This month the U.S. Department of Commerce, Department of the Treasury, and Department of Justice (DOJ) released a Tri-Seal Compliance Note outlining red flags and enforcement priorities as they relate to the use of third-party intermediaries to evade Russia-related sanctions and export controls.
According to the Note, the Department of the Treasury’s Office of Foreign Assets Control (OFAC) and the Department of Commerce’s Bureau of Industry and Security (BIS) have imposed sanctions and export controls of unprecedented scope and scale to degrade Russia’s ability to wage war in Ukraine. In addition, DOJ has taken significant enforcement efforts to prosecute those who violate U.S. sanctions and export control laws. In order to evade these efforts, certain actors are now turning to third-party intermediaries and/or transshipment points to circumvent restrictions, disguise the involvement of Specially Designated Nationals and Blocked Persons (SDNs) or parties on the Entity List, and to obscure the true identities of Russian end users.
By way of example of this trend, in November 2022, OFAC identified a global procurement network maintained by a Russian microelectronics company, AO PKK Milandr, which utilized multiple front companies to purchase microchips and divert the products to Russia. Similarly, BIS imposed an administrative penalty of nearly $500,000 on Vorago Technologies, an Austin, Texas company, for shipping integrated circuit components, which are critical components in missiles and military satellites, to Russia via a Bulgarian front company. Moreover, in October 2022, DOJ unsealed an indictment charging six Russian nationals and one Spanish national with offenses arising from the defendants’ alleged operation of a network of shell companies and transshipment points to illegally export military and sensitive dual-use items to Russia. Each of these enforcement actions highlights the range of tactics used by third-party intermediaries to evade Russian sanctions, including but not limited to: falsifying transactional documents, utilizing shell companies with no real operations, and shipping goods through third countries.
Identifying Warning Signs and Implementing Compliance Measures
The Note aims to shed light on the evasion tactics used by third-party intermediaries in order to assist the private sector in identifying warning signs and implementing compliance measures. The identified red flags included, but are not limited to:
- Corporate vehicles, like shell companies, used to hide ownership, source of funds, or countries involved – particularly sanctioned countries;
- A customer’s reluctance to share information about the end use or user of a product;
- Shell companies used to conduct international wire transfers, often involving financial institutions in jurisdictions distinct from company registration;
- Declining customary installation, training, or maintenance of purchased items;
- IP addresses that do not correspond to a customer’s reported location data;
- Last-minute changes to shipping instructions that appear contrary to customer history or business practices;
- Payment coming from a third-party country or business not listed on the End-User Statement or other applicable end-user form;
- Use of personal email accounts instead of company email addresses;
- Operation of complex and/or international businesses using residential addresses or addresses common to multiple closely held corporate 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; or
- Routing purchases through certain transshipment points commonly used to illegally redirect restricted items to Russia or Belarus, such as China (including Hong Kong and Macau), Armenia, Turkey, and Uzbekistan.
U.S. and multinational companies must be vigilant in their compliance efforts with evolving sanctions and export controls regulations. Screening current and new customers, intermediaries, and counterparties through the U.S. Government’s sanctions lists, as well as conducting risk-based due diligence on customers and intermediaries is essential. It is also critical that every company employ a risk-based approach to sanctions and export compliance by developing, implementing, and updating its own compliance policies and procedures based on its individual risk profile. Buchanan has a coordinated team with deep national security experience who are here to assist.