Traders face sanctions challenge “odyssey” as geopolitical risks reformat global markets

Commodity traders are operating in an increasingly fragmented sanctions environment where geopolitical developments can determine not only whether a transaction is lawful, but whether it can be financed, insured and ultimately completed, according to a briefing from law firm HFW.

In the briefing, authors Daniel Martin, HFW partner, and Amanda Rathbone, HFW knowledge counsel (commodities) said that sanctions compliance has evolved from a specialist legal consideration into a central strategic concern for commodity businesses trading oil, gas, metals and agricultural products.

Martin and Rathbone warn that the sanctions environment is changing so rapidly that risks can evolve significantly during the lifecycle of a single transaction, from initial negotiations through to shipment, financing and payment. As a result, companies are increasingly being forced to reassess traditional compliance processes and adopt broader, more dynamic risk management strategies.

they wrote. “It is much higher on the agenda and for good reason: depending on the jurisdiction, it can determine whether a trade is both permissible and economically viable, whether banks will finance it, whether insurers will cover it and whether the board and shareholders are willing to back it.”

They frame today’s sanctions environment as an “odyssey” for international businesses, drawing parallels with the trials faced by the mythical Greek hero Odysseus. Rather than navigating a single obstacle, commodity traders are now confronted with multiple, overlapping challenges that can shift unexpectedly as political priorities change.

Widening gap

Among the most significant challenges identified in the report is the growing divergence between major sanctions regimes. According to HFW, the US, European Union and the UK are no longer necessarily aligned in their approaches to countries such as Russia and Iran. This divergence has created a complex compliance landscape in which an activity permitted under one jurisdiction’s rules may face restrictions or heightened scrutiny under another’s.

“Businesses operating internationally now have to manage several overlapping, sometimes conflicting, sets of restrictions,” the authors note.

The report also highlights how sanctions programmes have expanded beyond their traditional focus on military, dual-use and advanced technology goods. Governments are increasingly using sanctions as instruments of broader geopolitical policy, meaning that ordinary commercial activity and seemingly routine commodity trades can now attract scrutiny.

At the same time, countermeasures adopted by other states are adding additional layers of complexity. HFW warns that efforts to comply with one jurisdiction’s sanctions requirements can sometimes increase exposure to conflicting regulations elsewhere, creating difficult commercial and legal dilemmas for international trading businesses.

Additionally, when companies based in Europe, the UK or the US withdraw from sanctioned markets, commercial activity often migrates to jurisdictions that have not adopted comparable restrictions. They caution that while the fact that a particular trade “has migrated outside its traditional markets does not, by itself, point to improper activity”… “the potential involvement of participants willing to disguise the true nature of a transaction through intermediaries, opaque corporate structures, unusual trading routes or misleading documentation”.

The report recommends that shipping businesses pay close attention to changes in counterparties, routing arrangements, ownership structures, documentation and payment mechanisms, as these can all be indicators of sanctions-related risk.

Secondary worries

Another area of growing concern is the increasing use of secondary sanctions. Historically, secondary sanctions were designed to influence the behaviour of non-US entities by restricting access to American markets and opportunities. HFW notes that the consequences have become far more severe, particularly given the possibility that non-US companies themselves could become designated sanctions targets.

“The commercial calculation can now be considerably starker,” the authors said. “The possibility that a business itself might be designated can operate as an extremely powerful means of changing behaviour outside the sanctioning state’s ordinary jurisdiction.” They add that for international traders, shipowners, insurers and banks, such a designation “may in practice be existential”.

The briefing also points to increasing expectations from regulators, who now expect companies to investigate broader sanctions risks throughout a transaction rather than relying solely on screening immediate contractual counterparties against sanctions lists.

As sanctions lists continue to grow, traditional screening methods are increasingly strained. Although technology can eliminate many false positives, more complex cases still require detailed human assessment, said HFW. Meanwhile, entities seeking to evade sanctions have become increasingly sophisticated in their methods, creating further pressure on compliance teams.

This includes examining who ultimately controls a counterparty, where goods originate, how they will be transported, which financial and insurance institutions are involved and why a transaction has been structured in a particular manner.

The report also advocates bringing sanctions assessments much earlier into the deal-making process. According to the authors, sanctions reviews should no longer be treated as a final-stage compliance exercise but should instead become part of the initial commercial evaluation of an opportunity.

“Before committing significant resources to an opportunity, traders need sufficient visibility over the supply chain, counterparties and payment arrangements to decide whether the trade is realistic,” they said.

Martin and Rathbone believe sanctions complexity is unlikely to diminish. They identify three major trends that commodity businesses need to understand: continuing divergence between sanctions regimes, greater emphasis on understanding ownership and supply-chain risks rather than simple list screening, and increasing judicial involvement as sanctions-related disputes reach the courts.

The authors conclude that sanctions compliance has become a strategic discipline that extends far beyond legal departments and now influences market selection, financing relationships, insurance availability and corporate risk appetite.

“There is no obvious end to this particular odyssey,” Martin and Rathbone concluded.

Source: Baltic Exchange by Carly Fields