Key Takeaways From New OTSI Guidance On No-Russia Clauses And Countering Trade Sanctions Evasion

On January 7, 2025, the UK's newly established trade sanctions implementation and enforcement agency, the Office of Trade Sanctions Implementation ("OTSI"), published two new guidance documents principally addressing the UK's Russia trade sanctions regime relating to no-Russia clauses and countering Russian sanctions evasion. The no-Russia clause guidance is focused on supporting those exporting or making available Common High Priority List ("CHPL") items, as well as other items critical to Russian weapons systems and Russia's military development, to tailor their due diligence and (if desired) make use of clauses prohibiting re-export of their products to Russia. The Russian sanctions evasion guidance is intended to aid UK exporters' understanding of Russian (and other countries') circumvention practices to reduce their risk of being targeted by those seeking to evade sanctions. Affected companies should consider whether any adjustments need to be made to their trade compliance programmes in light of the best practice recommendations made in the new guidance documents.

Background to the OTSI Guidance

Following Russia's invasion of Ukraine in February 2022, the UK has introduced trade sanctions measures on a wide range of goods, technology, and services. Following the introduction of these sanctions, direct trade between the UK and Russia has dropped significantly, however, Russia has continued to seek to procure items subject to these sanctions indirectly, including by making use of complex supply chains. This development has increased the risk posed by trade sanctions circumvention and the diversion of items to Russia for businesses operating in the UK. The techniques deployed to evade these restrictions are varied and fast-changing and can range from the falsification of end-use information and use of indirect shipping of items to the involvement of professional sanctions evasion networks.

In this altered landscape, it is essential that parties within supply chains are aware of the diversion risk Russia's procurement efforts pose. Among other things, UK trade sanctions targeting Russia prohibit the export from the UK of sanctioned items to or for use in Russia, even if the immediate destination of those items is not Russia. It is therefore incumbent on UK businesses to know the end destination of products and conduct robust, risk-based due diligence on their counterparties. The new OTSI guidance documents are designed to assist exporters to navigate and ensure compliance with the UK's Russia trade sanctions regime.

No Re-export to Russia Clause

Article 12g of Council Regulation (EU) No 833/2014 of 31 July 2014 concerning restrictive measures in view of Russia's actions destabilizing the situation in Ukraine requires EU operators to include a no re-export to Russia clause when certain sensitive goods subject to sanctions are exported to third countries. The US has not imposed a comparable legal obligation, although the Bureau of Industry and Security has issued guidance for exporters on language that they can include in their sales contracts or other export documents. OTSI's new guidance mirrors the US approach.

While the Russia (Sanctions) (EU Exit) Regulations 2019, as amended ("Russia Regulations") do not require the use of no-Russia clauses, the OTSI guidance suggests that no-Russia clauses can offer a useful tool to counter the risk of sanctions circumvention and the diversion of sanctioned items by acting as a deterrent to non-UK contractual parties seeking to redirect UK sanctioned items to Russia and should be considered for inclusion in contracts with non-UK persons that are conducting business from countries that continue to trade with Russia, or when items are relevant to Russian military operations.

The OTSI guidance includes a template clause that exporters can adapt to meet their needs and the risks posed by individual contracts. The template clause suggests the following are elements that exporters may wish to include in their sales contracts:

• an obligation on the importer/buyer not to sell, export, or re-export any items supplied under or in connection with the contract that are subject to trade sanctions under the Russia Regulations ("Sanctioned Goods") directly or indirectly to or for use in Russia;
• a requirement that the importer/buyer uses best efforts to ensure that the purpose of the no-Russia clause is not frustrated by any third parties further down the commercial chain (g., resellers), including by establishing and maintaining an adequate monitoring mechanism to detect such conduct;
• a provision establishing that any breach of the foregoing obligations by the importer/buyer constitutes a material breach of the contract that entitles the exporter/seller to seek appropriate remedies, including but not limited to termination of the contract;
• a requirement that the importer/buyer immediately informs the exporter/seller about problems implementing the requirements of the no-Russia clause, including third party activities that could frustrate the clause's purpose;
• a requirement that the importer/buyer makes information concerning compliance with the no-Russia clause available to the exporter/seller within two weeks of request; and
• a provision giving the exporter/seller the right to notify pertinent UK sanctions authorities when it has reason to believe that any Sanctioned Goods have been sold, exported, or re-exported directly to Russia.

