The U.S. government is turning up the dial on its efforts to combat evasion of export controls and sanctions against Russia. The severe trade restrictions against Russia (and Belarus) have seen continuous escalation since February 2022. In the latest round of measures, multiple U.S. government agencies took aim at companies that enable the circumvention of trade controls, with an increased focus on evasion tactics in third countries and by non-restricted entities that operate as fronts for sanctioned parties.
Anti–money laundering regulations have effectively deputized the banking system to function as the U.S. government’s eyes and ears on Russia sanctions and export controls compliance, increasing pressure on companies to ensure that their operations fully comply with extensive trade controls imposed on Russia and Belarus. Banks are actively identifying and reporting suspected trade control evasion to the U.S. government, including suspicious transactions involving diversion points that are often used to conceal the involvement of Russian parties.
Exporters need to update and sharpen their tools to identify high-risk transactions and red flags in their sales and operations as the U.S. government takes aim at a wider array of international commerce, not just direct transactions with Russia or Russian companies.
FinCEN and Suspicious Activity Reporting of Evasion Tactics
The U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN), which enforces anti–money laundering requirements for financial institutions, published a report on September 8, 2023, identifying patterns and trends in the reporting of suspected evasion of U.S. trade controls on Russia.
This report follows joint alerts issued by FinCEN and the Commerce Department’s Bureau of Industry (BIS) in May 2023 and in June 2022, urging vigilance around attempts to circumvent trade controls on Russia, and alerting financial institutions to red flags for trade control evasion that might necessitate the filing of a Suspicious Activity Report (SAR) with FinCEN.
Under regulations promulgated pursuant to the Bank Secrecy Act (BSA), a financial institution is required to file a Suspicious Activity Report (SAR) if it knows, suspects, or has reason to suspect that a transaction conducted through a financial institution involves funds derived from illegal activity or involves the use of the financial institution to facilitate criminal activity. See 31 C.F.R. § 1020.320. Financial institutions have historically used SARs to report suspected violations of U.S. anti–money laundering laws, economic sanctions and other illicit finance. After Russia’s February 2022 invasion of Ukraine, FinCEN provided a specific SAR code to indicate possible Russia trade control circumvention: FIN 2022-RUSSIABIS. FinCEN is now able to forward SARs with codes suggestive of export control evasion to export enforcement authorities.
These recent publications show that financial institutions are now a significant source of information used to enforce U.S. export controls and to combat trade control circumvention. Recent FinCEN reports highlight the following trends and red flags for companies:
- Russian agents are establishing front companies outside of Russia to purchase U.S.-origin goods. These companies, in non-sanctioned third countries, obtain U.S. goods and forward them on to Russia or are used by a third party outside Russia for the benefit of a Russian party, while U.S. suppliers are paid from non-Russian banks.
- In the last year, banks filed 333 SARs on U.S. companies concerning suspected trade control evasion.
- Russian defense, aerospace, manufacturing, maritime and energy production sectors have been the focus of FinCEN reporting.
- U.S.-based companies identified in the SARs manufacture fluid transfer system components, underwater technology for submarine monitoring, microelectronic components, aircraft parts, non-lethal military equipment, machinery for electrical manufacturing units, imaging technology, electronic filters, electromechanical instrumentation, radio frequency products, gas compressors, wood materials, plumbing equipment, precision tungsten rods and welding equipment.
- Transshipment points include China and Hong Kong, Azerbaijan, Belgium, the British Virgin Islands, Canada, Cyprus, Estonia, Germany, Kazakhstan, Kyrgyzstan, Serbia, Singapore, Turkey, the United Arab Emirates and the United Kingdom, with particular focus on China and Hong Kong, Turkey and the United Arab Emirates.
- Under BIS’s aggressive enforcement stance, companies will not receive voluntary self-disclosure (VSD) credit where BIS is made aware of an export violation through other means, including through a SAR. This should factor into companies’ risk calculus when deciding whether to make a VSD.
Companies that export products subject to U.S. export jurisdiction should anticipate heightened scrutiny from their banks around processing of payments for transactions involving Russia or that could indicate evasion of Russia trade controls, as well as increased diligence in lending transactions with respect to use of proceeds. Companies should adopt proactive procedures to identify red flags, such as:
- Payments for defense-related products from a company based in a non–Global Export Control Coalition (GECC) country that was incorporated after the February 22, 2022 Russian invasion of Ukraine
- A customer who previously did not receive exports of sensitive goods, but does so after the invasion
- A customer that previously received exports of sensitive goods, but has requested or received a significant increase in the quantities of those same sensitive goods after the invasion
- General lack of transparency into transaction details, including third parties, intended end use or company ownership
- Overpaying for an item above market price
- A customer is similar in name or address to a sanctioned or designated entity
On September 14, 2023, BIS announced updates to its list of “common high-priority items” – items that the Russian government is actively seeking in order to supply its weapons programs. All these items are controlled for export or re-export to Russia, but largely consist of less sensitive EAR99 items the Russian government has not been able to produce domestically. Manufacturers and sellers of these items, including many commercial-grade semiconductors, electrical components, navigation devices, sensors, cameras, ball bearings and telecommunications equipment, should be particularly mindful of red flags for potential evasion.
Recent Sanctions Activity
The U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) is continuing to expand the number of parties subject to U.S. sanctions, focusing not only on malign Russian actors, but also non-Russian entities that provide material support to Russian war efforts through the circumvention of existing trade controls.
For example, on September 14, 2023, OFAC announced sanctions on two Finnish logistics firms for the transshipment of sensitive goods into Russia, including unmanned aerial vehicle cameras, high-performance optical filters and lithium batteries. OFAC also announced sanctions on several Turkish entities for diversion activities. Two Turkish entities were sanctioned for the transshipment to Russia of components for drones to be used in the Ukraine war, and sensors and measuring tools, respectively. Another Turkish intermediary was sanctioned for shipping sensitive U.S.- and European-origin electronics to Russia.
Navigating these heightened regulations and reporting obligations can be difficult. To discuss your particular concerns, do not hesitate to contact any of your Fenwick relationship attorneys.
*Trade & National Security associate Trevor Coval also contributed to the preparation of this alert.