Geopolitical Risk: How Sanctions Increase Supply Chain Risks

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Learn How to Assess Compliance Implications When Supply Chain Disruptions are Possible. Get the First Steps to Protecting Against Geopolitical Risk.

In the current geopolitical climate, dealing with compliance issues under the present US administration has become a challenge not just for domestic compliance officers, but also for those in the UK, Europe, Canada, and Mexico.

Sanctions have significant implications for companies everywhere. In 2018, the US withdrew from the Iran nuclear deal, restricting various persons and entities from generally doing business with Iran. Companies with business interests in the country will be required to cease business activities within a certain “wind-down” period, after which, if the goods and services of their contracts have not been fully provided or delivered, either the subsidiary or Iranian company will have extremely limited remedies by which to recoup their losses. The implications of this are far reaching, and it will be important to adapt quickly in the coming year.

How Sanctions Increase Supply Chain Risks

You may not think you’re at risk from sanctions imposed on other countries. However, the impact can have a domino effect, and companies need to look beyond their Tier 1 suppliers. Their suppliers likely conduct business with thousands of smaller companies around the world, all linking back to the primary corporation. Global sanctions require corporations to have visibility into their supplier base at the secondary and tertiary levels – and even beyond. Aside from the legal ramifications and loss of goods and services, further consequences could include the loss of financing by US banks, the loss of US shareholders, and the inability to continue US operations. You can clearly see the devastating effect violations can have not only on the entity at fault but throughout its entire supply chain. It’s important to be prepared for sudden political changes and foreign policy pivots. Every organization should have a plan for adapting to change in a volatile political environment.

How to Assess Compliance Implications

Compliance Week’s Joe Mont identifies three things companies should do to begin to formulate a plan for Iran sanctions in Navigating the Unchartered Waters of Geopolitical Risk, a Compliance Week e-book sponsored by Dun & Bradstreet:

  1. Identify touchpoints. The first step companies should take is to identify their Iran-related touchpoints, both direct and indirect. Questions to consider include:
    • Do any non-US subsidiaries conduct business with Iranian counterparties?
    • Where do your ships port?
    • Are you transacting in US dollars?
  2. Assess touchpoints. “What companies should do is take an inventory of their activities related to Iran,” said Theodore Kassinger, a partner at law firm O’Melveny. That involves not only assessing existing contracts, but also having solid answers to these questions:
    • What delivery schedules exist, and how do they fit into the wind-down period?
    • What’s in the pipeline for potential contracts that could be awarded?
    • What payments are owed?
    • Which operational processes have been put in place to handle business with Iran?
  3. Review existing contracts. Companies should also review existing contracts with Iranian counterparties and any other agreements that touch Iran to assess how to fulfill the terms of the contract, or terminate it, before the wind-down period ends. For goods or services not fully provided or delivered to an Iranian counterparty, “suppliers should be in discussions with their Iranian customers on how to handle matters already contracted for that may not be completed within the wind-down periods,” Kassinger said.

If your due diligence strategy can’t quickly adapt to changes in the geopolitical landscape, your organization is at risk.

You need to ensure your compliance risk program screens for the beneficial ownership of all parties you do business with and that it includes a documentable audit trail. That information should also be communicated clearly to relevant stakeholders, including employees, subsidiaries, portfolio companies, and other business partners.

The First Step to Protecting Against Geopolitical Risk

Steve Klemash, Americas Leader for the EY Center for Board Management, recommends that leaders ask themselves the following questions to guard against risk:

  • Am I addressing geopolitical risk in a comprehensive fashion?
  • What is the most comprehensive approach around strategic implications, financial reporting and compliance implications?
  • What analysis tools should I be using?
  • Is management supporting actions taken regarding these risks?

Making an honest appraisal of where your organization stands and what changes need to be made to be responsive to any shifts in the geopolitical environment is the first step in protecting yourself against geopolitical risk.

To learn more about the implications of geopolitical risk, click the link below and download the Compliance Week e-book:

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