The Decisive | Season 3 Ep.8 - Navigating Sanctions: Insights on Trade Compliance

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Kristen Hallam  

Welcome to The Decisive Podcast brought to you by S&P Global Market Intelligence. I'm your host, Kristen Hallam. In this episode, we're discussing sanctions and trade compliance with Byron McKinney, Product Management Director for our Trade Compliance Solutions. We're recording this ahead of the S&P Global Market Intelligence Sanctions and Export Control User Group seminar, which will be held at S&P Global's New York City headquarters on the 1st of April. This event will bring together trade compliance people from the financial institutions, shipping and corporate worlds to discuss the latest developments in international sanctions affecting business. Byron, welcome back to the podcast. It is great to have you on The Decisive.

Byron McKinney  

Thank you very much, Kristen.

Kristen Hallam  

Let's start with the 30,000-foot view, if you will. Byron, what do you see as the main challenges in sanctions and export control currently?

Byron McKinney  

So it's a great question to start with because I think the main challenges which people see from a very much a practical point of view today is the regularity of actual circulars, advisories, recommendations which come from agencies, whether that's from the U.S., the EU, the U.K. almost feels as if there's maybe one every week or every fortnight at the moment, which could affect anyone across sanctions: sanctions within the export control side, within shipping maritime on corporates, individuals, whoever it is, there seems to be a lot of it. And obviously, the more there is, the more scope, the more regularity of the controls themselves. It means that businesses and firms need to then take that and incorporate it back into their risk and compliance screening program. You almost have the sense that there's probably a lot of compliance fatigue at the moment within firms and organizations in trying to manage this on a regular basis, stay ahead of it as well and remain compliant. And just in the way of a few examples, already in January this year and December last year, there have been some very significant updates and changes. And the challenges of incorporating that are pretty big. So in the U.K., we've had the guidance for exporters, which was provided for those within the financial institution, the corporate world as well in being able to understand if you're shipping goods across borders, who are your end users, what are the end usage of those products and items, how are they being used by particular firms. So that kind of reiterated a few things across certain types of goods, high-risk goods, countries in which they go to, whether they were transit or transshipment points, all of that kind of information as well. And it played on what came out of the EU from December 2024 as well and previously too, around various clauses in reference to a kind of a no Russia kind of element to trade in a way and trying to understand who your end user was, whether the final destination for your goods was Russia. And off the back of that, I think one of the most significant pieces from last year was the U.K. and the EU's move to what is generally known within the compliance world now as a secondary sanctions light program. So obviously, the United States has a secondary sanctions element to its regulation, which means that anyone who has a U.S. nexus, whether it's U.S. dollar trade, U.S. goods, so you have a U.S. officer within your company, meaning that you have an open door to OFAC or other U.S. agencies to be able to sanction you or to regulate you in some way. That kind of exists to an extent on the U.K. and the EU side as well, not quite as robust as the U.S. one, but it's now there nonetheless. So the U.K., for example, in relation to Russia, where it sees the advancement of Russian strategic aims in terms of goods from a high-tech electronic perspective or standpoint, making its way to the country, the EU and the U.K. now have the ability to maybe sanction outside of its own jurisdiction, another company or another firm or individual. So these are all pretty significant, I feel, and they're just adding to the burden of compliance in general.

Kristen Hallam  

That's a lot in the past couple of months, as you said, definitely lots to keep an eye on there. Byron, could you walk us through common high priority goods? What are they and how many items are classified in this way?

