US Agencies Issue "Tri-Seal Compliance Note" Regarding Russia-Related Sanctions Evasion

On March 2, 2023, the U.S. Department of Commerce's Bureau of Industry and Security ("BIS"), the U.S. Department of Justice ("DOJ"), and the U.S. Department of the Treasury's Office of Foreign Assets Control ("OFAC"), issued a Tri-Seal Compliance Note, Cracking Down on Third-Party Intermediaries Used to Evade Russia-Related Sanctions and Export Controls (the "Note"), to alert the business community and the public to attempts by individuals and entities to continue to try to evade sanctions and export controls in support of Russia's war against Ukraine. The Note follows numerous reports by media and nongovernmental organizations that debris of Russian missiles, rockets and other ordnance recovered from the battlefield in Ukraine often suggests that these weapons are being manufactured using US-controlled components.

Specifically, the Note highlights common evasion tactics used to hide the involvement of sanctioned persons and obscure the true identifies of Russian end-users. This is the first collective effort by DOJ, OFAC, and BIS to "inform the private sector about enforcement trends and provide guidance to the business community on compliance with U.S. sanctions and export laws." As such, the three agencies state that they will continue to issue these advisories on an ongoing basis.

According to the Note, "[i]t is critical that financial institutions and other entities conducting business with U.S. persons or within the United States, or businesses dealing in U.S.-origin goods or services or in foreign origin goods otherwise subject to U.S. export laws, be vigilant against efforts by individuals or entities to evade sanctions and export control laws." Focusing on companies such as manufacturers, distributors, resellers, and freight forwarders, the Note emphasizes that "effective compliance programs that employ a risk-based approach to sanctions and export controls" are critical to empowering staff to identify and report potential violations of U.S. sanctions and export controls so that companies can make timely voluntary disclosures to the U.S. government. The Note recommends that any compliance programs include management commitment (including through appropriate compensation incentives), risk assessment, internal controls, testing, auditing, and training.

Common Red Flags of Sanction or Export Control Violations

The Note elucidates the following common red flags which typically indicate that a third-party intermediary may be engaged in efforts to evade sanctions or export controls:

• Use of corporate vehicles (e., 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 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. Such locations may include China (including Hong Kong and Macau) and jurisdictions close to Russia, including Armenia, Turkey, and Uzbekistan.

In order to avoid unnecessary risks, companies should screen current and new customers, intermediaries, and counterparties through the Consolidated Screening List and OFAC Sanctions Lists, as well as conduct risk-based due diligence on customers, intermediaries, and counterparties. Companies should also regularly consult guidance and advisories from OFAC and BIS to inform and strengthen their compliance programs.

Civil Enforcement and Designation Actions

In addition to the above recommendations to mitigate risks, companies should review BIS and OFAC enforcement and targeting actions, as they "often reflect certain tactics and methods used by intermediaries engaged in Russia-related sanctions." The following enforcement actions are illustrated in the Note to provide companies with examples of such tactics and methods:

• AO PKK Milandr—In November 2022, OFAC designated individuals and entities involved in a global procurement network maintained by a Russian microelectronics company, AO PKK Milandr, which used a front company to transfer funds from Milandr to another front in a third country, which purchased microchips to divert to Russia.
• Vorago Technologies—In September 2021, BIS imposed an administrative penalty of $497,000 on Vorago Technologies, an Austin, Texas company, for shipping integrated circuit components, which are critical components in missiles and military satellites, to Russia via a Bulgarian front company.
• Iranian Drone Entities—In January 2023, BIS imposed restrictions on seven Iranian drone entities in due to their production of Iranian unmanned aerial vehicles ("UAVs") used by Russia against Ukraine. These Iranian UAV entities, which were using diverted U.S.-branded parts and components, were also sanctioned by OFAC.

According to the Note, OFAC's civil enforcement actions have also illustrated a range of sanctions evasion techniques employed across multiple sanctions programs, including falsifying transactional documents, omitting information from internal correspondence, and shipping goods through third countries.

Criminal Enforcement of U.S. Sanctions and Export Laws

The Note also highlights that the DOJ is actively pursuing criminal charges against those who it alleges are using front companies and intermediate transshipment points to evade Russia-related U.S. sanctions and export controls. The following are recent examples of DOJ criminal enforcement actions which illustrate tactics used for evasion purposes:

• In October 2022, the DOJ unsealed an indictment charging six Russian nationals and one Spanish national with multiple offenses arising from the defendants' alleged operation of a network of shell companies designed to enable them to illegally export military and sensitive dual-use items to Russia and embargoed Venezuelan oil to Russian and Chinese end users.
• In December 2022, the DOJ unsealed an indictment charging five Russian nationals, including a suspected Federal Security Service officer, and two U.S. citizens with violating U.S. sanctions and export controls in a global procurement and money laundering scheme for the Russian government.

The allegations in the linked indictments describe tactics that the defendants purportedly employed to evade detection, including the following:

• Claiming that shell companies located in third countries were intermediaries or end users; in one case, DOJ alleges that only one of the five intermediary parties had any visible signage and consisted of an empty room in a strip mall;
• Claiming that certain items would be used by entities engaged in activities subject to less stringent oversight; on at least one occasion, a defendant allegedly claimed that an item would be used by Russian space program entities, when in fact the item was suitable for military aircraft or missile systems only;
• 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; and
• Claiming to do business not on behalf of a restricted end user but rather on behalf of a U.S.-based shell company.

The Justice Department's enforcement of these new measures has been led by Task Force KleptoCapture, established on March 2, 2022, under the leadership of the Office of the Deputy Attorney General. Task Force KleptoCapture is an interagency law enforcement task force dedicated to "enforcing the sweeping sanctions, export controls, and economic countermeasures that the United States, along with its foreign allies and partners, has imposed in response to Russia's . . . military invasion of Ukraine."

Key Takeaways

The Note makes it clear that the U.S. government is aggressively cracking down on sanctions and export controls evasion and will not hesitate to pursue criminal prosecutions, administrative enforcement actions, or additional designations. As such, "[b]usinesses of all stripes should act responsibly by implementing rigorous compliance controls, or they or their business partners risk being the targets of regulatory action, administrative enforcement action, or criminal investigation."

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.