On March 2, 2023, the US Department of Commerce’s Bureau of Industry and Security (“BIS”), the US Department of Justice (“DOJ”), and the US Treasury Department’s Office of Foreign Assets Control (“OFAC”) published a Tri-Seal Compliance Note: Cracking Down on Third-Party Intermediaries Used to Evade Russia-Related Sanctions and Export Controls (“Compliance Note”) warning the public of efforts to evade Russia-related sanctions and export controls via use of third-party intermediaries and transshipment points. To aid the public in detecting common sanctions and export controls evasion schemes, the Compliance Note also highlights common evasion tactics and identifies common red flags. The Compliance Note also highlights increased interagency enforcement efforts, including regulatory actions, administrative enforcement actions, and criminal investigations.
The Compliance Note comes amid an increase in interagency cooperation and enforcement efforts concerning sanctions evasions and export controls violations. On the same day the Compliance Note was issued, Deputy Attorney General Lisa Monaco made public remarks announcing the DOJ’s significant restructuring and commitment of additional resources to the National Security Division and the Banking Integrity Unit in the Criminal Division’s Money Laundering and Asset Recovery Section to address corporate criminal enforcement efforts and prosecute related sanctions evasions and export controls violations, particularly those relating to Russia. As part of this effort, the National Security Division plans to expand its capacity to investigate and prosecute sanctions evasions, export controls violations, and similar economic crimes by hiring 25 new, dedicated prosecutors and by starting to issue joint advisories with the Commerce and Treasury Departments to inform the private sector about the latest enforcement trends and compliance best practices.
The issuance of the Compliance Note also follows a marked increase in international cooperation on anti-circumvention of Russia sanctions, particularly concerning the role of third-parties in facilitating the circumvention. For example, in late January, the US Under Secretary of the Treasury for Terrorism and Financial Intelligence, Brian Nelson, traveled to Turkey, Oman, and the United Arab Emirates to alert government officials and business stakeholders in those countries of the risk of Russia sanctions and export controls evasion in those jurisdictions, and to promote the intent of the United States to aggressively enforce Russia sanctions and export controls. During his visits with government counterparts and stakeholders in Oman, Turkey, and the UAE, Under Secretary Nelson discussed the US Treasury Department’s international partnerships and cooperation efforts to crack down on money laundering and illicit finance, Russian attempts to evade international sanctions and export controls, and Iran’s destabilizing activities in the region. For additional information on Russia sanctions circumvention and related developments, please see our previous blog post here.
A summary of the Compliance Note is provided below.
Detecting Efforts to Evade Russia-Related Sanctions and Export Controls
The Compliance Note emphasizes the elevated risk of evasion efforts, particularly by third-party intermediaries, and identifies the following common red flags that businesses may use to detect when such risks are present:
- Use of corporate vehicles to obscure ownership, source of funds, or countries involved (particularly sanctioned jurisdictions);
- A customer’s reluctance to share information about the end use of a product, including reluctance to complete an end-user form;
- Use of shell companies to conduct international wire transfers, often involving financial institutions in jurisdictions distinct from company registration;
- Declining customary installation, training, or maintenance of the purchased item(s);
- 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, e.g., China (including Hong Kong and Macau) and jurisdictions close to Russia, including Armenia, Turkey, and Uzbekistan.
Businesses should also beware of doing business with entities utilizing complex sales and distribution models, which may obscure visibility into the ultimate end-users of technology, services, or products subject to US jurisdiction.
Trends in Enforcement Actions
Companies are encouraged to learn more about common evasion tactics by reviewing recent Russia-related sanctions and export controls enforcement actions, including various regulatory and designation actions, administrative enforcement actions, and criminal investigations.
- Civil Enforcement Actions
OFAC’s recent civil enforcement actions highlight a range of frequently used sanctions evasion techniques, including the falsification of transactional document, omission of information internal correspondence, and shipping goods through certain third countries. The Compliance Note highlights several recent administrative enforcement actions involving third-party intermediaries and transshipment points, including a substantial administrative penalty BIS recently imposed on a US company for shipping critical missile and military satellite components to Russia via an intermediary in third country.
- Criminal Enforcement
Similarly, companies are encouraged to review the DOJ’s recent criminal enforcement actions against defendants utilizing shell companies and transshipment points in third countries to evade Russia-related sanctions and export controls, which highlight the following trending evasion tactics:
- Claiming that shell companies located in third countries were intermediaries or end users;
- Claiming that certain items would be used by entities engaged in activities subject to less stringent oversight;
- Dividing shipments of controlled items into multiple, smaller shipments to try to avoid law enforcement detection;
- Using aliases for the identities of the intermediaries and end users;
- Transferring funds from shell companies in foreign jurisdictions into U.S. bank accounts and quickly forwarding or distributing funds to obfuscate the audit trail or the foreign source of the money;
- Making false or misleading statements on shipping forms, including underestimating the purchase price of merchandise by more than five times the actual amount;
- Claiming to do business not on behalf of a restricted end user but rather on behalf of a US-based shell company.
Compliance Best Practices
To detect common evasion tactics and avoid compliance issues, the Compliance Note encourages businesses to employ effective compliance programs tailored to each company’s particular risk assessment. Such compliance programs should include management commitment, risk assessment, internal controls, testing, auditing, training, and controls tailored to the business’ risk profile, such as the risk of diversion by third-party intermediaries. Further, the Compliance Note identifies the following best practices with respect to customers, intermediaries, and counterparties: screening against the Consolidated Screening List and OFAC Sanctions Lists; conducting risk-based due-diligence; and regularly consulting official guidance and advisories. Finally, those who believe they may have violated sanctions or export controls are encouraged to voluntarily self-disclose the conduct at issue to the relevant agency.