Byron McKinney  

Yes, sure. Common high-priority goods have been with us for a while now since maybe mid- to late 2022, where they kind of started off originally as commodities of concern. So the United States Department of Commerce and also FinCEN, another U.S.-based agency, listed, I think, at the time, maybe 10 items by the ECCN number, the economic classification control number and then type of or description of the item as well. Since then, we've gone through many different variations and iterations of those original commodities of concern, where they're now known as common high-priority goods, and they take into account 4 different tiers. So you have Tier 1 to Tier 4. Tier 1 is known as the most high-risk items, which are high risk because there are certain types of microelectronics, integrated circuits and chips. which have some usage in certain types of military technology, which can be used by Russia and obviously, others as well, but mostly by Russia on the battlefield within Ukraine. So those items are seen as the most high priority, and they come under export control guidance and regulation as a result of that. There is an agency or organization now known as the Global Export Control Coalition, which covers countries in North America, in Europe, some in Asia as well, who have started to socialize and be joined up in terms of the items and goods which are on the high priority list. And they make sure that they stay in sync with each other. So those 4 tiers of goods have a lot more energy and focus in terms of how they're regulated from those particular countries. And they've evolved in some way. The latest items which are added to that list was the 4B category around machine tools. So those are the latest ones back in February 2024. But since then, we haven't really seen much in terms of new products or items being added to, just more on the enforcement of those existing items.

Kristen Hallam  

All right. Got it. Let's talk about sanctions evasion for a moment. What are some of the main ways shippers try to evade these sanctions that you've just been walking us through here?

Byron McKinney  

Yes. So the key ways of trying to evade those sanctions are the ones which have existed for quite a while now. So there are not necessarily any kind of new evasion tactics or techniques. But what we do see are the use of kind of tried and tested formats. The one which is the most obvious is kind of Shell front companies, which sits between maybe a sanctioned entity or a high-risk entity, which then aim to try to obscure the origins of who is facilitating the shipment or who is the person who will be receiving the shipment of goods. Obviously, lots of these Shell front companies are based in countries which are light touch in terms of regulation also. If you're trying to evade sanctions, you don't want to do so from somewhere which is high risk in terms of it has a good set of regulation, good enforcement, et cetera, et cetera. You move to areas where things are a little easier for you to navigate and walk around. So you still see a lot of that in place as well. And that exists for traded goods and export controls. But then there are also other ways in which people have tried to evade sanctions, which regulators especially from the U.S. and again, Department of Commerce have tried to raise the profile of. So they have a new list of behavioral red flags, which have probably been around for a while and people are mostly aware of, but they put a bit more emphasis on those. And the emphasis is around when a company was set up. So was it pre-2022 or post 2022? New companies obviously have a slightly higher risk attached to them. But then those companies are then more high risk, dependent on the type of goods which they're involved in trading. So again, it comes back to the common high priority goods list. If they're trading goods within those 4 categories, the company was set up post 2022, they're a company which doesn't really have much of a footprint, which you can find through open source Internet searches, for example, or maybe that company just has 1 or 2 employees, but is dealing in very sophisticated high-value goods, then these kind of generate red flags for people who are trying to capture and identify these people from compliance perspectives. But those are generally the key tactics which are in use today. None of them are really very new. They are tried and tested, but they still exist now. And people are trying to use different ways to manage sanctions evasion.

Kristen Hallam  

You mentioned red flags there. I wanted to ask you about a different type of flag, fraudulent flags. Our data shows an increase in the number of ships registered with a fraudulent flag. What does that mean, Byron?

Byron McKinney  

So fraudulent flag basically are just ship nationality or the flag in which the vessel sails under which they haven't changed or they're no longer sailing with. So for example, you might have the flag of whoever it might be, and you're still under that flag in terms of where you think you're registered or where you're trying to give the impression you're registered. But that flag doesn't have you on the books anymore. You've left that flag. So that kind of fraudulent piece there is basically something which you're no longer attached to, but you're trying to give the impression that you are. And we see this as being on the rise, and it's mostly for kind of vessels who have skirted sanctions or maybe they have been sanctioned as a vessel or a vessel owner, but are trying not to get to the bottom of the barrel and scrape the bottom of the barrel by going through all the different flag states they potentially could get to. And then this is the endpoint. You're just -- you can't go anywhere else. You've been moved away from light touch regulation flags, for example. So you're flying a fraudulent one to try and give off the impression that there's something different or better, which you have attached to that status. But yes, as we mentioned, it is on the rise, and we see a lot more, especially on the liquid bulk tanker side where shadow vessels, shadow fleet use a fraudulent flag for certain purposes.

