Toll is an international freight forwarding and logistics company from Melbourne.
Thereby the U.S. sanctions authority OFAC (Office of Foreign Assets Control) confronted Toll with 2,958 of its payments that involved the U.S. banking system, for logistical services with sanctioned parties and territories. Occurring between 2013 and 2019. OFAC assessed the compliance failures behind the case, and found the company’s behaviour to be “non-egregious”. Not least because it considered that Toll properly voluntarily self-disclosed.
However, the number of violations, and the failures identified, nevertheless resulted in a settlement where Toll had to pay more than 6 million USD.
The problematic logistical services covered sea, air, and rail shipments, and have been conducted by Toll, its affiliates, or its suppliers. Whereas the problematic payments were originated or received by Toll’s overseas entities (in Asia, Europe, Middle East, North America). Thereby a U.S. jurisdiction was caused due to the fact, that the international payments were “processed through at least four financial institutions in the United States or foreign branches of financial institutions incorporated in the United States”.
The deeper practical problem was according to OFAC, that Toll rapidly grew by purchasing small freight forwarding companies around the globe; while in OFAC´s assessment not ensuring “a requisite increase in compliance resources”.
Interesting. What were the key factors considered by OFAC in this case?
OFAC identified both aggravating and mitigating factors. Among aggravating factors, Toll displayed “reckless disregard” for U.S. sanctions law, ignoring warnings and indications of compliance issues. Mitigating factors included Toll’s lack of prior OFAC violations, voluntary self-disclosure, and extensive remedial actions taken, such as restructuring its compliance division, implementing sanctions compliance training, and introducing risk-based screening of transactions.
What yould you say, are the key takeaways from this?
I would like to stress out that, OFAC emphasizes the responsibility of non-U.S. businesses conducting international payments through the U.S. financial system. The case underscores the need for careful transactions to avoid dealings with OFAC-sanctioned countries and persons. Additionally, it highlights the importance of integrating recently acquired entities and counterparties into the compliance framework effectively.
Who are typically your clients in this particular industry, when it comes to the size and geographical scope of business of the companies?
We have clients ranging from Austrian SME to some of the largest financial institutions in the world. Our typical logical clients are SME in Central Europe – active mostly in Europe and Eurasia. However, we also have some large logistical service providers in the rail operator sector.
Can you give any advice on what strategies or best practices such organizations can adopt to proactively address sanctions-related risks and to keep track of the transnational regulations?
To avoid severe punishments and exclusions from markets, businesses must adequately and proactively try to avoid any sanctions or export violations. For other than the smallest businesses, this due diligence obligation is expected to be conducted within an established Sanctions Compliance and Export Control Program.
This is utmost pertinent when doing business in markets that carry compliance risks, where US authorities expect businesses to go dig deeper. Such as when doing business related to Turkey, UAE, Kazakhstan and other countries considered “high risk” for sanctions evasion. Or when doing business related to the energy sector or dual use goods.
In these scenarios, Enhanced Due Diligence is required. This goes beyond what most businesses or even attorneys can provide using standard procedures. Rather, special skills and access must be applied, whether developed inhouse or via external service providers. The solution for businesses starts by conducting a sanctions risk assessment, and then map out and adequately simplify the complexities of US and EU regulations relevant to their business and risk picture.
Then, based on that, establish a risk-based, tailored Sanctions and Export Compliance Program. One that also de-conflicts and balances between EU and US legal obligations. Whereas such a program should be designed to not only comply with the laws, but to improve one’s position vs. competitors. By better knowing how to navigate an increasingly sanctions affected world.
On a daily basis, it is about smooth processes that conduct either quicker or deeper sanctions due diligence with regard to all of their business contacts, depending on what the tailored Program points towards. Especially before executing larger transactions or onboarding critical customers or partners, businesses must conduct extensive research into the background of their targets, partners, customers.
That sounds crucial for companies operating in today’s complex business landscape. Could you tell us about the key services RSB International and Grant Thornton Austria provide to corporate clients and how they benefit from them?
Such risk assessments, program development or improvement, and due diligence reports are services that RSB International and Grant Thornton Austria provide to their corporate clients in Europe and the US. With such services, companies mitigate their risks, and reduce the chance of costly violations substantially. When nevertheless mistakes happen and the U.S. or European authorities knock at a CEO’s door, the outcome for the affected companies and managers will be much better if authorities see that such diligence and services had been conducted. After all, this shows “management commitment” and a dedication of resources to sanctions compliance, as expected nowadays. If you don’t spent some money and time on sanctions compliance, and you are more than a tiny one man operation, authorities consider your commitment less and less adequate.
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