Key US government agencies warn of greater scrutiny of third-party intermediaries aiding evasion of Russia-related sanctions: five takeaways

In the year since Russia’s invasion of Ukraine, the US government has deployed historically unprecedented economic sanctions and export controls to degrade Russia’s economy and military capacity.  US authorities from the very beginning of the conflict have repeatedly and publicly signaled they would aggressively enforce these measures.  The US government has correspondingly committed significant resources toward enforcement.  Last year, the Department of Justice (DOJ) announced the launching of Task Force KleptoCapture, a massive multi-agency effort led by the US and its international partners to “isolate Russia from global markets and impose serious costs.”  Last month, DOJ and the Department of Commerce’s Bureau of Industry and Security (BIS) announced the creation of the Disruptive Technology Strike Force, which was noted in a previous alert.

The US government also signaled that its enforcement focus has widened.  When Task Force KleptoCapture was launched, DOJ announced that the Task Force would surge resources “to hold accountable corrupt Russian oligarchs.”  The Deputy Attorney General stated, “Oligarchs be warned: we will use every tool to freeze and seize your criminal proceeds.”  However, recently published guidance and public statements by senior officials strongly indicate that DOJ and regulatory enforcement agencies are casting a wider net.  In a recent interview, Deputy Assistant Attorney General Andrew Adams, who leads Task Force KleptoCapture, stated that “illicit procurement networks will continue to take up an ever-increasing amount of our bandwidth . . .”

The enforcement agencies have also placed the onus on the private sector to commit resources to identify suspicious activity and prevent the diversion of restricted goods and services to Russia and other sanctioned jurisdictions. 

To assist the private sector in recognizing warning signs and sanctions-evading tactics and then implementing “appropriate compliance measures,” this month the Department of the Treasury’s Office of Foreign Assets Control (OFAC), BIS, and DOJ published a first-ever tri-seal[1] advisory note (the Tri-Seal Compliance Note). 

Below, we provide a breakdown of the Tri-Seal Compliance Note and conclude by offering five key takeaways.

Use of third-party intermediaries or transshipment points

The use of third-party intermediaries or transshipment points is one of the most common methods used to evade restrictions, disguise the involvement of Specially Designated Nationals and Blocked Persons (SDN) or parties listed on the Entity List, and obscure the true identities of Russian end users.

Common red flags for businesses and financial institutions to consider upon suspicion that a third-party intermediary may be engaged in efforts to evade US sanctions or export controls include:

• Use of corporate vehicles (ie, legal entities, such as shell companies, and legal arrangements) to obscure (i) ownership, (ii) source of funds, or (iii) 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 e-mail accounts instead of company e-mail 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 locations may include China (including Hong Kong and Macau) and jurisdictions close to Russia, including Armenia, Turkey, and Uzbekistan.

An effective, risk-based compliance program should include:

• A commitment from management commitment
  
  
• Appropriate compensation incentives
  
  
• A risk assessment
  
  
• Internal controls
  
  
• Testing
  
  
• Auditing and
  
  
• Training.

Risk-based due diligence and screening are also recommended for current and new customers, intermediaries, and counterparties in transactions.

Enforcement actions targeting third-party intermediaries

The Tri-Seal Compliance Note also highlights several enforcement actions involving third parties.

For example, in October 2022, a federal court unsealed an indictment that charged Russian nationals and a Spanish national with multiple offenses arising from the defendants’ alleged operation of a network of shell companies, which permitted them to export military and sensitive dual-use items to Russia and embargoed Venezuelan oil to end users in Russia and China. Additionally, Russian nationals and US citizens were indicted for violating US sanctions and export controls in a global procurement and money laundering scheme for the Russian government. In both cases, the defendants allegedly used shell companies and transshipment points in a third-party country to evade sanctions.

Five key takeaways

• Enforcement agencies are increasingly placing the responsibility of preventing sanctions evasion on corporations and the private sector.  This move coincides with DOJ’s renewed emphasis on corporate criminal enforcement and recent message that corporate crime is a national security issue.
  
  
• Know your business associates.  The US government’s emphasis on third-party intermediaries, recent enforcement actions, and corporate compliance programs make it clear that a company will be expected to exercise a level of due diligence on business associates and third parties that reflects its risk profile, particularly if there is a high diversion risk based on a company’s products and services.
  
  
• While the Tri-Seal Compliance Note is not binding, it nonetheless reflects the expectations of the enforcement agencies if and when there is an investigation.  Companies should ensure that their export controls and sanctions compliance policies and procedures measure up to the latest guidance published by regulatory and enforcement agencies.
  
  
• The private sector should regularly review administrative and criminal cases published by OFAC, BIS and DOJ.  These actions highlight various ways in which private sector actors have been ensnared in export control and sanctions-related investigations and enforcement actions.  The Tri-Seal Compliance Note provides links to these resources.
  
  
• DOJ and regulatory agencies have different requirements for timely voluntary self-disclosures.  A company that identifies a suspected export control or sanctions violation faces the questions of how and to whom to submit a voluntary self-disclosure (VSD).OFAC, BIS and DOJ have different VSD submission requirements that need to be carefully reviewed and considered.  The Tri-Seal Compliance Note (p. 6) provides links to those requirements.

Our global team continues to monitor developments as they arise and will update this alert as changes take place.

To learn more about these developments, please contact any of the authors or your DLA Piper relationship attorney.