Kristen Hallam  

Who should be concerned about the rise in fraudulent flags?

Byron McKinney  

So I think the people who should be most concerned are those within the tanker and the bulker community within maritime shipping. Obviously, as we just mentioned, the shadow fleet of vessels are more likely to be using fraudulent flags anyway. And for the point we also raised as well around in the bottom of the barrel where you've been to some of those who have not raised too many concerns or questions about your behavior, but you've left those flags and now you're having to work with a fraudulent flag or give the impression you're working with a flag which isn't fraudulent. So those within the maritime space who need to understand where ownership is, trying to understand where a red flag may be cropped up or where it's identified are those who should be able to try to spot it as quickly and as easily as they can because it is one kind of indicator within many others, which will tell you that there's something maybe not quite right or suspicious with that vessel. And this is probably likely to open up a can of worms where you would see a fraudulent flag, you're likely to see other fraudulent areas around red flags, maybe warnings within that vessel's movement history, ownership history, for example.

Kristen Hallam  

Now you mentioned Russia at the top of the podcast, and I wanted to come back to that. We heard in an earlier episode of The Decisive that there is likely no resolution to the war between Russia and Ukraine in the near future. Following elections in the European Union last year, have we seen or do we expect to see a change in the approach to sanctions against Russia from the EU government?

Byron McKinney    

I think from the EU perspective, probably not. I think despite what has been in the news over the last couple of days, couple of weeks, I think the European Union still wants to keep pushing forward with certain sanctions on Russia, whether that's from an export control trade perspective, but also maritime in terms of the price cap policy. So I think those are still likely to continue from the EU side. There is a new package, which is likely to come up next week from the EU anyway, which I think is then going to be the 16th package of Russian trade sanctions. And we will see some -- maybe something significant on the maritime side as well. And what the knock-on effect of doing something like that would actually lead to is probably unsure. But I think for the moment, the European Union does seem to want to push ahead with sanctions on Russia. And I think the 16th package next week kind of underscores that. And I think we'll probably see more beyond that as well.

Kristen Hallam    

Now we also had elections in the U.S. last year, and we're about 1 month into President Trump's second term. Have we seen or do we expect to see a change in the approach to sanctions against Russia from the U.S. government?

Byron McKinney    

Yes. So I think the U.S. one is probably more challenging to work out where it's likely to go and what is maybe going to change. So there's obviously going to be some change of some kind because there's talks ongoing now with the U.S. government has now met with the Russian government and their representatives in Saudi Arabia. So we expect something to come from there, which is going to impact sanctions. I think on the maritime side is maybe where we're likely to see the most impact. And there might, in the short term, be a tightening of sanctions. And I think maybe whilst we do see something in the short term, I think in the long term, maybe the oil price cap from the U.S. perspective won't remain for very much longer. So there is the potential there for that piece. But I think on the export control side, and when we come to the high-priority goods and the battlefield electronics, which Department of Commerce and Department of Treasury have put in place over the last 2 years, I don't see there being too much of a change to those items, to those goods. I think they will stay in place. From the U.S. government perspective, they will probably be seen as national security initiatives anyway because they do take into account certain types of electronics, AI, high-tech supercomputing. And I think that does still have a relationship back to China as well. So I don't think that piece will change. I think the export control bit will continue as is. And maybe with the kind of the joined up initiatives we've seen across the G7 and other countries as well. I think that also might continue, too. The big change is more likely to be on the oil price cap and with the maritime shipping sector.

Kristen Hallam    

So like we were saying earlier, lots to keep an eye on there, lots of moving parts. Byron, how do the views of key stakeholders such as businesses and foreign governments influence the effectiveness of sanctions?

