DOJ Task Force KleptoCapture charges highlight expansion of US efforts to detect and prosecute sanctions evaders

The Department of Justice (DOJ), crediting Task Force KleptoCapture, has announced charges against five Russian nationals and two US nationals in connection with a scheme to help the Russian military and intelligence agencies evade sanctions.[1]

The defendants, charged on December 13, were allegedly affiliated with Serniya Engineering and Sertal LLC, two Moscow-based wholesale machinery and equipment companies that, according to the DOJ, were part of a wide-ranging illicit procurement network of international shell companies and bank accounts under the direction of the Russian intelligence apparatus. 

Serniya and Sertal were added to the US Department of Commerce Bureau of Industry and Security (BIS) Entity List in March 2022 and were designated – along with other individuals and alleged front companies in the United Kingdom and Spain – by the US Department of the Treasury’s Office of Foreign Assets Control (OFAC) for their alleged roles in illicitly procuring dual-use equipment and technology for Russia’s defense industry.[2]

The superseding indictment announced by the DOJ alleged that one or more of the defendants:

• at the request of Russian end users, unlawfully purchased and exported millions of dollars in military-grade ammunition and highly sensitive electronics, equipment, and technology used in quantum computing, nuclear and hypersonic weapons, and space‑based military applications
• solicited purchase orders from Russian end users and relayed the requests to Serniya and Sertal employees, who secured funding and arranged the logistics for the transactions
• procured the products, in separate orders to avoid detection, through various shell companies and bank accounts in the New York City area that routed shipments and layered financial transactions in connection with the scheme and
• used an alias to frustrate due diligence efforts and falsely stated the use and ultimate end users of such products.The two US nationals allegedly worked closely with other defendants to alter, forge, and fabricate shipping documents and invoices before reshipping the export-controlled items to intermediate destinations, including Finland, Germany, Hong Kong, and Estonia.

A suspected Russian intelligence operative allegedly shipped or physically smuggled the products from Estonia to Russia before being arrested in Estonia on December 6, 2022. 

If convicted, the defendants may serve up to 30 years in prison.

Implications

A shift in focus by the Task Force toward procurement networks. Until recently, Task Force KleptoCapture has largely limited its actions to seizing assets, including personal jets and superyachts, of Russian oligarchs designated by OFAC.  The latest indictment is a signal that the DOJ has refocused its efforts toward prosecuting third parties who may be supporting Russia sanctions evaders.

Demonstrates willingness to use other legal enforcement authorities. The indictment reaches deeper into the DOJ’s kit bag of resources and legal tools.  The announced indictment included a wide range of charges, which reflects the current enforcement posture focused on all parties to a transaction, even ancillary support entities effecting a money transfer.  The sheer range of charges raises the exposure of individuals and entities across a supply chain who may play only a secondary or tertiary role (for example, effecting a money transfer).

Reveals close partnerships with other countries’ law enforcement authorities.  The defendants were located in Russia, Estonia, and the United States, and unindicted entities in the United Kingdom and Spain were identified and sanctioned.  The DOJ worked directly with the Estonian Internal Security Service and the Prosecutor’s Office to bring the defendants to justice.  This demonstrates the ongoing international collaboration between the DOJ and partner countries, meaning it has become easier for the long arm of US export control and sanctions laws to reach non-US entities and individuals.

Action steps for OEMs

Notably, no US original equipment manufacturers (OEM) appeared to have received a fine or penalty as a result of this enforcement action.  This is likely due to the sophistication of the alleged ruse perpetrated by the defendants. 

However, now that this type of activity is identified in an enforcement action, industry has notice of these tactics and should consider implementing additional measures to mitigate this type of risk.

While the defendants falsified information to divert attention from the true nature of the illicit arms sales under this enforcement action, going forward companies should consider stringent “Know Your Customer”[3] diligence measures and compare transactions against a red flag checklist at every step in the supply chain. 

In the event a US OEM is the subject of a DOJ investigation down the road, these additional measures may demonstrate to enforcement officials that the OEM has put in place rigorous oversight to prevent the type of unlawful transactions described here. 

The sweeping reach of the Task Force and the US government’s corresponding enforcement priorities – particularly the focus on procurement networks and facilitators – underscore the risk to companies that fail to maintain adequate compliance and screening programs.  The risk is especially high for companies active in the electronics, security, aerospace, energy, transportation, and defense sectors currently being targeted by Russia-based procurement networks. 

This aggressive enforcement posture, combined with ongoing changes to the Russia sanctions and export control regulations and the level of international cooperation we are starting to see, are a big flashing light for companies, warning them to take a closer look at their international trade compliance programs to make sure they adequately address the risk of noncompliance and comply with DOJ and regulator guidance.  Companies should also ensure that they are prepared in case the need arises to conduct an internal investigation or respond to government inquiries concerning compliance with US sanctions and export control laws.

Find out more about the implications of this development by contacting the authors or your DLA Piper attorney.