International enforcement attention on Russia trade sanctions circumvention is building
On 26 September, trade sanctions authorities in the UK, Australia, Canada, New Zealand and the United States - calling themselves the Export Enforcement Five (EEF) - published their first-ever joint guidance for industry and academia. The guidance lists items of potential military use currently at highest risk for diversion to Russia, which includes not only items more obviously of potential military application (such as integrated circuits or radar apparatus), but also products with a wider range of uses (such as digital cameras and ball bearings). The guidance urges exporters to conduct both customer and transaction due diligence whenever these products are involved and lists “select” red flags of possible trade sanctions evasion.
Calling the private sector the “first line of defense” preventing Russia from acquiring items used in the war against Ukraine, the joint guidance underlines the partnership’s increased efforts to work more closely with industry to counter diversion efforts, with a focus on goods capable of military application. In this respect the guidance builds on similar themes articulated in a Russia trade sanctions circumvention notice published by the UK Export Control Joint Unit (ECJU) in May, guidance on enhanced due diligence to protect against circumvention published by the European Commission in September, and a series of guidance documents issued by US authorities over the past year, including recent best practices to prevent diversion of consumer and electronic items.
Read as a collection, these publications provide vital guidance for legal and compliance teams looking to identify potential signs of Russia trade sanctions circumvention and focus their diligence efforts accordingly. Although some of the tips are perhaps best characterised as timely reminders of established good practice - such as the importance of conducting appropriate diligence not only on customers but also on intermediaries and end-users - others seem more specific to the Russia trade sanctions context and therefore may be of more interest to compliance teams looking at circumvention and diversion risk in particular. Three of the key takeaways in this category are:
- Customer and transaction due diligence should be calibrated to take into account geography-related risk - The EEF guidance encourages higher diligence in transactions touching countries that do not have trade sanctions aligned with the 39-member Global Export Control Coalition Partnership (GECCP). Both the UK and EU guidance encourage attention to trade with or through countries presenting “diversion concerns” or which are known as “circumvention hubs”. Interestingly, the UK and EU guidance documents do not specifically list such countries, which may reflect a desire by the authorities for the guidance to remain current even if evasion and circumvention patterns evolve. For its part, the US has issued an initial list of “transhipment countries of concern” that includes Armenia, Brazil, China, Georgia, India, Israel, Kazakhstan, Kyrgyzstan, Mexico, Nicaragua, Serbia, Singapore, South Africa, Taiwan, Tajikistan, Turkey, United Arab Emirates, and Uzbekistan, but has noted that it may adjust or add to the list as circumstances and enforcement efforts warrant. The US also increasingly has been sanctioning and imposing new export controls on third country entities and industries that it has found to be engaging in transhipment or other evasion efforts.
- Changes in a customer’s or end-user’s activity since 24 February 2022 are a key potential risk indicator - All three of the potentially concerning trade patterns described in the EEF guidance reflect changes in customer or end-user activity before and after the war began. Companies that did not exist before February/March 2022, which did not import higher risk goods before February/March 2022, or which demonstrated significant spikes in imports of higher risk goods are called out as raising question marks. The EU guidance also states that changes to a customer’s or end-user’s own ownership, beneficial ownership, or assets - well-known hallmarks of potential financial sanctions circumvention - can also be red flags of potential trade sanctions circumvention.
- If given vague or incomplete information, verify - don’t trust - According to the EEF guidance, a customer who lacks or refuses to provide details on banks, shippers or third parties, including about end-users, intended end-use, or company ownership raises a key red flag. The UK alert similarly flags customers and vendors who are vague about details, noting too that customers and vendors who provide incomplete information or are resistant to providing additional information when sought can also present risks. The EU guidance specifically calls out the CEO or manager who is “never available for discussions” as a potential red flag.
Trade sanctions present a dynamic and evolving regulatory landscape. When regulatory agencies provide industry guidance on specific measures for evaluating transactions for sanctions risk, companies should have robust international trade compliance programs in place which allow for timely updates to demonstrate compliance with those measures. This includes policies and procedures to identify and manage sanctions-related risks, training programs to ensure that employees understand possible sanctions evasion red flags, and internal controls to detect and prevent potential violations. By taking these steps, among others, companies can reduce their risk of violating trade sanctions against Russia along with potential penalties.
Given the complexity of these laws, companies should seek legal advice to ensure they are in compliance. This is particularly important for companies that operate in multiple jurisdictions or that engage in complex financial transactions. If you would like to discuss trade sanctions risk and compliance and how the guidance discussed in this alert may be relevant to your company, please contact the authors below.