Byron McKinney    

So I think there's probably a few things there in terms of how it can be influenced and how sanctions can be made effective as well. So I know there's always outreach from regulators and government departments who put in place sanctions. If we go all the way back to May 2020 when the Department of Treasury in the United States first released its Maritime Advisory, which was quite a large document and went to some great detail as well where it talked about all the various sectors who are working with shipping from the bank all the way down to the ship's captain as well, which then laid out certain types of typology, which could be managed by each individual sector. That was a fairly large influential document, which went through many different forms of iteration with people from various businesses within trade finance, supply chain and others as well. So there is that kind of influencing and factoring of what happens and how it's actually done. And then I think on the other side, from the business perspective, there obviously are instances where businesses do have the ability to feed back into government regulation and sanctions, as to how it works, how effective it is. And there are occasions where regulators do sometimes get it wrong because they haven't been through that process as well. So there are some cases where if you don't do that outreach, it can go wrong. But I think maybe lessons have been learned and we've seen, as I mentioned, from May 2020 onwards, the feedback loop and the mechanism is there and it does work, and it is a valuable thing to have.

Kristen Hallam    

So Byron, what do you see as the future challenges in sanctions and export control? And what types of businesses should be concerned about those challenges?

Byron McKinney    

Yes. So this is a really good question, a really great point because there are certain sectors and certain types of products, commodities, which I think are more under the spotlight than many others. And I think the one which is likely to be looked at in the coming months and coming years is around the kind of supercomputing AI sector. which I think from a U.S. perspective, U.S. government regulatory perspective is the one which is going to be the big thing to concentrate on. So that's going to be the next area where we will see many more controls, sanctions applied. I think today, even what we've had over the last 6 to 12 months, which is being focused on these items, there have been various technologies, which have been more in the spotlight. So this is separate to common high priority items. This is the quantum computing, supercomputer type areas. And we can see that there's been a lot of export control work here, which has been outside of the normal frameworks where export controls generally come from. So export controls generally come from multilateral conventions, which many countries have signed up to, but those are maybe being seen as more less dynamic and slower to get to this point to be able to control them. So you've seen certain countries go it alone. And obviously, the United States has been one of those where it's adapted and modified its own export control regulation to try and capture these easier and quicker in trying to hold back China and other countries from acquiring those technologies. And I think that's where businesses should be most concerned because if you're already in that sector, then obviously, there will be companies who would have already reacted to it. But I think it's dragging in more companies, more firms who within the semiconductor, high-tech electronics materials sector who are probably being dragged into this but maybe weren't previously. So this is the one area I'd say people should probably concentrate on more because I think that's where the regulator is going to concentrate.

Kristen Hallam    

That's a top tip. Well, it's time for us to wrap up our conversation. Byron, any final thoughts for our listeners?

Byron McKinney    

I think maybe the final thought, as I've mentioned, I think the EU 16th package rumored to go out next week is the key one to look at just to see what the EU actually has in that document because I think things are changing in terms of relationships between the EU, the U.S. and whether the European Union will go ahead and will have a kind of a stronger tactic when it comes to Russian trade sanctions. And I think the one thing to look at in that document is there's likely to be new vessels, which will go on to the EU's sanctioned list, whether any of those vessels are actually different to anything which we've seen from the U.S. and the U.K. My doubt is they won't be. They'll probably just align themselves. But I think if we do see anything new in terms of vessels within the shadow fleet or high-risk vessels, which have been participating in trading above the oil price cap figures, then that would be quite significant, I feel. And just the last point, plus also the rumor which is out there that vessels which are poorly maintained, of high age, or just not up to spec, which are traveling through European waters could be detained for inspection. That bit, I think, would be very controversial, but maybe we might see it next week. That's something to very much, I think, look out for to see how that plays out.

Kristen Hallam    

All right. And we'll leave it there. Thank you so much, Byron, for taking the time to share your insights with us. And that wraps up this episode of The Decisive podcast. Until next time.