U.S. CRACKS DOWN ON SANCTIONS EVASION

On March 2, 2023, the U.S. Department of Commerce’s Bureau of Industry and Security (BIS), the Department of the Treasury’s Office of Foreign Asset Control (OFAC) and the Department of Justice issued a joint compliance note titled “Cracking Down on Third-Party Intermediaries Used to Evade Russia-Related Sanctions and Export Controls” (hereinafter “Compliance Note”). The Compliance Note seeks to ensure that multinational companies remain vigilant and do not miss signs of evasion of the multiple sanctions and export controls that were implemented to target Russia’s economy and military-industrial complex after Russia’s invasion of Ukraine in February 2022. The Compliance Note specifically warns of the growing use of third-party intermediaries or transshipment points as a frequent tool for evasion and seeks to assist the private sector in identifying warning signs and implementing appropriate compliance measures.

While the Compliance Note focuses on Russian- and Belarusian-related measures, the principles discussed apply broadly to all U.S. government enforcement regimes and highlight that the U.S. government will not hesitate to pursue evasion efforts. The Compliance Note specifically flags several recent civil and criminal enforcement actions that targeted defendants who employed intermediary companies, transshipment points and other evasion tactics to circumvent U.S. sanctions and export controls. Furthermore, the Compliance Note concludes by specifically warning businesses that, should they not implement rigorous compliance controls, “they or their business partners risk being the targets of regulatory action, administrative enforcement action, or criminal investigation.”

Accordingly, this client note addresses the common red flags identified as critical in the Compliance Note as well as best practices companies can and should take to ensure they are not inadvertently assisting in sanctions or export control evasion efforts.

Common Red Flags

It is critical that financial institutions and other entities be vigilant against efforts by third parties to evade sanctions and export control laws. While companies such as manufacturers, distributors, resellers and freight forwarders are often in the best position to spot whether a particular dealing, transaction or activity raises red flags, all entities should be cognizant of possible sanctions and export control evasion tactics. The Compliance Note identifies common warning signs that a third-party intermediary may be engaged in efforts to evade sanctions or export controls, including:

• Use of corporate vehicles to obscure ownership, source of funds or countries involved;
• A customer’s reluctance to share information about the end use of a product;
• Use of shell companies to conduct international wire transfers;
• Declining customary installation, training or maintenance;
• IP addresses that do not correspond to a customer’s reported location data;
• Last minute changes to shipping instructions (especially when contrary to customer history or business practices);
• Payment coming from a third-party country or business not previously disclosed;
• Use of personal email accounts;
• Operation of complex and/or international businesses using residential addresses or a single address common to multiple entities;
• Changes to standard letters of engagement that obscure the ultimate customer;
• Transactions involving a change in shipments or payments that were previously scheduled for Russia or Belarus;
• Transactions involving entities with little or no web presence; and
• Routing purchases through certain transshipment points commonly used to illegally redirect restricted items to Russia or Belarus (including China, Armenia, Turkey and Uzbekistan).
  

Companies should also ensure sufficient due diligence on entitles that use complex sales and distribution models, as these models may hinder a company’s visibility into the ultimate end-users of its technology, services or products.

Compliance Measures

The Compliance Note also provides guidance to companies on how to maintain an effective, risk-based sanctions and export compliance program and recommends certain measures that multinational companies can take to ensure they remain vigilant and attuned to possible attempts to evade U.S. laws.

There is no one-size-fits-all methodology when creating an effective compliance program. However, best practices include screening current and new customers, intermediaries and counterparties through BIS’s Consolidated Screening List and OFAC’s Sanctions List, as well as conducting risk-based due diligence. Effective compliance programs will also include the demonstrated commitment of management, dedicated compliance resources, regular risk assessment, robust internal controls, compliance audits and training of relevant personnel.

Key Takeaways

• The Compliance Note highlights the increased focus of the U.S. government on targeting sanctions and export control evasion networks and third parties that assist evasion efforts. Companies should ensure that their compliance programs are well equipped to identify common red flags identified in the Compliance Note that indicate evasion efforts by third-party intermediaries and other actors.
• If the current compliance program lacks appropriate safeguards, companies should update their compliance program accordingly.
• Lastly, companies should keep abreast of U.S. government enforcement actions, guidance and advisories to strengthen their compliance programs and ensure their employees remain vigilant and are aware of new methodologies that third-party intermediaries and other actors may use in an attempt to evade sanctions and export controls.