Manufacturing in Times of War: A Guide to Navigating Sanctions Lists Amid Global Conflicts

Lenin once said there are decades where nothing happens and weeks where decades happen. The current period seems to be one of the latter, especially for global manufacturers. As they were rebuilding supply chains post-COVID-19, the Russian invasion of Ukraine threw them into disarray. Governments swiftly imposed packages of new sanctions, causing chaos for UK-based manufacturers. The result of increased sanctions, no-fly zones and heightened red tape led many organisations to suspend their Russian operations – cutting off a vital revenue channel. A strategic decision that  contributed to a £612 million impairment charge in British American Tobacco results.

In the wake of the invasion of Ukraine, manufacturing businesses suddenly found themselves facing a deluge of new regulations. Quickly followed by the Houthi-itched attacks on ships in the Red Sea and the fears of the Chinese invasion of Taiwan, compliance teams and suppliers found themselves with little refuge from risks anywhere near the war-torn areas – whether on land, sea or air. This led to many businesses facing halted productions, longer shipping times and severe reputational damage due to being associated with sanctioned suppliers and entities, often leading to massive public boycotts and even shutdowns.  

Sanctions come in all shapes and forms! But among these, trade sanctions on imports and exports are complex, full of legal jargon and often come with heightened commercial and reputational risk.

War and terrorism-related sanctions continue to grow each year; with the Russian invasion of Ukraine adding 1,800 alone since February 2022. It's fundamental to take a deeper look into what each ‘often misinterpreted’ type of sanction means and some real-life examples of the risks they carry.

Trade sanctions, embargos & restrictions

As the name implies, these sanctions prohibit a company, industry, or organisation from trading with a sanctioned regime. Recently, the UK imposed new import bans on Russian metal, diamonds and vodka. These could be imposed in the form of barriers such as the application of fees or taxes on the import of goods, like raising taxes on Russian Vodka by 30%. Other barriers include limiting or outright banning certain goods. Most notably, the UK and EU began to phase out their use of Russia’s biggest exports, oil and gas.

While these actions were designed to penalise the regime and financial control of Russia’s president Vladimir Putin, they have impacted many small businesses and even large businesses and their consumers with a significant spike in energy prices.

Sanctions on Specially-Designated Persons

The latest wave of sanctions is pressing news for manufacturers of all sizes - large ones with global, complex supply chains and diverse partners, and SME manufacturers who are less equipped for the particularly time-consuming and resource-intensive due diligence processes. Nileema Ali, Product Manager at Creditsafe has spent over 16 years managing risk and compliance teams across major financial institutions and suggests the best methods for managing the growing compliance burden with three basic tenets of compliance.

Even if your current portfolio is clean, sanction lists change with time and compliance best practices evolve alongside them to encompass the latest industry trends. There's no need to reinvent the wheel! Instead of falling victim to non-compliance, auditing your existing risk exposure or elements of the supply chain has the potential to protect your business from any potential risk.

Compliance teams must remain vigilant about complex and private ownership structures, as sanctioned entities often hide behind these to extend business ties. For example, enhanced due diligence is essential if your organisation uses suppliers from Xinjiang, China, where forced labour camps have implicated major brands like Nike. 

Business is all about mitigating risk and maximising opportunity. But how much risk can the business inherit? Your business may need to rely on cross-border suppliers to grow, or even remain competitive. Yet, if you’re caught entering a relationship with the wrong business, it can have severe reputational damage that even the biggest brands struggle to shake off. 

Sanctions lists are always changing, and keeping track of these changes can feel like analysing a giant geopolitical chessboard – a process which is typically manual-heavy and puts extensive pressure on already strained resources.

SMEs and large manufacturing firms face similar risks, though the nature of their exposure differs. SMEs generally have simpler, less geographically dispersed value chains, resulting in lower risk. However, they can still be vulnerable to sanction breaches due to opaque financial transactions and supply chain connections with hidden ties to Russian routes.

In contrast, large manufacturers deal with complex, multi-country supply chains, presenting a greater threat and necessitating continuous monitoring of third-party risks.

In recent years, technology has evolved rapidly to support manufacturers, enabling real-time global visibility of their suppliers and automating the risk management process. These advancements allow manufacturers to effortlessly track and monitor their global supply chains with enhanced accuracy and efficiency, identifying and mitigating potential risks before they escalate and impact the business. This real-time oversight not only ensures that manufacturers can safeguard their business operations but also enhances their regulatory compliance processes, providing a robust framework for maintaining standards and meeting industry requirements

Technology will continue to play a pivotal role in helping businesses strengthen their due diligence processes. SME manufacturers will continue to grapple with a lack of access to resources, preventing them from staying up to date with the latest myriad of new sanctions and best practices.

On the other hand, although large manufacturers find themselves with compliance teams at their disposal, the complexity and sophistication of their global supply chains cause delays and bottlenecks when looking to conduct thorough due diligence into the UBOs.

However, it's important to remember that digital due diligence platforms are not designed to be at the forefront of your compliance efforts. They are designed to complement and enhance an existing compliance management framework. Done well, manufacturers equipped with a well-planned compliance framework and a dependable platform will likely thrive in the face of a volatile global landscape, which is expected to last into the distant future.