As of 2016, the execution of national and international sanctions in Latvia is governed by the Law on International Sanctions and National Sanctions of the Republic of Latvia (the Law). It instructs accountants, lawyers, consumer lenders and other companies to implement internal controls for execution of sanctions. However, according to the most recent amendments, the law must be respected by everyone!
In the spring of 2018, Oleg attended a dance festival in Georgia. Police arrived to the first festival party and detained him for extradition to the United States (USA) for conspiracy against the USA, smuggling of goods, and violation of the ban on the export of arms to Russia. He spent several months in Georgian and American prisons because he had purchased a user’s manual for the American F-16 fighter aircraft on eBay. The Russian citizen Oleg Tishchenko claimed to have added the manual to his collection because he draws airplane cabins for combat flight simulation video games.
In its legal nature, Oleg’s crime is a violation of the US embargo on the sale of arms to Russia. Criminal proceedings against Oleg and the seller of the instruction manual were started because a user’s manual of military equipment– the F-16 fighter aircraft – had been disclosed to Russia. The USA regularly imposes such embargoes on F-16 and related goods and information with respect to Pakistan, Indonesia, and other countries. As soon as the case file was complete, Oleg’s arrest warrant was published on the Interpol network.
Can this happen to anyone?
Anyone engaging in transactions with sanctioned persons or goods, either for professional or personal reasons, may find themselves in a similar situation. Latvia provides for criminal penalties for violation of the sanctions or the embargo regime of the European Union (EU), the United Nations, or other organisations (but not the USA).
As of 2016, the enforcement of national and international sanctions in Latvia is governed by the Law on International Sanctions and National Sanctions of the Republic of Latvia, amendments to which were adopted by the Saeima at its sitting on 13 June 2109. Section 13(1) of the Law instructs accountants, lawyers, consumer lenders, and other companies to implement internal control systems for enforcement of sanctions. Companies working in the sectors covered by the law must also comply with the sanctions imposed by the USA.
What should a company that is not required to implement an internal control system under Section 13(1) of the Law do? Should it comply with the US sanctions if it is not required to implement an internal control system and there is no criminal penalty for non-implementation?
What should every company do?
Section 2(2) of the Law has been supplemented and currently reads as follows:
The law applies to all persons and all persons are obliged to comply with and enforce the international and national sanctions.
Hence, the Law obliges every single one of us to comply with the restrictions covered by the sanctions, such as not selling luxury car parts to importers in North Korea or donating to research in the field of physics in Iran. Since it is the responsibility of the management board to ensure compliance with the sanctions, the following issues should be addressed at a board meeting:
Section 13(1) of the Law instructs credit institutions, other financial service providers, accountants, lawyers, etc., to implement internal control systems, as these sectors are considered to face circumvention attempts more often than others and may help discover circumvention attempts. Conversely, those engaged in other types of commercial activity may use identical risk assessment criteria to understand whether they are facing the risk of breaching the sanctions regime.
The risk assessment shall be divided into three categories:
A similar evaluation should be made when creating an internal control system. Information on how to create an internal control system can be found in the guidelines of the State Revenue Service and the Consumer Rights Protection Centre available on their websites.
The most convenient tool for determining the geographical risks and get an overview of the sanctioned countries and their sanctioned nationals is the “EU Sanctions map”. For example, you will find that natural persons from Belarus and Russia are included in the EU sanctions lists, while the Russian bank “Sberbank” is banned from borrowing on the USA markets. In addition, it is advisable to use the risk levels assigned to different jurisdictions by the Financial Action Task Force, available at Fatf-gafi.org., as the basis for your risk assessment.
Thus, a Latvian company buying raw materials from Russia will need to take a closer look at its suppliers. In contrast, Kazakhstan and its nationals are not subject to any restrictions but supplies of raw materials from Kazakhstan must be assessed in the light of its relatively close proximity to Afghanistan and Iran, which could, due to their geographical location, try to circumvent the restrictions imposed on them.
Risks associated with the customer or person involved in a transaction
Companies that work with individuals or jurisdictions that may pose a risk due to their geographic location should verify their business partners, i.e. make sure their names don’t appear on any sanctions lists. If a company is required to implement an internal control system, the Law also requires verifying who the beneficial owners of its customers are. If a company is not required to implement an internal control system, it is still advisable to verify who the beneficial owners are to preserve the reputation of the company and reduce the responsibility of the board.
For example, Oleg Tishchenko is actively denying that his employer, a video game developer, was aware of Oleg’s attempts to purchase the F-16 instruction manual. If the US investigators had found evidence to the contrary, this Russian company would have been banned from engaging in business with its US partners or making payments in US dollars, and thus the US market would have become unavailable to it.
Risks associated with a product or service
Companies may also face risks posed by goods or services if persons or jurisdictions appearing on sanctions lists are prohibited to access these goods or services. Companies will most likely detect this risk when assessing their geographical risks. For example, the automotive company Daimler recently tried to defend itself in the media saying that they had no idea how the North Korean leader Kim Jong-un got hold of their armoured Maybach limousines. A dealer of used cars may have sold them to a person in North Korea, but there was no way for Daimler to prevent it. If the sellers and suppliers of these cars operate in the EU, they have violated the embargo of luxury goods on North Korea.
Should any additional measures be taken?
Consequently, each board member should evaluate their business activities and the risks associated with their cooperation partners, and understand whether any additional measures should be taken, e.g. staff training in customer and business research, implementation of an internal control system, or performance of a sanctions compliance audit.
Risk assessment in a company
Step 1. General information on territories and areas of operation of the customers and services/goods provided.
Step 2. Due diligence of customers and suppliers that are, for example, registered in Russia, located on the Syrian border, supply luxury goods to Asia, or have Iranian nationals as board members.
Step 3. Choosing risk mitigation measures – training, auditing, or refraining from transactions.
If you work with US companies or make payments in US dollars, you should also consider the sanctions imposed by the USA when implementing an internal control system. For example, the USA just imposed a series of sanctions with respect to the Iranian elite, starting with the Iranian head of state Ayatollah Ali Khamenei, that are not included in any of the sanctions lists of the EU or other international organisations.
During the first discussions at the Latvian Chamber of Commerce and Industry, a significant level of frustration was expressed with respect to the fact that the law will increase the already existing administrative burden. Yes, that is undeniably true, but we cannot naively assume that our actions have no consequences. Since any breach of the law is punishable by a criminal penalty, the money you will make out of a suspicious transaction is not worth the hassle that will result from the investigations by the State Security Service. For example, several tour operators have been prosecuted for selling tickets to Crimea. You may make an extra few hundred euros, but it could result in employee or board member arrest, seizing of goods obtained through circumvention activities, and damaged company’s reputation.
Currently, every board member needs to evaluate their business activities, customers, and risks in order to avoid accidental conflict with the law.
 Daimler says it has no idea how North Korea got hold of limousines, The Guardian, 4/26/2019