Q2 2024 compliance overview: Evolving sanctions and human capital requirements
The second quarter of 2024 saw a rise in sanctions directed toward third-country support of Russia, as well as Iran. Recent months also proved eventful on the ESG front, with various European regulations being approved and unveiled, while artificial intelligence was a pressing point for legislators.
Despite these developments, the first half of 2024 has been quiet on the enforcement front. According to FCPA Clearinghouse, a joint project between Stanford Law School and Sullivan & Cromwell, the first six months of the year have seen five enforcement actions (four from DOJ and one from the Securities and Exchange Commission), down from 27 and 22 throughout 2022 and 2023, respectively.
Sanctions target third-country support
In Q2 2024, 2243 new sanction records were implemented globally, representing a 2.8% increase in total sanctions compared to Q1, according to Diligent data.
In May, the U.S. Department of the Treasury added almost 300 Russia-related records to the Office of Foreign Assets Control (OFAC) SDN List (Executive Order 14024), targeting "dozens of actors" in countries such as China, Belgium and Slovakia that "have enabled Russia to acquire desperately needed technology and equipment."
June saw 300 additional sanctions targeting Russia, with the Treasury expanding its definition of Russia's military base so that foreign financial institutions could be sanctioned for “conducting or facilitating significant transactions" or "providing any service" to entities and individuals blocked pursuant toExecutive Order 14024.
That same month, the EU Council expanded restrictive measures related to Iran's support of Russian war efforts against Ukraine.
"We are increasing the risk for financial institutions dealing with Russia’s war economy and eliminating paths for evasion," said Secretary of the Treasury Janet Yellen. “Today’s actions strike at their remaining avenues for international materials and equipment, including their reliance on critical supplies from third countries."
Companies need not look far to see the consequences of noncompliance. In April, the president of U.S. import company Metalhouse was sentenced to six years in prison and a $160 million forfeiture for conspiracy to commit money laundering to promote violations of U.S. sanctions against pro-Russian Ukrainian oligarch Sergey Kurchenko.
Other notable developments to emerge this quarter include OFAC removing Zimbabwe Sanctions Regulations 31 CFR from the Code of Federal Regulations, following the termination of the national emergency in March.
ESG compliance evolves
The second quarter saw significant developments in ESG regulations, with Europe's long-awaited Corporate Sustainability Due Diligence Directive (CSDDD) receiving final approval from the European Council in April and being formally adopted in May.
The directive requires EU-based companies with upwards of 1,000 employees and a global turnover exceeding 450 million euros ($490 million) to monitor and mitigate their activities related to human rights and environmental protection across various phase-in periods between 2024 and 2028. CSDDD will also require applicable companies to adopt climate transition plans to make their business model compatible with the Paris Agreement.
Member states will create supervisory authorities to investigate and impose penalties on non-compliant firms, which includes “naming and shaming” and finescosting up to 5% of worldwide turnover.
The U.K.'s analog to CSDDD, the Commercial Organizations and Public Authorities Duty Bill (COPAD), which seeks to hold companies accountable for failures to prevent environmental and human capital-related harm, also passed its second reading in the House of Lords.
Recent months also brought forth delays to ESG regulations. In May, the European Council opted to delay the Corporate Sustainability Reporting Directive (CSRD). The legislation will now come into force in July 2026 for companies outside the EU, while sector-specific disclosure requirements have also been pushed back.
In the U.S., the highly debated SEC Climate Rule has been voluntarily stayed by the commission while awaiting a judicial rule on several lawsuits that have been consolidated in the U.S. Court of Appeals. However, this has not ceased outside pressure on the rule, with a group of 35 republican lawmakers urging the court to vacate the rule.
Despite the uncertainty surrounding emerging regulations, compliance teams should be proactively ensuring their policies and processes are aligned and sufficiently robust to align with upcoming requirements.
“Businesses need to think ahead and make decisions based on reliable assessments of the likely future legal and regulatory environment in which they will compete. Strategic and operating plans need to be put into place with financial support and management incentives designed to support desired outcomes,” said Todd Baker, senior fellow at Columbia University’s Richman Center for Business, Law and Public Policy, in a recent blog post.
EU clamps down on artificial intelligence
Compliance teams have been granted more time to prepare for fast-approaching artificial intelligence (AI) regulations, with the EU AI Act's compliance deadline being pushed back from July to August.
The regulation applies to all providers, deployers, importers and distributors of AI systems that market or serve AI system clients, as well as users of AI systems in the EU and classifies AI into four risk categories, with varying levels of regulation and restrictions. Noncompliance with the legislation could incur fines exceeding $38 million or 7% of global company turnover.
Artificial intelligence is forming a key part of upcoming global regulations, with the NIS2 Directive coming into force in October, while the EU's Digital Operational Resilience Act (DORA) will be introduced in January for financial entities.
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