How to Avoid Becoming an Unwitting Facilitator of Russian Sanctions Evasion

US President Joe Biden on December 22nd, 2023 signed a new Executive Order (EO) that allows the US Treasury’s Office of Foreign Assets Control (OFAC) to sanction foreign financial institutions that are transacting with and helping enhance Russia’s military capabilities. Biden administration officials noted that Russia, in response to increasing restrictions that limited its access to the global financial system and tools and technologies necessary to maintain its military, has created cutouts and front companies, using both witting and unwitting financial intermediaries to evade sanctions and source critical components for its war in Ukraine.

However, foreign financial institutions are not the only ones that should pay attention to this new EO. Manufacturers and exporters should consider this EO a shot across the bow and enhance their compliance programs and due diligence processes, especially if they deal in products at high risk of diversion, such as military scopes, high-precision machines necessary to produce weaponry, and chemical precursors.

What steps can organizations take to avoid becoming unwitting suppliers of critical components and tools for the Russian military?

Key Steps

OFAC has issued a sanctions advisory, providing guidance for foreign financial institutions to help them avoid being designated by the United States. These strategies can also be used by firms operating in vulnerable sectors, such as technology, avionics, shipping, navigation, and import/export to enhance their due diligence processes.

• Review a company’s customer base to determine exposure to the Russian military-industrial sector or identifying customers who may be involved in the transfer of items such as rifle scopes, CNC machines, or other critical items Russia needs to strengthen its military.
• Communicate compliance expectations to customers—especially those engaged in import-export activity, manufacturing, or any other relevant business lines—and informing them that they may not sell or resell critical items to designated persons operating or supporting Russia’s military-industrial base.
• Send questionnaires to customers known to deal in or export specified items to better understand their counterparties.
• Take appropriate mitigation measures for any customers or counterparties engaged in high-risk activity or who fail to respond to requests for information regarding activity of concern including, exiting relationships or including customers or counterparties on internal block lists.
• Obtain attestations from customers confirming that they do not operate in the specified sectors, engage in any sales or transfers of the specified items to Russia, or otherwise conduct any transactions involving Russia’s military-industrial base.
• Update risk assessments and customer risk criteria to include jurisdictional analysis and risks related to Russia’s military-industrial sector.
• Use open-source information and past transactional activity to inform due diligence and to conduct proactive investigations into possible sanctions and export control evasion.

Examples

Examining reseller activity and keeping a robust profile is particularly important for US manufacturers and exporters.

⚠️ A reseller or distributor located in Russia may list an innocuous or vague description of its line of business but could be reselling critical items to Russia’s military.

⚠️ A mismatch between the business activity listed in a company’s registration documents and the products the company is purchasing from US manufacturers could also indicate that the distributor is shipping critical items to entities or individuals linked to Russia’s military-industrial sector.

⚠️ Historical bids on Russian military or government tenders or contracts to provide critical or dual-use items by a company may give manufacturers insight into their customer’s activities and whether they have acted as a Russian military supplier in the past.

⚠️ In addition, US manufacturers and exporters may want to examine the leadership, ownership, and control of companies that are purchasing items critical to Russia’s military. Checking the names of ultimate beneficial owners, general directors, and other company leaders against sanctions lists, third-party databases, and adverse media reports will provide insights into whether they are linked to other entities that may be supplying Russia’s military.

⚠️ Manufacturers and exporters should also examine the routes along which their products are shipped. Are the shippers taking circuitous routes, using transshipment points and third-party intermediaries, or turning off their vessels’ automatic identification systems to obscure their path to Russia? Does the end-user’s location listed on purchase documents match the destination of the shipment of critical items? Is the shipment of critical items transiting third-party countries known to be potential transshipment points for exports to Russia?

Although the new Executive Order is focused on financial institutions and provides strategies and typologies for them to identify indicators of Russian sanctions evasion, manufacturers and exporters can also use these strategies to enhance their understanding of their clients, improve their compliance processes, and avoid becoming an unwitting facilitator to Russian sanctions evasion.

DOLFIN’s Policy Alert provides details about OFAC’s Framework for Compliance Commitments and can help firms and financial institutions not only understand the US government’s compliance expectations, but also avoid common pitfalls that result in steep fines and reputational damage.