In recent years, the luxury goods sector has faced increasing scrutiny over compliance with and enforcement of international export controls, particularly in the wake of geopolitical tensions and subsequent changes in regulation. For providers of high-end products, standards are important, and not just the standards of a jewelry, automotive, or clothing range, but compliance standards.
Failures in compliance can trigger not only regulatory penalties, but they can also potentially damage brand equity and cause loss in company value if share prices take a dip.
Since 2022, there has been an increase in sanctions targeting Russia and other high-risk jurisdictions, including export control restrictions. In the European Union, for instance, the export of luxury goods to certain countries is now subject to strict controls. Thresholds are set at relatively low values—such as a €300 limit for individual items.
These types of rules are designed to curb the movement of goods to sanctioned entities or territories. Importantly, these rules apply not only to direct exports but also to indirect sales through intermediaries. Companies may look at implementing controls to try to prevent their products from ending up in sanctioned destinations—whether through retail channels, wholesale operations, or third-party distributors.
The consequences of export control violations can be severe. Regulatory authorities may impose substantial fines, initiate legal proceedings, or stipulate additional, ongoing monitoring and reporting. In Europe, penalties are determined by national agencies, which may vary in their approach. In the U.S., the Bureau of Industry & Security (BIS) imposes fines and publicizes enforcement actions related to the luxury goods restrictions.
Reputational impacts can be felt by brands who have come under scrutiny or been the subject of enforcement action due to compliance failures. However, fines and reputational harm are only a part of the story.
Another cost of compliance failings, which extends beyond the regulatory sphere, can come in the form of investor action and market responses. Active investors, such as hedge funds, may view compliance failures as a signal of deeper governance issues, and in some cases, this could impact investor confidence.
Luxury goods providers can adopt robust strategies to assess export control-related risks and conduct effective screening. Steps might include:
For investors in luxury goods businesses, export control compliance may be increasingly viewed as a material financial risk. There may be exposure due to weak compliance controls or insufficient oversight of a supply chain and distribution network. To better protect their portfolios and proactively manage risk, investors may consider:
The potential cost of compliance failings in the luxury goods sector is not limited to regulatory fines. Market discipline, driven by active investors, can mean companies are impacted in other ways and therefore need to approach export control compliance as a strategic priority.
By investing in robust risk assessment and screening processes, businesses can better protect their reputation, maintain investor confidence, and safeguard their market share in an increasingly complex regulatory environment.
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