Sanctions Compliance Measures to Mitigate Russia Trade Sanctions Evasion Tactics - article

Sanctions Compliance Measures to Mitigate Russia Trade Sanctions Evasion Tactics

By Jaclyn Jaeger

18th Annual Flagship Conference on

ECONOMIC SANCTIONS

ENFORCEMENT AND COMPLIANCE

April 29–30, 2024 • Washington, DC AmericanConference.com/ Economic-Sanctions-Enforcement-Compliance

T

he various and elusive tactics used by Russia to evade global sanctions and export controls have grown increasingly sophisticated over the last several months, putting the onus on multinational entities to become equally sophisticated in the due diligence they perform on their global supply chains.

Over the last two years, the United States, joined by the G7 countries and other international partners, has imposed thousands of sanctions and other restrictive economic measures against Russia in an unprecedented global effort to weaken the Russian government’s ability to finance its war against Ukraine.

In the United States alone, the Treasury Department’s Office of Foreign Assets Control (OFAC), since February 2022, has added over 2,500 Russia-related targets to the Specially Designated Nationals and Blocked Persons (SDN) List. This includes approximately 2,400 individuals and entities, 115 vessels, and 19 aircraft – a number that has further grown in scope over the last year.

Simultaneously, the U.S. Department of State also continues to announce new designations against entities, vessels, and aircraft. The U.S. Department of Commerce’s Bureau of Industry and Security (BIS), too, continues to expand its Harmonized Tariff Schedule (HTS) for items requiring a license for export, reexport, or transfer (in-country) to Russia or Belarus.

From a sanctions compliance standpoint, several industry sectors have become targets. Such sectors include automotive, aerospace, chemicals, defense and related materials, electronics, financial services, metals and mining, quantum computing, shipbuilding and ship repair, and technology – essentially any sector or related items in those sectors that are in high demand by the Russian military.

Russia’s Evasion Techniques To evade global sanctions, Russian targets have deployed increasingly sophisticated techniques, including “by using complex financial schemes, falsifying the nature or origin of the goods traded, or relying on the jurisdictions of third countries,” according to guidance issued by the European Commission.

A sanctions risk analysis conducted by S&P Global Market Intelligence identified several items – including motor vehicles, mechanical and electrical machinery, and tools – that experienced increased trade growth from Germany, the United Kingdom, and Turkey to the central Asian countries of Kazakhstan, Kyrgyzstan, Armenia, and Uzbekistan in 2023 that were then routed to Russia.

Direct exports from Turkey to Russia of “high-priority” battlefield items also increased, including “electrical equipment, such as converters, electrical sockets, processing machines, and bearings,” according to S&P’s analysis. “The majority of trade conducted in these categories was non-existent in 2021, suggesting the creation and expansion of new trade lines and routes.”

Sanctions Compliance Measures to Mitigate Russia Trade Sanctions Evasion Tactics

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Michael Zolandz, chair of the Federal Regulatory and Compliance practice group at Dentons, said many of his clients have experienced such trade evasion techniques first-hand. “We work with a number of entities that, after Russia’s invasion of Ukraine and sanctions were imposed, suddenly saw dramatic increases in sales volumes in places like Turkey and Khazikstan, both of which border Russia,” he said.

“That was a red flag for potential diversion risk.”

Collectively, over the last 18 to 24 months, not only have more jurisdictions than ever before begun imposing sanctions-based restrictions against Russia but the scope of counterparties that potentially pose a threat has increased as well, Zolandz stressed. In practical terms, such dynamic shifts in the sanctions landscape have brought to companies in high-risk sectors a greater sense of urgency to both conduct a heightened level of due diligence and considerably broaden the scope of their sanctions screening practices, he said.

Other Red Flags The European Commission’s guidance provides a list of several other common red flags that, when identified, should prompt sanctions compliance officers to conduct a deeper level of due diligence.

Examples of those red flags include: •

Indirect transactions (e.g., through intermediaries and shell companies) that make no or little economic sense;

•

New transactions with companies located in countries or territories known as “circumvention hubs” and involving “high-priority battlefield items.”

•

Complex corporate or trust structures linked to Russian-friendly countries;

•

Use of trust arrangements or complex corporate structures involving offshore companies;

•

New business partnerships linked with sanctioned entities or persons;

•

Multiple different companies sharing the same physical address;

•

Changes in ownership of corporate holdings below the 50 percent threshold;

•

Change of ultimate beneficial owner shortly before or after the imposition of new sanctions;

•

Movement of assets previously associated with a sanctioned person; and

•

Numerous transfers of shares from sanctioned entities to non-sanctioned entities involving companies incorporated by the same individuals or entity.

Sanctions compliance officers further should review the Tri-Seal Compliance Note, issued last year by the U.S. Commerce Department, Justice Department, and Treasury Department, which also provides an additional list of common tactics that third-party intermediaries use to evade Russia-related sanctions and export controls.

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Sanctions Compliance Best Practices Conducting a sanctions risk assessment today is inherently more complex than just a few months ago, Zolandz said. Companies must conduct enhanced due diligence on high-risk items and high-risk countries not just directly involving Russia but must also now take that due diligence a step further by looking for unusual spikes in sales volumes in certain product categories and/or in certain participating countries that pose a high risk for diversion, he said.

Nate Bolin, a partner at DLA Piper, said one way to mitigate this risk is to ask critical questions such as, “‘Who is this new customer that is now asking for our products? We’ve never done business with them before. Why do they want our products now?’ If the answer is that ‘They are products that used to be sold to Russia, and now we’re getting new inquiries from some country we’ve never done business with before,’ that ought to be a red flag that requires additional diligence,” he said.

When doing enhanced due diligence on the global supply chain, consider counterparties as well, “making sure that you are looking at the various potential touchpoints,” Bolin said. Screen for sanctions risk as it applies not only to direct customers, but also to distributors and sales agents, and verify to whom they are selling, he said.

“If you haven’t looked at your distribution agreements in a while, or your standard terms and conditions, now is a good time to do that and make sure you have clauses requiring compliance with export controls sanctions laws, and screening, and make sure distributors are doing screening,” Bolin said.

A truly comprehensive sanctions risk management assessment must be data-driven, and so “make sure you have invested in the infrastructure internally to help with this,” Bolin said.

Most large multinational companies should already have some type of ERP system or inventory management system to track relevant data. From there, it’s about applying “appropriate risk-based analytics around that data,” Zolandz said.

Another best practice is simply to learn from the experiences of industry peers and other companies and ask outside advisers to share examples of what they are seeing in the way of Russia’s sanction evasion techniques. “Information-sharing is really important for combatting this issue, for sure,” Zolandz said.

Further Discussion on This Important Topic Will Unfold at ACI’s Upcoming Economic Sanctions Events: https://www.americanconference.com/conferences/ by-sector/#aml&economicsanctions For questions, concerns or more information about ACI Sanctions Events, please contact: Katrina Savarino Associate Director of Marketing American Conference Institute | The Canadian Institute | C5 E: K.Savarino@americanconference.com

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