Updated G7 Guidance On Preventing Russian Export Control And Sanctions Evasion

For the first time, the G7, in collaboration with the Global Export Control Coalition (GECC), has released joint guidance to aid industries in preventing the diversion of controlled goods and technologies to Russia. Since the imposition of export controls and sanctions following Russia's invasion of Ukraine, efforts have intensified to restrict Russia's access to crucial technologies for military operations. As Canada is a member of both the G7 and GECC, the joint guidance provides important direction for Canadian individuals and businesses to comply with applicable export controls and sanctions and mitigating related risks.

This article outlines the critical elements of the G7's guidance, including details on the Common High Priority List (CHPL), red flag indicators and best practices for businesses involved in global trade.

The Common High Priority List (CHPL)

The CHPL was developed by the European Union, Japan, the United Kingdom and the United States to highlight items that pose a heightened risk of being diverted to Russia due to their importance in Russia's war effort. These items, identified in Russian weapons or flagged as essential for military production, are categorized into several tiers based on the nature of their importance and risk:

1. Tier 1: Includes integrated circuits, critical for advanced Russian precision-guided weapon systems. These components are in short supply domestically in Russia, making them a prime target for illicit procurement.
2. Tier 2: Features additional electronics, such as those used in wireless communications, that, while potentially domestically available in Russia, are preferably sourced from G7 or GECC countries.
3. Tier 3.A: Encompasses further electronic components utilized in Russian military systems from a wider array of suppliers.
4. Tier 3.B: Includes mechanical components used in Russian weapons systems.
5. Tier 4.A and 4.B: Covers production equipment and CNC (computer numerically controlled) machine tools essential for the manufacturing and quality testing of electronic components.

Each item on the CHPL is associated with a Harmonized System (HS) Code, which exporters, importers, freight forwarders, shippers and brokers must monitor carefully to ensure compliance with export controls and prevent unauthorized diversion to Russia. The CHPL is available here.

Red flag indicators of export control evasion

The G7 has identified numerous red flag indicators to help industry identify potential export control or sanctions evasion attempts. Key red flags include:

• New or sudden changes in trade activity: Companies newly involved in importing or exporting CHPL items or those with substantial increases in trade volume.
• Misclassification of goods: Using inaccurate HS codes to obscure the nature of CHPL items.
• False declarations and documents: Misrepresenting the end use or end user of goods, particularly when involving companies traditionally linked to military activities.
• Concealed shipping routes: Circuitous routes through multiple third countries or involving intermediaries, shell companies and front entities to disguise the final destination of goods.
• Connections of concern: Entities co-located at the same address as a sanctioned entity, the customer is associated with companies suspected or known to be selling sanctioned goods and/or technology to Russia.

Best practices for due diligence

To mitigate risks, businesses are encouraged to enhance their export compliance systems and conduct robust due diligence when encountering these or any other red flags. The G7 guidance suggests several best practices:

1. Screening and verification: Regularly run all transaction parties (including names and addresses) through public sanctions lists. This helps identify entities or individuals connected to sanctioned parties or high-risk addresses.
2. In-depth transactional due diligence: When encountering red flags, businesses should analyze the risks, request further details about the end user and destination of goods, and seek certification that the items will not be diverted to Russia or sanctioned third countries. Ensuring the legitimacy of the customer and the transaction is crucial.
3. Documentation and transparency: Businesses should request written certification from customers confirming compliance with export controls and update distributor agreements to include provisions requiring heightened due diligence.
4. Report suspicious activity: If concerns persist after due diligence, refrain from proceeding with the transaction and report the findings to the appropriate national enforcement agency.

Canadian businesses should consider their ability to adapt their existing compliance measures to these best practices within the evolving landscape of economic sanctions and related legal and regulatory requirements. For example, certain regulated entities are subject to a new requirement to report financial transactions suspected to be related to sanctions evasion to the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC). Those regulated entities should consider how the recommendations in the joint guidance can support this new reporting requirement. See our recent article "New sanctions evasion reporting requirements come into force" for an analysis of the new FINTRAC reporting requirements.

Conclusion

Canada and other G7 countries expect firms to undertake extensive due diligence to avoid violating export controls and sanctions. Further, trade partners and most notably customers and banks are requiring firms to complete robust supply chain questionnaires and provide related certifications, as a condition of doing business. While these are oftentimes not limited to Russia, there is a strong focus on evasion of Russian sanctions due to the size of the Russian economy and scope and newness of the sanctions.

The G7's updated guidance offers a broad framework for industries to identify and mitigate the risk of export control evasion by Russia. By using the CHPL as a reference for high-risk items, examining transactions for red flags, and adhering to best practices, businesses can protect themselves from reputational harm and legal risks while supporting global sanctions enforcement efforts.

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