Whether a no-Russia clause is used or not, OTSI expects businesses to implement robust due diligence and monitoring processes on new and existing counterparties to ensure compliance with UK Russia trade sanctions.

Sanctions Evasion Guidance

OTSI expects UK businesses to take responsibility for assessing their sanctions risk profile and developing appropriate safeguards and controls to address the specific sanctions risks their businesses face. To assist businesses in those efforts, OTSI's new guidance aims to support exporters' efforts to: (i) identify Russian and other countries' (e.g., Belarus, Iran, and North Korea) trade sanctions evasion practices; (ii) develop risk mitigation strategies and controls to prevent their items becoming sanctions circumvention targets; (iii) protect their technology from misappropriation; and (iv) prevent the financial and reputational harm that can result from engaging in sanctioned trade.

Items Targeted by Russian Sanctions Circumvention Efforts

The OTSI guidance identifies CHPL items, as well as the following categories of items subject to UK Russia trade sanctions as being at an elevated risk of diversion to Russia: (i) a wide range of industrial machinery, plant and laboratory equipment; (ii) instruments for aeronautical and radio navigation; (iii) motor vehicles, engines, and vehicle parts; (iv) tractors and self-propelled works trucks; (v) mechanical shovels; (vi) centrifugal pumps; (vii) turbojets and gas turbines; (viii) oil lubricants; (ix) printing inks; (x) computer monitors, processing units, semiconductor devices, electronic integrated circuits, and apparatus for manufacturing these items.

OTSI also has identified items in the following sectors as being at particular risk of being diverted and re-exported to Russia to circumvent UK sanctions and export controls and the OTSI guidance recommends that manufacturers, exporters, and wholesalers operating in these sectors implement additional oversight and controls on exported items:

• military and dual-use items;
• aerospace;
• automotive;
• microelectronics; and
• heavy machinery.

Finally, the OTSI guidance identifies a number of countries posing an elevated risk of re-export to Russia and suggests that businesses exporting items posing an elevated risk of diversion to Russia should consider conducting enhanced due diligence on customers based within, but not limited to, the following countries: (i) Armenia; (ii) China, including Hong Kong and Macau; (iii) India; (iv) Israel; (v) Kazakhstan; (vi) Kyrgyzstan; (vii) Malaysia; (viii) Mongolia; (ix) Serbia; (x) Thailand; (xi) Türkiye; (xii) United Arab Emirates; (xiv) Uzbekistan; and (xv) Vietnam.

Sanctions Circumvention Warning Flags

The OTSI guidance identifies a non-exhaustive range of warning flags concerning products, customers, transactions and export destinations that may indicate sanctions or export control evasion that businesses should use to inform the tailored due diligence they conduct on potential and existing trading partners. The warning flags include the following:

Product

• The transaction involves Sanctioned Goods (especially those flagged as being of heightened circumvention risk, or with military or dual-use applications).
• The item's capabilities do not fit the buyer/end-user's line of business or are incompatible with the technical level of the destination country.

Customer

• The customer is involved in the supply or delivery of heightened circumvention risk items to destinations identified as posing an elevated risk of re-export to Russia.
• The customer has business ties to a sanctioned person or has in the past entered into joint ventures or cooperation agreements with such a person, has a branch office in Russia, or other connections of concern (g., is located in or next to countries in which Russia has active procurement networks or is associated with companies suspected of selling Sanctioned Goods to Russia).
• The customer uses complicated structures to conceal its involvement in transactions (g., layered letters of credit, use of offshore companies/trust arrangements or intermediaries/brokers) or exhibits indicia of being a front company (e.g., its address is similar to that of a UK designated person, or it shares premises/registered address with multiple businesses dealing in similar goods).
• The customer's business activity changed suddenly after February 2022 or exhibits an anomalous increase in the volume or value of orders for Sanctioned Goods.
• The customer attempts to obfuscate the product's ultimate destination and purpose, including by being vague about details, providing incomplete information, or being evasive when further information is requested.

