CONTENTS OF LAST ISSUE
Recent developments in anti-Russian sanctions: evasion schemes and their prevention
After 24 February 2022, many nations (including US, Great Britain, European Union and Switzerland, as well as Japan, South Korea, Singapore, Australia and Canada) implemented multiple sanction packages against Russia, which include financial sanctions, prohibition of export and import of multiple goods to and from Russia, and personal sanctions.
However, the year under the sanction pressure has proven that Russian economy is still surviving, and struggling hard to restore the disrupted supply chains, to replace the business partners lost to the war with less scrupulous ones, and generally to overcome or circumvent the sanctions’ barriers.
Therefore, the governments of EU, US and other countries supporting the sanctions are facing new challenges; not only they have to keep increasing the economic pressure with introduction of subsequent sanction packages, but also to develop the ways and methods to fight the elaborate schemes for evasion from the existing restrictive measures.
There are a few recent analytical publications of European Bank [1] which provide evidence of intermediated trade via neighbouring economies being used to circumvent the sanctions. The analysis, supported by statistic data, shows a sharp drop in direct exports from the EU to Russia following the introduction of sanctions in March 2022. At the same time, the EU export to Armenia, Georgia, Kazakhstan and the Kyrgyz Republic increased by between 15 and 90 percent. The figures are even more impressing when they concern the sanctioned goods. In general, it is obvious that a substantial part of additional exports to Central Asia and the Caucasus may have been re-routed to buyers in Russia.
The participation of Turkey and China in the diversion of international trade aimed to the sanctions evasion is more complicated, as these countries also gained huge economic benefits from the replacement of goods previously imported by Russia from EU, US and Japan by their own production. However, there is some evidence of unprecedented growth of assets of Turkish banks in the first half of 2022, which lets one think at least part of these funds originated from Russia in an attempt to get access to the global financial system, when Russian banks were suffering from the first heavy blows of international sanctions.
To tackle this problem, the EU’s 10th package of sanctions introduced on 25 February 2023 prohibits the transit through Russia of EU exported dual-use goods and technology, as well as arms, intended for delivery to third countries.
US government also voiced their concerns in this respect, introducing on 2nd of March 2023 the Tri-Seal Compliance Note under the title “Cracking Down on Third-Party Intermediaries Used to Evade Russia-Related Sanctions and Export Controls”[2]. The Note suggests a number of “Red Flags” indicating that an intermediary (that is to say, non-sanctioned entity from an apparently “good” jurisdiction) may be engaged in efforts to avoid sanctions.
It is primarily addressed to the financial institutions and business entities operating in the US or with US persons, or dealing in US-origin goods or services. However, these “Red Flags” can be useful for the financial institutions and businesses all over the world, especially if they operate financial flows in USD (which at some point can be subject to review by US correspondent banks). It is also better to avoid some of the mentioned practices in your perfectly innocent business, not to be misapprehended as a suspicious person!
European Union’s recommendations on the same subject[3] are more discretionary, but in the end of the day, it is most likely the same “Red Flags” must raise concerns in the EU entities, foremost financial institutions, legal and accounting professionals, shipping companies, commercial carriers, brokers and distributors of sanctioned goods.
These “Red Flags” can be divided in 2 groups, first applicable mostly for the trading or shipping/transport companies, and the second fully available for the use of financial institutions and legal/accounting professionals, these being:
GROUP I:
- A customer’s reluctance to share information about the end use of a product;
- Declining customary installation, training or maintenance of the purchased product;
- Last-minute change of shipping instructions;
- Re-directing the shipments or payments previously scheduled for Russia or Belarus;
- Routing purchases through countries commonly used to illegally redirect restricted items to Russia and Belarus. Specifically, China, Armenia, Turkey and Uzbekistan are mentioned in the Note, but it is reasonable to pay closer attention as well to Georgia, Kazakhstan and Kyrgyz Republic.
GROUP II:
- Use of corporate vehicles (e.g. shell companies) to obscure the ownership, source of funds or countries involved;
- Use of shell companies for international bank transfers, especially if the company and their bankers are from different jurisdictions;
- IP addresses that do not correspond to a customer’s reported location data;
- Payment coming from a third-party country;
- Use of personal email accounts instead of company email addresses;
- Operation of complex or international businesses using private residential addresses or addresses commonly used for registration of corporate entities;
- Transactions involving entities with little or no web presence.
In an effort to demonstrate their serious intentions to fight the evasion, US have already pursued criminal charges against a few Russian, EU- and US-nationals who allegedly used front companies and trans-shipment points in third countries to evade anti-Russian sanctions[4].
The EU, too, is aiming to introduce criminal prosecution for those who violate the sanctions or assist in their violation. Upon a unanimous decision of the European Council, a new EU Directive[5] has been proposed on 2.12.2022 in order to criminalize the violation or circumvention of the EU restrictive measures, as well as inciting, aiding and abetting of such offences, or attempt to commit these actions. The proposed penalties include imprisonment for up to at least 5 years for natural persons, and fines in amount of minimum 5% of the total worldwide business turnover for the previous year for legal persons. This Directive, once adopted by the EU Parliament, will become mandatory for implementation in the national legislation of the EU Member countries, who will need to amend their criminal laws to incorporate new offences in the same manner as it was done in the past 20 years in regards to money laundering and terrorist financing. No doubt that we shall see it coming within very few years.
The other recent developments in the sanctions against Russia include the following main features:
- Prohibition of booking gas storage capacity in the EU for Russian nationals and entities (except for LNG);
- Expansion of the list of goods and technology prohibited for export to Russia or provision to Russian nationals (specifically, those which can be used for enhancement of Russian military and industrial sector);
- Additional import ban for the goods originating from Russia, such as asphalt, petroleum coke and petroleum jelly;
- A ban on Russian nationals from holding positions in the governing bodies of European critical infrastructure and critical entities (except for the EU, EEA and Swiss nationals);
- Mandatory reporting on the frozen assets and reserves of the sanctioned entities;
- Further expansion of the list of the sanctioned individuals.
In a nutshell, considering the recent developments in the regulations, it is even more important to pay attention to the compliance and due diligence procedures and proper UBO identification, always bearing in mind the “Red Flags” that can indicate an attempt to circumvent the restrictions.
[1] See The Eurasian roundabout: Trade flows into Russia through the Caucasus and Central Asia by Maxim Chupilkin, Beata Javorcik and Alexander Plekhanov, a working paper by European Bank of Reconstruction and Development from Feb 2023, https://www.ebrd.com/publications/working-papers/the-eurasian-roundabout
[2] https://www.justice.gov/file/1571336/download?utm_medium=email&utm_source=govdelivery
[3] https://finance.ec.europa.eu/system/files/2023-02/07.02.2023%20FAQ-%20Circumvention%20and%20Due%20Diligence.pdf
[4] See: Indictment, United States v. Orekhov, et al, Case 1:22-cr-00434-EK (E.D.N.Y Sept. 26, 2022), Indictment, United States v. Grinin, et al, Case 1:22-cr-00409-HG (E.D.N.Y Dec. 5, 2022)
[5] https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=COM%3A2022%3A0684%3AFIN
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