On May 22, 2023, the Department for Business and Trade's Export Control Joint Unit published new guidance on trade sanctions circumvention under the UK's Russia sanctions regime (the "Guidance"). While direct trade between the UK and Russia reportedly has fallen significantly since the introduction of a broad package of trade sanctions in response to Russia's invasion of Ukraine, there is a growing associated risk of displacement of trade and diversion of goods to Russia via indirect routes.
The Guidance seeks to prevent the trade sanctions, export controls, and other measures implemented in response to Russia's invasion of Ukraine being undermined by raising awareness of the risks associated with trade in goods subject to UK trade sanctions and export controls and the obligations that trade in such goods places on those subject to UK jurisdiction to conduct appropriately robust due diligence that considers certain key risks associated with the product, customer, and destination.
The Need for Robust Due Diligence
Organisations seeking to circumvent trade sanctions often use a layered approach to conceal their procurement activities and the true end-users of goods subject to trade sanctions may be unlikely to approach international suppliers directly or be named as end-users on paperwork. Consequently, closer scrutiny of intermediary companies and apparent end-users is necessary to identify any discrepancies.
The Guidance states that "strong due diligence on counterparties and internal governance in relation to sanctions is essential." This includes periodically refreshing due diligence, including in relation to established counterparties, to ensure that the risk profile of the trading partner and activity has not changed as a result of changes in the counterparty's directors or the products being traded.
The Guidance advocates that companies consider potential circumvention risks to their business in light of their individual circumstances (i.e., the nature of their product, who they do business with, and where they operate and sell to).
With respect to product risk, the Guidance identifies the following non-exhaustive list of risk indicators that businesses should seek to identify, assess and, when necessary, resolve:
- the transaction concerns goods or technology subject to trade sanctions;
- the transaction concerns military, dual-use, or proliferation-sensitive items (whether licensable or not);
- the transaction involves an individual or entity in a foreign country of proliferation concern;
- the description of the goods on the trade or finance documentation is non-specific or misleading;
- shipments of goods appear inconsistent with normal geographic trade patterns (i.e., the country involved does not normally export or import the particular goods, particularly if it borders a country subject to trade sanctions restrictions on the particular goods);
- the country of the stated end-user of the goods differs from the country in which the order is placed; and
- there is evidence, or a suspicion, that the documentation for the transaction or material particulars therein are fraudulent.
When considering customer risk, the Guidance identifies the following potential warning flags:
- the customer is, directly or indirectly, involved in the supply, sale, delivery or purchase of restricted or high-risk goods, particularly to higher risk destinations;
- the customer is physically located in, or adjacent to, countries subject to trade sanctions restrictions on the particular products such that a diversion concern arises;
- the customer maintains connections with a country of concern;
- the customer has previously had dealings with individuals or entities now designated;
- the customer has entered into a joint venture or cooperation agreements with designated persons;
- the customer sells goods with a disproportionate delivery cost without a justified reason;
- the customer appears to use complicated structures to engage in the trade, for example makes use of layered letters of credit, front companies, intermediaries, brokers, etc.;
- the customer's personnel, address or telephone number match or are suspiciously similar to details found on sanctions lists and other publicly available watchlists;
- the customer is vague about details, especially details regarding the end-user and end-use of the goods;
- the vendor is vague, particularly about its source of materials; and
- the customer or vendor provides incomplete information and resists providing additional information when requested.
Finally, in relation to country risk, the Guidance highlights the following possible risk indicators:
- countries that are actively engaged with a country subject to sanctions;
- the transaction, or shipment route of the goods, is inconsistent with normal geographical trade patterns or the customer's expected business activity;
- payments or transfers are made to importers, exporters, agents, or brokers that export to countries and ports near the borders of countries subject to sanctions; and
- shipments involve individuals, companies or a shipment route involving countries with either weak export control laws or weak enforcement of such laws.
Procurement Cycle Risks
The Guidance also outlines the different stages and types of entity that may be used to acquire goods covertly, noting that the end-user of the goods subject to trade sanctions typically will use a "cover" or "front" company to request goods from a network of complicit intermediaries, as follows:
It should be noted that not all of the foregoing stages may be used in every procurement attempt.
The agencies responsible for UK sanctions enforcement have identified the circumvention of sanctions, including trade sanctions, as a priority area for enforcement in 2023. Given the wide range of goods now subject to trade sanctions restrictions targeting Russia, companies may wish to consider reviewing their trade sanctions and export controls policies and procedures to ensure that they continue to adequately address the risks currently associated with their trading activities.
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.