Transaction

• Payments are made from entities located in third countries that are not otherwise involved in the transaction.
• Requests are made to use non-standard payment routes such as transfers outside SWIFT, the use of smaller overseas banks, or use of cryptocurrency.
• The customer pays significantly above known market rate for the items, or is willing to pay cash for an item whose terms of sale normally would require financing.
• Supporting documents do not list the actual end-user, are otherwise vague, or provide incomplete or inconsistent information.
• There are indications or suspicions of an attempt to record goods under a false Harmonised System (HS) code not subject to sanctions or export controls.
• The customer declines routine installation, training, or maintenance services associated with the product.
• The transaction involves intermediaries or shell companies and lacks a clear economic rationale.

Export Destination

• The destination country is one identified as meriting enhanced due diligence in the OTSI guidance, or the items would transit through such a country.
• The shipping route is abnormal for the product or destination, or involves a country with weak export control laws and/or enforcement of those laws.
• The destination country is actively engaged with a sanctioned country.
• Transporting through Russia is required to deliver the items to the destination country.
• Exports of the item to the destination country have increased significantly compared to historically limited or non-existent trade in that item with the destination country.

Due Diligence Best Practices

The OTSI guidance provides best practice suggestions that businesses should consider to mitigate the risk of their products being targeted by Russian circumvention efforts, while noting that there is no one-size-fits-all approach to compliance.

1. Strategic risk assessment – Businesses should undertake an assessment of their exposure to targeting by those seeking to circumvent sanctions and identify key threats and business-specific vulnerabilities, including business exposure via overseas subsidiaries and facilities in third countries. Risk-based controls, processes, and procedures to mitigate the identified risks should be developed and implemented, including enhanced due diligence, end-use and end-user verification, and additional safeguards for the highest risk items.
2. Enhanced due diligence – Businesses should implement a model that includes customer and business partner screening that targets, in particular, higher risk products and export destinations and is tailored to the findings of their strategic risk assessment. Written records of due diligence should be maintained.
3. Screening tools – Businesses should consider using additional sanctions screening tools to support their due diligence checks, including the Open Sanctions database, War Sanctions portal, the Trade Integrity Project database of entities that have shipped CHPL items to Russia since 2023, and the Kyiv School of Economics' SelfSanctions and LeaveRussia databases of non-Russian companies operating in the Russian market.
4. Ongoing monitoring – Businesses should remain vigilant to signs they are being targeted for the purpose of circumvention, including by tracking their trade flows and buyer patterns over time to identify trends in the export of higher risk products to specific destinations that may indicate product is being procured for diversion to Russia. They also should regularly update their risk assessment and keep their approach for assessing sanctions risk exposure updated as the circumvention landscape continues to evolve.

Conclusion

The new OTSI guidance documents provide additional clarity to businesses on the nature and level of risk assessment, due diligence, and contractual protections that OTSI expects them to implement to mitigate the sanctions circumvention risk associated with their products and trading activities. Businesses engaged in the trade of items subject to UK trade sanctions should review their existing trade compliance programmes to ensure that they satisfy OTSI's expectations and make any needed enhancements to policies, procedures, resources, and controls promptly.

OTSI has the power to investigate and civilly enforce breaches of UK trade sanctions on a strict liability basis that involve the movement of sanctioned items outside the UK when a UK person is involved, or that involve circumvention of those trade sanctions. Having robust trade sanctions compliance mechanisms in place that adequately take into consideration OTSI's expectations is a key element of sanctions risk management and mitigation for businesses engaged in the trade of UK sanctioned items.

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.