G7 guidance published on Russian sanctions evasion

The G7 (Canada, France, Germany, Italy, Japan, the UK, the US and the EU) has published its first joint guidance on preventing evasion of sanctions and export controls targeting Russia. The guidance is issued by the G7 Enforcement Coordination Mechanism (ECM) created in February 2023 to support compliance and enforcement of sanctions and export controls against Russia.

The guidance contains:

• A list of items that pose a heightened risk of being diverted to Russia – as identified on the Common High Priority List (CHPL).
• Red flag indicators of potential sanctions and/or export control evasion.
• Best practices for industry to identify and address these red flags.
• Screening tools and resources to assist with due diligence.

Key takeaways

1. Review product inventory to establish whether the business deals with goods and technology listed on the CHPL.
   
   
2. Communicate the red flag indicators of Russian sanctions evasion to employees in key functions – including sales, marketing, logistics and legal/compliance. Whilst these red flags are particularly relevant for businesses dealing with goods and technology on the CPHL, they are also relevant for any business that deals with goods or technology that is controlled under sanctions measures targeting Russia.
   
   
3. Ensure all employees know how they should escalate concerns related to evasion of sanctions and export control within the business and to legal/compliance.
   
   
4. Businesses dealing in goods and technology on the CHPL should implement an enhanced due diligence procedure to identify, investigate, and escalate red flags.
   
   
5. Be prepared for additional due diligence requests from your counterparties – particularly suppliers and banking providers.
   
   
6. Confirm compliance with disclosure and notification requirements under the sanctions and export control regulations.

Goods and technology on the Common High Priority List

The guidance draws particular attention to goods listed on the CHPL, a list, developed by the UK, the US, the EU and Japan, of items that have been retrieved from Russian weapons found on the battlefield in Ukraine, or have been identified as essential for Russia to manufacture its military equipment. The G7 considers that the items listed on the CHPL pose a heightened risk of diversion to Russia.

The CHPL identifies items by tariff codes, covering: (i) integrated circuits/microelectronics; (ii) additional electronics, such as goods related to wireless communications; (iii) other electronic components used in Russian weapons systems; (iv) mechanical and other components utilised in Russian weapons systems; (v) manufacturing, production, and quality testing equipment for electric components, circuit boards, and modules; and (vi) Computer Numerically Controlled machine tools and components.

Red flags for evasion of sanctions and export controls

The guidance identifies twelve red flag indicators of potential sanctions and export control evasion. Businesses should increase their efforts to identify these red flags and respond to them by conducting enhanced due diligence to ensure that their goods or technology are not being supplied to Russia or to support Russian parties. The following are examples of red flags identified in the guidance:

1. Sudden changes in business activity after 24 February 2022, or after subsequent changes in sanctions measures, such as: (i) the emergence of new importers or exporters of CHPL items; (ii) increases in import value and/or volume from a CHPL importer; and/or (iii) an existing exporter/re-exporter or CHPL items switching to exporting to third countries after having previously primarily exported to Russia.
   
   
2. False, inaccurate or missing documentation. For example: (i) misclassification of goods, including the use of a non-CHPL HS code to conceal CHPL goods; (ii) using a different HS code when exporting an item to that used when importing the item into a third country; and/or (iii) documents claiming civil end use when items destined for companies traditionally known to be, or known to be associated with military entities.
   
   
3. Concealing the end user, including by: (i) circumventing shipments through third countries, including the use of shell companies, front companies, intermediaries, brokers, multiple freight forwarders and/or layered letters of credit; (ii) listing a freight forwarder/aircraft operator as the end user; (iii) transporting items through Russia to an end user in a third country; and/or (iv) changing an item’s shipping instructions when the item arrives at a freight forwarder, without the knowledge of the exporter.
   
   
4. Inconsistencies in transactions, such as: (i) abnormal shipping routes; (ii) unusually high volumes; and/or (iii) inconsistent information in trade documents and financial flows.
   
   
5. Vague details and/or incomplete information, including: (i) where a customer provides incomplete information, especially regarding the end user and/or end use; and/or (ii) the customer or vendor is resistant to providing additional information, including end use assurances, when sought.
   
   
6. Dividing an invoice value into smaller amounts to remain under value limits of sanctioned goods or export controls, particularly in respect of luxury goods.
   
   
7. Suspicious customer information, such as: (i) address inconsistent with the business, eg residential address; (ii) goods not matching customer's industry; (iii) little or no internet presence; (iv) customer’s website has changed since 2022 to eliminate links to Russia but customer has not attested that they no longer export to Russia; and (v) personnel, address, or telephone number match or are suspiciously similar to information found on sanctions lists or watchlists.
   
   
8. Customer has connections of concern, for example: (i) customer has business ties to Russia, (such as a branch, subsidiary, or parent company in Russia, one or more Russian or Belarussian shareholders, business with a Russian company, or is associated with people or entities related to the Russian defense sector; (ii) customer is co-located at the same address as an entity designated or sanctioned by a G7 member state; (iii) a new customer is co-located with and has a mutual shareholder and/or secretarial firm as an entity designated or sanctioned by a G7 member state; (iv) customer has previously had dealings or maintains relationships with individuals or entities now subject to sanctions; and/or (v) customer is associated with companies that are suspected or known to be selling sanctioned goods and/or technology to Russia.
   
   
9. Concerning business practices, such as: (i) involvement in the supply, sale, purchase, or delivery of CHPL or other high-risk goods; and/or (ii) customer's disappearance after a single export.
   
   
10. Last-minute changes to parties involved with the transaction from an entity in Russia or Belarus to an entity in another country.
    
    
11. Payments from entities located in third countries that are not otherwise involved with the transactions.
    
    
12. Customer unwilling to provide certification that it will not sell items to Russia or sanctioned parties in third countries.

Recommended response to red flags

When encountering red flag indicators (and the list above is noted to not be exhaustive), businesses should conduct additional risk-based customer and transaction due diligence to investigate the red flags and thus mitigate attempts to evade sanctions measures.

There is no "one size fits all" approach to due diligence and all of the surrounding facts and circumstances should be considered before determining whether a transaction risks being associated with potential sanctions and/or export control evasion.

Businesses are "strongly encouraged" to follow these steps upon identifying one or more red flags:

1. Running transaction parties against applicable sanctions lists – the guidance contains useful guidance on separately screening the counterparty's name and address against sanctions lists to identify where an address but not a company name "hits" against a sanctions list.
   
   
2. Conducting additional due diligence, such as: (i) making further inquiries with the customer regarding the end use, end user, and/or ultimate country of destination for the items; (ii) conducting open source research on the customer; (iii) requesting that customers sign written certification that items will not be transferred to parties in Russia or Belarus or sanctioned parties in third countries; and/or (iv) updating distributor agreements to require implementation of heightened due diligence measures.
   
   
3. Analysing the risk of export control and/or sanctions circumvention and reevaluating the red flag indicators. Can the red flags be justified or explained?
   
   
4. Stopping the transaction if red flag(s) cannot be cleared and considering disclosing information to the appropriate regulator in your country.

DLA Piper has sanctions and export control lawyers across the G7. If you would like to discuss any points raised in the guidance or explore how we can support you with identification of the red flags and adherence to the best practices considered above, please see contacts below: