Clampdown on Russian sanctions circumvention

Edward James and Stacy Keen of Pinsent Masons were commenting after the Export Control Joint Unit, which sits within the UK government’s Department for Business and Trade, issued guidance designed to “prevent the undermining of trade sanctions, export controls, and other restrictive measures designed and implemented in response to Russia’s invasion of Ukraine”.

The guidance warns that Russian entities are unlikely to contact Western entities directly for restricted goods, technology and software but rather use a layered approach to disguise the end-user and destination of those items using cover or front companies. A non-exhaustive list of risk indicators is flagged to traders in the new guidance, broken down by customer, product and location, and the Export Control Joint Unit has called on traders to undertake due diligence and maintain strong internal governance arrangements to address those risks.

Edward James said: “Whilst a lot of focus has previously been placed on who companies appoint as direct and indirect suppliers, the latest guidance from the Export Control Joint Unit suggests that companies involved in the sale of restricted goods, technology and software need to be more vigilant in respect of their customers.”

“It seems apparent that the Unit recognises that Russian parties seeking to buy restricted items may seek to do so by establishing ‘smoke screens’ between themselves and UK suppliers. The apparent regulatory expectation for companies that sell restricted goods is to understand who their customers are and to critically consider whether there are risk indicators that may suggest the ultimate recipient is not the customer that you are dealing with. For companies that are not used to performing this type of risk based due diligence on customers, guidance should be sought from compliance and corporate intelligence experts,” he said.

In addition to issuing the new guidance, the UK government also recently published its “common high priority items list” comprising items it considers “critical to Russian weapons systems and its military development”.   

The list does not detail all the categories of items subject to the UK’s Russian trade restrictions, but it is designed to draw business’ attention to items that Russia is using within weapon items and that have been found on the battlefield of Ukraine. The list, which is a living document, includes microelectronics and electronic items related to wireless communication and satellite-based radio navigation, as well as discrete electronic components, electronics cabling and connectors, digital cameras and related optical components, and manufacturing, production, and quality testing equipment of electric components and circuits.

The Foreign, Commonwealth & Development Office said: “Russia is seeking to procure restricted goods such as those on this list, via non-sanctioning countries. Businesses should ensure that they consider these risks. Businesses should undertake due diligence to ensure that the end destination of these products is not Russia. The UK is working in coordination with international partners to tackle sanctions avoidance and evasion including closing routes that Russia is potentially using to circumvent our sanctions.”

Stacy Keen said: “Comprehensive sanctions have been imposed by the UK, EU, US and others against Russia. Whilst it is not a complete embargo on dealings in, or linked to, Russia, the net on such activity is closing. There is an increasing focus on circumvention and evasion. Facilitators of Russian sanctions evaders have been designated themselves as sanctions targets, while criminal investigations are understood to be live against facilitators. An EU diplomat has indicated that there would be an increasing focus on circumvention going forward, with the EU having nearly exhausted the sanctions restrictions it can impose to counter Russian action in Ukraine.”

“The Export Control Joint Unit’s guidance compliments the ‘red alert’ issued in 2022 with typologies for financial sanctions evasion. A common theme between the two guidance documents is to assess risk, scrutinise counterparties, end-users and wider supply chain, identification of red flags for circumvention or evasion and raising awareness. Simply relying on what you are told by a counterparty about the end-destination, use or user of goods, technology and software is unlikely to suffice from a risk mitigation perspective, particularly when dealing with new counterparties and those with links to Russia, or countries where trade with Russia is not restricted,” she said.